HOA Homefront – Questions from readers: HOA insolvent? A board modifying assessment allowances
Q: Our HOA suspended reserve deposits, borrowed from reserves without disclosing to members the total amount borrowed or repayment plan, and did not repay borrowed funds within the required year (also without disclosing to owners) . Even before these actions, the reserve was “materially underfunded” according to the latest studies of the reserve. Obviously, the red flags are flying wildly, but our Board of Directors is unwilling to address, or even openly discuss, these financial issues.
I’ve tried to work with the council, but my concerns are brushed aside. Besides running for a position on the board, is there anything an owner can do? I considered emailing all owners, raising my concerns and imploring other owners to request and review the financial reports themselves. However, this is sure to create some drama in the neighborhood, anger the board members, and I’m afraid it could lead to lawsuits against the HOA, which would hurt everyone in the long run. I don’t want blame, lawsuits or anger; I just want accurate financial reports, transparency on issues, and a plan to get our community back on solid financial footing. No advice?
A: HOA boards have an important financial oversight responsibility. See Civil Code Sections 5500 and 5502, which give strong responsibilities to HOA boards of directors to review a list of financial reports monthly and to review larger HOA expenses. Associations are not required by law to deposit money in the reserve account, but are required to provide very detailed information to members (and, by extension, potential purchasers) regarding the status of savings. reserve of the HOA.
HOAs that try to “stay the course” on valuations often do so by halting regular deposits to reserves and instead using that money to help pay for living expenses. This creates two problems for the HOA. First, it hides the fact that the budget is insufficient and does not cover the monthly expenses of the HOA. Second, such an HOA falls into an unliquidated debt situation. Each month, various components of the common area deteriorate, and the function of the capital reserve fund is to offset this continued deterioration with corresponding savings so that the HOA will be ready when the component needs to be replaced or refurbished.
Lawsuits aren’t the answer to help HOAs start doing it right. Elect trustees who will commit to obeying the law and making (not avoiding) the tough financial decisions necessary to care for the HOA community.
Q: We pay monthly dues, which are based on one or two bathrooms. Can the board now change the dues formula for the same amount of fees charged each month? Can you advise?
A: HOA CC&Rs should describe how the budget is distributed among members in the form of annual or monthly reviews. There are many ways to assign ratings and no one method is perfect. Normally a board cannot change this and a member vote is required. However, trying to get members to change this allocation may be a wasted effort, regardless of the logic of the proposed change. It is very unlikely that a majority will agree that some owners will pay more and allow others to pay less than their current obligation.
Kelly G. Richardson, Esq. is a member of the College of Community Association Lawyers and a partner at Richardson Ober DeNichilo LLP, a California law firm known for its advice to community associations. Submit your questions to [email protected] Past columns on www.HOAHomefront.com.