Removal of Reserves legal or illegal?

Started by JaniceF1 • 29 replies • 1655 views

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JaniceF1 (California)
Posts: 8

Posted:

I am VP of a small HOA. At the last meeting, it was proposed to spend a good percentage of our $12000.00 reserves for putting synthetic turf on the individual homeowners front yards - approximately $8000.00. The front yards are mowed by the landscaper who takes care of the common area. They think that it would save money in the long run if there was no grass to mow and in the future it would help with the water shortage and fertilizer runoff.
Although personally, I do not think it would save us money but would be interested in not having higher water bills and fertilizer runoff, I have mixed feelings about synthetic turf but that is only my opinion.
I would like to know:
1) Can the reserves be used for anything but the street and the common area maintenance?;
2) Since the reserve study last year said we were borderline for assessments, if the reserves could be used legally, what would happen next to our assessments since we would have approximately $8000.00 less than the 'reserve study borderline'; and
3) Do you have any suggestions about the appropriate way to handle the situation?
ANY RESPONSE WOULD BE APPRECIATED,
Janice

SusanW1 (Michigan)
Posts: 5,202

Posted:

The Board MUST prove that it has the power given to it to take money from one fund to another.

Can they do that?

JohnK3 (Pennsylvania)
Posts: 967

Posted:

Quote:

Posted By JaniceF1 on 09/02/2008 9:36 AM
I am VP of a small HOA. At the last meeting, it was proposed to spend a good percentage of our $12000.00 reserves for putting synthetic turf on the individual homeowners front yards - approximately $8000.00. The front yards are mowed by the landscaper who takes care of the common area. They think that it would save money in the long run if there was no grass to mow and in the future it would help with the water shortage and fertilizer runoff.
Although personally, I do not think it would save us money but would be interested in not having higher water bills and fertilizer runoff, I have mixed feelings about synthetic turf but that is only my opinion.
I would like to know:
1) Can the reserves be used for anything but the street and the common area maintenance?;
2) Since the reserve study last year said we were borderline for assessments, if the reserves could be used legally, what would happen next to our assessments since we would have approximately $8000.00 less than the 'reserve study borderline'; and
3) Do you have any suggestions about the appropriate way to handle the situation?
ANY RESPONSE WOULD BE APPRECIATED,
Janice

Janice,

For starters:

1. Who owns the front lawns? If the HOA does, the Board could make a somewhat valid pitch that reserves could be used. I'll set aside the wisdom of its position for now.

2. How big is your small HOA as to household count?

3. Do you have an indication/opinions from Membership as to having this proposed project undertaken?

4. Aside from what you've stated, are there any other reasons your fellow BODs might have for the proposal, including personal tastes, a relationship with someone that would do the installation, etc.

5. Do you have a PM, or are you self-managed?

GlenL (Ohio)
Posts: 5,491

Posted:

Janice IMO this would an improper use of the reserve fund. The money could be borrowed from the reserves if it is repaid by the savings in lawn care and water but the money is set aside for the repair of specific items and that repair will eventually be needed. My question is do you have a section in your CC&R's concerning capital improvements? While our BOD has no limits on what it can spend to repair and maintain the community; they cannot spend over $2,000 for capital improvements without a homeowner vote.

Studies show that 5 out of 4 people have problems with fractions

KirkW1 (Texas)
Posts: 1,665

Posted:

There is more then a good chance that the documents leave the entire thing up to the Board. But that is probably not a wise thing to do. It would be wise to get some solid information and present the whole thing to the membership if feasible.

You will need a plan to replace not only what you spend on the artificial turf, but you will need to put more in to cover its eventual replacement.

I will say that the price seems pretty low i you have a sizable amount of grass. And at that rate, I can't imagine that it won't pay for itself in just a couple of years. This is something that can be find out in advance though. And you should be able to get a reasonable guess of how much water it will save. But unless you have water restrictions, I would lean toward the direction that will save money. I would certainly expect that 100% of the savings be placed back into the reserve fund.

