County of Los Angeles Department of Consumer Affairs New Consumer Laws 2007

Homeowners Associations: Reserve Budget Plans

Civil Code Sections 1365, 1365.2.5, and 1365.5 and 1365.6

There are more than 3 million units in common-interest developments in California, and about half of them are more than 20 years old.

Under current law, homeowners associations (HOA) are required to complete a reserve study at least once every three years to identify the major components of the development that have a remaining useful life of less than 30 years and that the HOA is obligated to repair, replace, restore, or maintain. The reserve study has to include the estimated cost of repairing or replacing those components and the total annual contribution minus the amount that is in the current reserve accounts needed to make the repairs or replacements.

This new law increases protections for current and future HOA members by requiring the board of directors of an HOA to:

• Adopt a reserve funding plan every three years to fund the reserves necessary to replace and repair all major components of the HOA with an expected remaining life of 30 years or less;
• Include in its current disclosures to members the reserve funding needed on a per unit basis and a notice informing the members that they may request a copy of the full reserve study plan.
• Include the following in the Assessment and Reserve Funding Disclosure Summary:
  • Estimated reserve funds required for the next five budget years;
  • Projected reserve fund cash balance, the percentage of reserves that will be funded based only on the assessments already approved, and other revenues; and,
  • Projected reserve fund cash balance and percentage of reserves funded if the approved reserve funding plan is implemented.
• Beginning January 1, 2009, the HOA to send the owners a summary of the reserve funding plan adopted by the board of directors each year.
• Include in the reserve funding plan the amount of any changes in all scheduled regular and special assessments necessary to fund the reserves.
• Insure that any action taken by the board of directors regarding the reserve funding plan must be taken in an open meeting of the membership.
• Comply with the Common Interest Development Open Meeting Act.
• Include in the financial information mailed to the membership each year the following:
  • A decision and justification as to whether or not the board of directors has determined to defer or not undertake repair or replacement of any of the major components with a remaining life of 30 years or less;
  • A list of all outstanding loans with an original term of more than one year which must include the name of the payee, interest rate, amount outstanding, annual payment, and when the loan is due;
  • The projected amount of reserve funds at the end of the fiscal year and the percentage of reserves being funded for the year.

For more information:
County of Los Angeles Department of Consumer Affairs
B-96 Kenneth Hahn Hall of Administration
500 W. Temple Street * Los Angeles, CA 90012-2706
Telephone (800) 593-8222 (within the County) * (213) 974-1452
web site: dca.lacounty.gov