Reserve Funds vs Operating Funds

Started by DavidY3 • 8 replies • 2205 views

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DavidY3 (California)
Posts: 18

Posted:

Our HOA in CA is looking to install solar on the roof to power HOA common area electricity. Our yearly bill is around $25k. I just recently met with the reserve analyst consultant and I told him the board's interest with solar. He said that solar would need to come from the operating budget. I'm confused by this as I based on my understanding and research any large project would tap into the reserve funds. Operating would just be day to day and Reserve would be to upgrade and improve existing infrastructure in the building. Reserve would also be used for any large projects to improve the building.

When we had security cameras installed throughout the building we used funds from the reserves. I asked for clarification but have not heard back.

Thoughts?

JohnC46 (South Carolina)
Posts: 14,265

Posted:

David

Typically Reserve Funds are set aside for planned on (known via a Reserve Study) replacement/repairs of an existing thing with a lifetime like roofs every 20 years.

Typically Reserve Funds would not be used for a Capital Improvement such as adding solar panels. Repairing of such, yes. Adding new, no.

Typically Reserve Funds can be borrowed from for other reasons (like installing solar panels) but there must be a firm/agreed plan in place to repay the Reserve Fund.

KerryL1 (California)
Posts: 14,550

Posted:

JohnC is right, DavidY. In CA, too, reserves are to repair/replace existing components that ARE listed in the reserves study. There's a really clear statement at Davis-stirling.com on this topic. As I recall the actual statute in the Davis-Stirling Act is similarly very clear.

You'll see, as JohnC also stated, that you may borrow from the cost of the solar system from reserves, but you must have a plan about how you're going to repay reserves; it must be in writing, and must be US mailed to all owners.

IMO, your board should not have used reserves to purchase a camera system IF they were not replacements of some listed in your study.

so, you can borrow from reserves, place this component, its estimated useful life & cost to replace in your study and then pay back reserves via a special assessment of from you operating budget next year. Or wait, an budget for this in your operating budget in '16.

RichardP13 (California)
Posts: 3,868

Posted:

David

Capital Improvements, such as the project you are referencing, would come from the operating account. You MAY borrow from the reserves, as long as it is rpaid with 12 months and the Board approves in a Open Meeting and the approval is noted in the minutes. Once completed, amend your reserve study so that any further repair/replacement would come from that account.

DavidY3 (California)
Posts: 18

Posted:

Thanks for the feedback everyone.

In regards to the cameras, our MC cut a check from the reserves to be signed. We would have been fine using operating funds. Thus the confusion solar when the cameras came from reserves.

KerryL1 (California)
Posts: 14,550

Posted:

Here's the exact citation, DavidY: "Spending Restrictions. Boards may not spend reserve funds for any purpose other than the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components that the association is obligated to repair, restore, replace, or maintain. (Civ. Code §5510(b).)"

And Richard is accurate--no need in CA to send a notice via US mail to state a payback plan if you borrow form reserves; noted in one meetings minutes is sufficient.

Our previous PM, too, also advised us directors that using reserves to purchase non-replacement items was OK. She's no longer our PM for other reasons, but I lost faith in her when she advised us poorly on that matter.

Read more: Reserve Expenditures http://www.davis-stirling.com/tabid/3405/Default.aspx#ixzz3dHBsR3jR
from Davis-Stirling.com by Adams Kessler PLC.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By KerryL1 on 06/16/2015 5:57 PM
Here's the exact citation, DavidY: "Spending Restrictions. Boards may not spend reserve funds for any purpose other than the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components that the association is obligated to repair, restore, replace, or maintain. (Civ. Code §5510(b).)"

And Richard is accurate--no need in CA to send a notice via US mail to state a payback plan if you borrow form reserves; noted in one meetings minutes is sufficient.

Our previous PM, too, also advised us directors that using reserves to purchase non-replacement items was OK. She's no longer our PM for other reasons, but I lost faith in her when she advised us poorly on that matter.

Read more: Reserve Expenditures http://www.davis-stirling.com/tabid/3405/Default.aspx#ixzz3dHBsR3jR
from Davis-Stirling.com by Adams Kessler PLC.

Question:
Solar would appear to be an upgrade. Do you think an upgrade would qualify as a "replacement" under 5510?

Sikubali jukumu. Read all posts at your own risk.

RichardP13 (California)
Posts: 3,868

Posted:

NpS

Section 5510 states replacement FOR which the reserve fund was established. Lowering your electric bill is not a reserve item, its an operating expense. Once it is put in, amend your reserve study to include in the future.

NpS (Pennsylvania)
Posts: 4,216

Posted:

Quote:

Posted By RichardP13 on 06/16/2015 9:50 PM
NpS

Section 5510 states replacement FOR which the reserve fund was established. Lowering your electric bill is not a reserve item, its an operating expense. Once it is put in, amend your reserve study to include in the future.

Understood. Was thinking that a replacement of existing equipment might be involved, but then I realized that solar is probably just a straight add-on. A better example probably would have been a situation where existing street lamps are being converted to LEDs. Thanks.

Sikubali jukumu. Read all posts at your own risk.

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