JaniceF1 (California)
Posts: 8

Posted:

The front lawns are owned and watered by the seven individual owners. The water system paid by the HOA only waters the common area which is all plants, shrubs, and trees.
The CCR's indicate that the reserves can ONLY be used for the common area. I assume that means the eventual street repair (it is considered our private street) and stucco wall, lighting, and landscaping maintenance.
It was agreed the first year that the landscaper would be paid monthly and also mow the front yards so they would all be done at the same time. It used to be $10.00 extra for the mowing but it is now approximately $205 to maintain the common areas and approximately $90.00 to mow the front lawns. He comes once a week.
The two homeowners that have proposed the synthetic turf say they are concerned with the water and fertilizer in the future.
I have not agreed or disagreed and have said I would listen to a proposal but in any event I did not think the reserves could be taken out for this purpose and I would check further. After reading the CCR's, IMO it would be illegalto take the money out of the reserves and that is the reason I'm asing this group if I am right or wrong. It seems that we have put $12000 into our reserves for the eventual repaving of the street. The required 'reserve study' indicated we are borderline so leaving $4000 would put maintenance issues at risk.
Janice

SusanW1 (Michigan)
Posts: 5,202

Posted:

Janice - AGAIN I will ask, does your Board have the power to borrow money from the Reserve Fund to be used for another purpose? This seems like a new idea - not planned for.

(Where did the Board think it was going to get the $$ for the project??)

KirkW1 (Texas)
Posts: 1,665

Posted:

Quote:

Based on the above you can not use reserves for putting artificial turn on the front lawns.

Now for economics - if the $8000 covers only front lawns it will take 89 weeks to pay back the money using the $90 a week. But...if that covers the common areas as well, then you are looking at only 28 weeks to pay back.

But based on what you are saying I think it only covers the front lawns that they owners are watering and fertilizing. And while it is admirable to look at these areas, they need to come up with a better plan if the savings is $90 a week. But it might be worth looking into if there is support. Perhaps you can have a special assessment to cover this cost. Or you could raise dues while at least part of the initial cost is raised.

I suspect that the owners don't understand the nature of reserve funds. Generally they are strictly for replacement and repair of existing common elements. As a note, reserve funding is now being looked at when banks write notes. Fannie Mae guidelines now have the banks looking to see that there are adequate reserves. Unless the money will come back quickly you don't want to use them for items not necessary.

MaryA1 (Arizona)
Posts: 7,043

Posted:

Quote:

Posted By JaniceF1 on 09/02/2008 6:04 PM
The front lawns are owned and watered by the seven individual owners. The water system paid by the HOA only waters the common area which is all plants, shrubs, and trees.
The CCR's indicate that the reserves can ONLY be used for the common area. I assume that means the eventual street repair (it is considered our private street) and stucco wall, lighting, and landscaping maintenance.
It was agreed the first year that the landscaper would be paid monthly and also mow the front yards so they would all be done at the same time. It used to be $10.00 extra for the mowing but it is now approximately $205 to maintain the common areas and approximately $90.00 to mow the front lawns. He comes once a week.
The two homeowners that have proposed the synthetic turf say they are concerned with the water and fertilizer in the future.
I have not agreed or disagreed and have said I would listen to a proposal but in any event I did not think the reserves could be taken out for this purpose and I would check further. After reading the CCR's, IMO it would be illegalto take the money out of the reserves and that is the reason I'm asing this group if I am right or wrong. It seems that we have put $12000 into our reserves for the eventual repaving of the street. The required 'reserve study' indicated we are borderline so leaving $4000 would put maintenance issues at risk.
Janice

Janice,

If the "front lawns are owned and watered by the seven individual owners", as you say, why is the board even considering replacing the grass with artificial turf at the assn's expense? The assn isn't paying for any of the upkeep, including the watering, of this grass. IMO, the increased costs are a problem for the individual h/o's, not the assn. If some h/o's want to replace their grass with artificial turf, then all the assn has to do is approve their request to do so.

But, in answer to your questions about using the reserve account. . .Unless there are state laws regarding your reserve account, or a stipulation in your gov. docs. that you must use the reserves for their intended purpose, the board can do as they wish with the money. I know of no IRS requirement to the contrary either. However, IMO, that equates to "robbing Peter to pay Paul" and would not be a very prudent thing to do. If a maint. project were required for an item contained in the reserve, the money wouldn't be there. But, this is all a moot point! IMO, the assn is not obligated to replace grass not owned by them!!!

