• ABOUT B|W
• PRACTICE AREAS
  • LITIGATION & ARBITRATION
    • Construction Defect Litigation
    • Building Defects and Design Failures
    • Defective Material and Product Liability
    • Soil and Landslide Claims
    • Contract and Real Property Disputes
  • COMMON INTEREST DEVELOPMENTS
    • Directors and Officers Liability Defense
    • Formation and Dissolution
    • Operations and Management
    • Meetings and Elections
    • Covenant Enforcement
    • Insurance and Liability
    • Commercial and Industrial CIDs
  • CONSTRUCTION LAW
    • Project Support
    • Contract Drafting, Negotiation and Review
    • Disaster Claims
    • Insurance Coverage Claims
• OUR PEOPLE
• LIBRARY
  • • Useful Materials
    • Top Articles of Interest
    • Featured Publications
    • Webinar Video Library
    •  
  • • 
      Davis-Stirling CID Act
    • 
      Disclosure Checklist
    • 
      Davis-Stirling Cross Reference Chart
    • 
      Residential Construction and Outside Time Limits
  • • 
      Why Build Houses in Shopping Centers?
    • 
      How the Law Fails Condo Owners
    • 
      Hidden Damage—Life, Death, and Legislation?
    • 
      California is Back! What does this mean for your association?
  • • 
      Basic Training Manual For Board Members
    • 
      Guide to Reconstruction Projects
    • 
      Guide to Construction Defect Claims
    • 
      Guide to Community Association Transition
    • 
      The Condominium Bluebook
  • • 
      The Common Interest Development Open Meeting Act
    • 
      Decision Making Outside of a Board Meeting
    • 
      The Board Meeting Agenda
    • 
      The Significance of Board meeting Minutes
  • •  
• HAWAI'I
• CONTACT US

Borrowing From Reserves

A Primer From California Law

California law permits a community association board to authorize temporary transfers of money from the reserve fund to the operating fund if the association has a short-term cash flow problem or other expenses it must meet.

Notice Rules

Since July 2, 2005, California community associations have had special notice rules to follow. Unless the board complies with these notice rules, the board may not borrow funds from reserves. The special provisions are at Civil Code section 5515.

Proper “Borrowing” Notice

A “borrowing” notice consists of the following: At least four days before the meeting at which the board is going to make the decision to borrow, a meeting notice needs to be posted in the common area. The notice needs to include ordinary date, place and time information about the meeting, of course, but also notice that this particular decision will be on the agenda. The notice must also explain why the money needs to be borrowed, discuss options for repaying the reserves, and whether a special assessment might be considered.

“Borrowing from Reserves”

“Borrowing from reserves” means using money in the reserve fund for things other than what the reserve fund was set up for in the first place. A typical example is temporarily using reserve funds to pay a large insurance premium due early in a budget year.

Another form of “borrowing from reserves” arguably happens when scheduled transfers to the reserve fund that were planned for in the budget are not made. If assessments that were intended in the budget for reserves have not been moved into the reserve fund as the year-end approaches and the board plans to delay those transfers into the future, the board is required to give the members notice of that meeting and decision as well.

Restoring Reserves

The board has one year from the time it decides to borrow money from reserves (or to delay making a scheduled transfer) to put that money into the reserve fund. The law permits the board to delay restoring the reserves for longer than one year, but only if the board believes a delay is in the association's best interest.

Proper “Delaying Restoration” Notice

The board is obligated to give notice for the meeting at which a decision is made to delay restoring reserve funds. Notice needs to be posted at least four days before the meeting, including information that the decision will be on the board's agenda, explaining the reasons for delaying the restoration of the funds, and what options could be considered in the future, including a possible special assessment.

Calendaring the initial decision and one year out is very important.

Written Findings in the Minutes

Decisions to borrow from reserves are important financial considerations that need to be adequately documented in the association's permanent records. Either decision – whether borrowing funds from reserves or determining that delaying restoration of the funds is in the association's best interest – must be adequately supported by the board's reasoning. Such “written findings” must be recorded in the board's meeting minutes and both protect the board and create a proper historical record for the association.

Legislative Concern

The law underscores the legislature's concern about money being too easily borrowed from reserves and not being restored, or never saved in the reserves as budgeted in the first place, leaving too little cash in the reserve fund when work needs to be done. The law permits borrowing but also strongly encourages promptly replacing that money through increased regular assessments or by special assessment, as part of the board's duty to prudently manage association finances.

Print Article

Email Article

Sign Up for Our Newsletter

Sign up for Berding|Weil's Community Association ALERT Newsletter, providing Legal News, Comments, and Great Ideas for Community Association Boards and Managers.

Please Note: To ensure delivery to your inbox (not bulk or junk folders), please add news@berding-weil.com to your address book and/or allow emails from berding-weil.com to pass through your automated anti-spam software or service.

Request Our Complimentary Program and Information Package

1. Name*
2. Email*
3. Phone
4. Yes, please send me the Complimentary Program and Information Package.

Submit Your Request