Nevada, Transfer Defect funds to Operations budget?

-- Please confirm: Is this a condominium?

-- I googled on "defect project" and "defect money transfer." Nothing helpful came up. Can you explain what these phrases mean?

Correction: There is no mention of legal counsel in the board meeting minutes,

It sounds like the money was transferred from the reserves to pay for repairs/replacements of reserve items. Reserve items are major structural components owned by the HOA - eg., a clubhouse, pool, streets, etc. HOAs conduct periodic reserve studies to determine the remaining useful life of these things so that the HOA can plan to have the necessary funds available when needed.

Reserve funds are often invested, and money is transferred to the operating account out of which HOA bills are paid.

Does this sound like what is going on?

If that's not what is going on and reserve funds are being used for true operating expenses, that may or may not be a sign of anything nefarious. HOAs generally can borrow from the reserves as long as they can replace these funds within a short amount of time (such as during the current year). If this is what happened and the HOA does not have a plan to replace these funds, that's a problem. If these aren't emergency repairs, then it suggests poor financial management: assessments set too low for many years and the can kicked down the road until it can no longer be kicked. This sort of thing is not unusual, unfortunately.

At the very least the board should be telling the homeowners what's going on. If you're not recovering from some natural disaster that resulted in unplanned spending, for example, there is some other explanation and they should be honest about what that is.

These funds are not “reserve funds”. These funds are from a defect litigation settlement, and are kept in a separate account.

These funds are not being borrowed, there are no talks to pay-back the defect funds.

Thank you. Please confirm: Are the defects (that the funds are supposed to be used for) in infrastructure for which individual owners (and not the Association) have the maintenance responsibility?

Are the defects extant?

I do not see anything in the Nevada statute that addresses this.

I suspect you may be stuck with first, asking questions, and second as needed, doing a recall of these directors or throwing them out at the next election.

Nevada's COA meeting laws say to me that the conversations by email should not have happened. Instead and as you suggest, the discussions should have happened at an open meeting. Furthermore and quite importantly, Nevada statute says owners have the right to speak at board meetings, with a few caveats. See NRS 116.31085  . Hence I view the exchanges by email as a serious transgression by the board and I would make clear to the board, without anger and without emotion, how serious this is.

And per your first post, this happened in July 2021, over a year ago?

-- That this action was imprudent is not clear to me at this time. I hesitate to agree with you only because I think it's possible the operational needs were significant. (I could be wrong. I am not there and do not have all the facts.) Then down the road, the Board would have to either raise the regular assessment or impose a special assessment (requiring owners' approval? I am not sure at the moment) or seek a bank loan (ugh) to pay for repair of the construction defects. But then, this outcome (raising the regular assessment or special assessing) would be the same if the board had not used the defect funds, wouldn't it?

-- I think there is an argument that these 'construction defect funds' are in fact reserve funds, and so the aforementioned statute section restricts their use. But then, all this means is that again, the board would have to raise the regular assessment, seek a special assessment or seek a bank loan.

-- I happen to think that, had the conversations that happened by email happened at the open meeting, owners might have spoken up. If talking by email is a habit of the board, then per the aforementioned statute, I would consider the complaint, investigation and intervention process administered by the Office of the Ombudsman for Owners in Common-Interest Communities and Condominium Hotels, the Nevada Real Estate Division and the Commission for Common-Interest Communities and Condominium Hotels. Owners really should take these side conversations very seriously and nip them in the bud if at all possible. Boards need to get used to having their discussions at open meetings.

-- To me, these two statements seem kind of at odds with each other. In other words, if the defects fund was not used to pay for the operational expenses, would the HOA fees have to rise?

-- How I would feel about this would depend on the construction defects and these "defect projects" and their status. Pardon if I am being naive, but is it important that these defects be remedied, and sooner rather than later?

-- Thank you for your patience in discussing this. An online forum, where information is transferred post by post, is somewhat hard.

-- I do not disagree with anything CathyA3 posted.

-- If this transfer did occur over a year ago (in July 2021), then challenging this and being taken seriously is harder.

I hear you. I loathe boards that won't increase assessments when it's obvious they need to be increased. It's not just "the principle." It's that this is the road to having to impose a Special Assessment or increase the regular assessment by a lot. Taking people by surprise with large increases in their expenses is highly risky to a condo association's financial well-being.

Throwing the bums out means several owners having to campaign on the need for an increase in the assessment. Which more likely than not will go over like a lead balloon, especially if its not all that obvious that infrastructure needs are not being addressed.

Do get some who feel as you do to run for the board, though.

Or file the complaint with the Nevada agency I name above, per the statute section, asserting that the Board used reserve funds (the defect funds, which you will assert to be reserve funds) and see what happens. If I could not get on the board with a like minded majority, I might very well go this route. Your condo association's towers et cetera resemble a bit too much Surfside's (in Florida). Taking repairs seriously as soon as they occurred at Surfside arguably would have avoided the building falling.

I would not guess at this. Thanks anyway for your opinion.

This sounds like funds from a construction defect lawsuit, that had either gone to court or settled out of court. These funds should be put into a separate bank account earmarked only for those items itemized in the lawsuit.

How do you pay for the specific defect projects. One way is to pay all through the bank account the funds reside. This would require separate GL Codes specifically for that account and there would be a separate P & L statement as well as separate line items on the Balance Sheet. Another way, and the one that is probably being done is the GL codes for the defect project expense are in the operating bank account chart of accents and then you would have separate GL codes called "due from reserves" or due from defect project".

My question is why isn't your board paying for the defect repairs from the defect settlement account to avoid any improprieties? Transferring the money to the general fund will make the general account
look way overfunded.
Any money remaining money after all defects are fixed, then put the money in the general operating account.

I was wondering if your opinion was backed by California law.

If the bills were paid out of the operating account, then yes, you would be running deficits. Not illegal, just not good accounting.

If the defects are considered reserve assets in the future, any remaining funds should go into reserves.

Bruce

While I am not an expert, I say the Defect Funds should have been in a Defects Fund and correcting defects paid out from such. Even transferring the money out Operational Funs then paying it out for correcting defects could be confusing.

Someone would need to see the income expense statement to give you an expert opinion. Because funds were transferred into an operational account does not mean they were used for operational expenses. It depends on how it was coded.

Actually it’s quite easy to determine where the money went.

No need for an expert.

First, the board said they were going to spend the money on operational expenses.

Second, everything in the operational expense budget is coded for expenses.

And with expense statements published and available for homeowners, it is easy to review.

I am in the opinion that defect funds should be paid to fix all defects in their entirety, then and only then any remaining funds should be transferred to the operating fund. If there are any overages in the operating fund then transfer to reserves. as a rule You should have at least 3-4 months operating cash. NRS 116 calls for reserves to be 85% funded, no harm in it being more.

Say, Bruce, maybe NRS (Nev. Revised Statute), Chapter 40, which has a great deal of material about construction defects, e.g. 40.650(3), can help.

LetA, there may be statutory requirements re: how construction defect funds may be handled once all defect are fixed. Our CA HOA had used any of the defects fund in a couple of years, so our HOA attorney said to go ahead and place the balance in reserves.