JohnK3 (Pennsylvania)
Posts: 967

Posted:

Janice,

I agree with the above recent posters. If the lawns are private property, the Board has no rights to install AstroTurf, putting greens or anything else. That being the case, your reserves are safe (for now).

JaniceF1 (California)
Posts: 8

Posted:

I don't think so.
Janice

JaniceF1 (California)
Posts: 8

Posted:

I realize the HOA is not obligated. The 2 owners that want to do this state it will repay itself by having the yard maintenance become once a month instead of once a week. I think from reading the comments it seems that:
1) it is not legal to remove money from the reserves for this purpose; and
2) it should be voted and decided without using the reserves but by special alternate funding.
Jaice

JaniceF1 (California)
Posts: 8

Posted:

KirkW1 you stated
Now for economics - if the $8000 covers only front lawns it will take 89 weeks to pay back the money using the $90 a week. But...if that covers the common areas as well, then you are looking at only 28 weeks to pay back.

The HOA pays $300 a month approximately $90 going toward the lawns ----- does that mean 890 or 89 weeks to repay?

Thanks again,

Janice

JohnK3 (Pennsylvania)
Posts: 967

Posted:

Quote:

Posted By JaniceF1 on 09/03/2008 9:30 AM
I realize the HOA is not obligated. The 2 owners that want to do this state it will repay itself by having the yard maintenance become once a month instead of once a week. I think from reading the comments it seems that:
1) it is not legal to remove money from the reserves for this purpose; and
2) it should be voted and decided without using the reserves but by special alternate funding.
Jaice

Installing gravel to replace the grass would reduce yard costs to zero. So what? The Board lacks the authority, whatever their good intentions. If some/all of your Membership wants turf, let 'em pay for it themselves and keep the HOA out of it.

GlenL (Ohio)
Posts: 5,491

Posted:

The cost savings to the HOA would be ZERO unless you are mandated to pay for the mowing of the front yards out of Association funds. Each H/O should be paying an extra $13 per week over and above what their normal assessment would be to pay for the mowing.

Studies show that 5 out of 4 people have problems with fractions

GeraldT4
Posts: 1,022

Posted:

JaniceF1 - As I see it, the entire membership would need to vote upon expanding the common elements to include the owner's front lawns. That is what you are talking about here, expansion of the elements the association is to maintain and replace. To me the concept is absurd, and why the association would even entertain the discussion when ONLY 2 OWNERS HAVE PROVIDED THE REQUEST IS ABSOLUTELY BEYOND ME!!!!!

JaniceF1 (California)
Posts: 8

Posted:

Susan, I didn't reply in the right place but the answer was and is "I don't know if they have the power".

GlenL, Yes, we all agreed the first year to pay that extra $10.00 a month for the mowing. He may be charging slightly more now but we never reexamined the fee for landscaping when he raised his rates to $300 a month.

GeraldT4
To me the concept is absurd, and why the association would even entertain the discussion when ONLY 2 OWNERS HAVE PROVIDED THE REQUEST IS ABSOLUTELY BEYOND ME!!!!!

After pondering this for a few days, your statement about this is how I feel but we are a very small group and I am trying to handle this the correct way.
I didn't mention this but to me it is even worse because they want to dole out $1200 - $1500 from the reseraves to each homeowner and let them do their own thing. That IMO would be really unfair and possibly make the entire street look bad. Some of the fronts are different shapes and perhaps would cost more or less. One of the group said she would want to do gravel and plants and one said she would prefer a driveway extension. I assume they are thinking the landscaper would charge 1/4 of what he charges now but I don't think he would come for only $75 a month. I did ask them to find out the particulars of the cost and the charge for once a month. That leaves only 2 homeowners that I do not know their opinion. 2 for turf, 1 for gravel, 1 for cement, Me for leave it alone and the other 2.
Janice

KirkW1 (Texas)
Posts: 1,665

Posted:

Janice,

I see a couple issues here and they are somewhat independent of each other.

