Plan to Replenish Tapped Reserves

QUESTION: Our condominium has 16 units and the complex is 15 years old. The board of directors is a three-member board. We have about $32,000 in the reserve fund and our reserve study was done about four years ago.

Our board president plans to update the reserve study using software that we recently purchased. The original analysis did not include any funding for termite control. The president plans to add this and other items to the new reserve study. He then wants to spend all of the reserve funds on these items. Localized treatment of termites during the last seven years has been unsuccessful, and tenting the whole complex will cost $22,000.

The president insists that it is legal to spend all of our reserves as long as the money is spent on items included in the reserve study. He does not think the money has to be replaced even though these expenses were unforeseen four years ago when the most recent reserve study was done.

I disagree with his opinions. What advice can you provide?

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ANSWER: When funds are used from the reserves, a plan should be set in motion that will replenish those funds.

If your board is contemplating using a major portion of the accumulated fund, you must determine what other needs will arise in the next few years.

How will the association pay for other reserve expenses that arise in the near future before the reserve fund can be built back to the level that is needed?

A reserve study analyzes the future repair and replacement needs of the association for 20 years or more. A reserve study should include a complete list of all components for which the association has maintenance responsibility.

Even in a relatively small complex, the component list can be quite extensive. In your association, these components might include roofing, heating/cooling equipment, elevators, lobby and hallway redecoration, lighting security gates or garage doors, painting, swimming pool and/or spa and other items.

The association should have funds available for these large expenditures. Otherwise, maintenance is deferred and the entire complex is in danger of slow deterioration.

The downward spiral is sometimes hard to detect until the situation can be reversed only by levying hefty special assessments, an extra fee levied in addition to the regular monthly assessment.

Boards tend to dislike levying special assessments because they don’t want to make unpopular decisions. Also, if special assessments are levied to fund major expenditures, unit owners may not be able to afford to pay the extra fees, and delinquencies and foreclosures will occur. But if reserve funds are inadequate, the only way to build them up is to increase the assessment that each owner is paying to the association.

If your board allows the reserve funds to be substantially depleted, it could have a negative impact on the value of your units. Buyers, real estate agents and mortgage lenders look favorably on associations that have adequate funding in their reserves.

Every association, large or small, needs a board that can provide sound financial planning or find the outside sources to do so. If the other board members do not agree with your president’s views on spending the reserve funds, they have a duty to explore other ideas. Obtain competitive bids on the termite work. Survey the owners to find out if they would prefer paying a special assessment rather than depleting the reserve funds. It is basically a “pay me now or pay me later” situation because the reserve funds used for the termite work should be replaced.

Ins and Outs of CC&R; Amendments

Q: In your April 27 column you suggest that homeowners can vote to change their declaration of covenants, conditions and restrictions. But you should point out that some declarations have amendment provisions that require lender approval.

Obtaining a favorable vote from a majority of the mortgage lenders of all of the units seems like a formidable task. This, coupled with the requirement of a super-majority vote of the homeowners, may make the amendment process impossible.

An association could spend a great deal of money on legal expenses and still be unsuccessful in passing the amendment. I think you should warn your readers about unscrupulous attorneys who might take advantage of associations with naive boards of directors.

A: As years pass, most associations need to amend their declarations. This is not easy to do but it is rarely impossible. Most associations have declarations that require at least 66% approval of the owners. In many associations, the percentage of affirmative votes required is 75%.

If an amendment fails to get the approval of the owners, it is usually not because the attorney failed. It could be that the amendment is not a popular or prudent change, so it fails because it lacks merit. In some cases, an attorney might draft an amendment that the board requests even though the attorney advises against presenting the amendment to the owners. Another reason for amendment failure could be lack of communication with the owners or lack of organized campaign to obtain the needed votes.

Attorneys who are experienced in the amendment process are knowledgeable about the methods of obtaining approval from a super-majority of the owners and the mortgage lenders. Drafting the language for the amendment is only a portion of the assistance the attorney can provide. The attorney will guide the board from the planning stage all the way to the recordation of the amendment after it has been adopted by the owners.

The successful adoption of an amendment depends on teamwork and communication. The board should communicate with the owners so that they will understand the need for the amendment.

Meetings for all of the owners should be scheduled before the vote so that the owners will have an opportunity to ask questions and become informed about the amendment process and the reasons that the amendment is good for the association.

California Civil Code, Section 1356, explains the procedure to follow to reduce the percentage requirement. If the amendment is approved by more than 50% but less than the super-majority required in your declarations, you can petition the superior court in your county to accept the lower percentage.

Hickenbottom is a community association management consultant and a founding director of the California Assn. of Community Managers. She selects questions of general interest for the column and regrets that she cannot respond to all questions received. Send questions to Condo Q&A;, P.O. Box 5068, Thousand Oaks, CA 91360.