Homeowners associations are required to maintain an appropriate level of HOA reserve funds in order to have sufficient funds available for the repair, restoration, replacement, maintenance of, or litigation involving the repair, restoration, replacement, maintenance of, major components that are part of the associations common areas that the association is obligated to maintain. The officers and directors of associations that have control over the associations funds frequently deal with issues concerning the use of reserve funds for other purposes such as the payment of unexpected legal fees for the defense of litigation that has been commenced against the association and/or its management personnel and which is not covered by insurance.
Because HOA reserve funds are typically afforded special protection by state statutes and an associations governing documents, the use of those funds necessitates the following of designated procedures and proper authorization by the associations board of directors. Proper authorization means that, absent an emergency situation, the decision to transfer reserve funds out of the associations reserve account and use those funds for a purpose other than those specified above, was made by a quorum of the associations directors acting collectively at a properly noticed meeting of the directors which included prior notice to the associations members of the directors intention to consider borrowing from the reserves in the meeting notice and agenda. Thus, the decision to use reserve funds is not a decision that can be made by the associations property manager or any one or two officers or directors who typically have authority to expend the HOA reserve funds.
Because state laws and/or governing documents may impose additional requirements for the borrowing of reserve funds, it is critical that the associations directors be familiar with those additional requirements. For example, in California, the notice of the board meeting and agenda that is first given to the associations members must include the reason that the contemplated use and transfer of reserve funds is needed, a description of the options that will be considered for repayment of the funds back to the reserve account, and whether a special assessment will be considered.
A decision made by an associations directors to borrow HOA reserve funds needs to be properly documented in a resolution adopted by the directors and recorded in minutes of the meeting. The recorded information concerning the authorization should include an explanation of the reasons for the use of the reserve funds along with a description of how and when the funds will be repaid to the reserve account. A sample of a resolution adopted by an associations directors authorizing the borrowing of reserve funds is set forth below.
To facilitate the proper handling of reserve funds by an associations board of directors, the association should have a Reserve Fund Policy as part of its governing documents. The adoption of such a policy will enable consistency in the handling of the associations reserve funds between successive boards of directors. A sample of such a policy along with a sample resolution by the directors adopting such a policy is set forth below.
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