The first thing is that clearly some people don't understand the concept of the reserves. For this, the best explanation I can think of is the reserve study itself. If it is well written it should explain the concept and what that money is being saved for. Understand that some people would still rather spend the money and not worry about it. But I think most people can grasp the fairness issue of such a policy.

As for the legality of using the reserves, the truth is that I would be highly skeptical if one couldn't manage to justify how this fits into the stated purpose of the reserves. And if you have 100% membership buy in the whole thing becomes moot since your membership is who has reason to be concerned. And my second issue addresses the reason I think you need 100% buy in anyway.

The second is the treatment of the front yards as if they were common area. From what you described they are in fact private yards. As such, if a single owner decided he/she did not want their front yard mowed by the HOA they would probably win. Now you could probably still manage to keep the money added to the assessments, but you could not force them to allow the mowing crew to do their lots as well.

Now when you propose to make a major change such as rip out their landscape in favor of artificial turf, you are in the same boat. You simply don' have the power to force them to allow your organization to do this. As such, you need 100% buy in for this project to work. (Or you could skip those that don't want to participate but it wouldn't look the same.)

As for the economics of the action, if you pay $8000 for the project and save $90 a week, then after 89 weeks you will have paid for the cost of the project. As a note, you should not count weeks in which you wouldn't have mowed anyway. And you shouldn't count any week in which you would pay the $90 in maintanence. But for sake of illustration in my area most HOAs have their lawns mowed 36 weeks a year. Assuming no other maintenance was preformed, the project would be paid for in about two and a half years.

This of course only takes into account the money being spent on mowing. The reality is that it would pay for itself faster when you consider the savings in water.

MaryA1 (Arizona)
Posts: 7,043

Posted:

Janice,

Since you stated the h/o's own their front lawns and also water them, I'm assuming you live in a planned community. If so, this really means the whole lot upon which the home sits is owned by the property owner. The assn. has no right to replace the grass on private property at the expense of the assn, even if the owner agrees to it (actually, what owner wouldn't!!). The assn should only be concerned with maintaining the common areas which are owned by the assn. This is regardless of whether or not the h/o's have contracted with the assn to maintain their front lawns. This being said, I'm uncertain as to why you are still debating this issue.

KirkW1 (Texas)
Posts: 1,665

Posted:

Quote:

...The assn. has no right to replace the grass on private property at the expense of the assn, even if the owner agrees to it (actually, what owner wouldn't!!)...

I would disagree. The charter for my organization is pretty broad and if the owners allowed it, it could happen. (But getting more then 300 to agree on such would be a whole new game.)

Keep in mind that if the association pays for a change, the owners really have paid for the change. I really don't know how I would react to the idea of artificial turf in my yard. I would have to do a lot of research on the issue and see what was proposed. While I am sure that I would not make an effort to stop others from putting it in, I would have to spend more time when it comes to my yard.

I think that an HOA using the power of community is something to be encouraged. And we should not force the model of a 300 home HOA onto a small 7 home HOA. Also keep in mind that if 100% agree to the action, nobody is going to do anything to stop the action. Nobody in government much cares what their HOA does if nobody in the membership complains about it. They only would become involved is there is a law suit or an ordinance is broken.

MaryA1 (Arizona)
Posts: 7,043

Posted:

Kirk,

Well, it's true that if 100% of the h/o's agree to it then there shouldn't be a problem. But, what I was saying is that the assn does NOT have the authority to make this "improvement" on property they do not own AT THE EXPENSE OF THE ASSN. Frankly, even if all 7 h/o's agree to this and 7 is the total number of homes in the assn, I still think it's not an area the board should be getting into. Somewhere down the line someone is going to complain that they have paid more than their fair share -- their lot isn't as big, etc., etc.

Someone else suggested the board consider using stones instead of artificial turf. I agree this would be much nicer. Here in AZ, a high % of homes have desert landscaping which includes stones and large boulders and rock and no grass.

JaniceF1 (California)
Posts: 8

Posted:

KirkW1 and MaryA1,

I really didn't think we were still debating this.
Just had a few questions that I was trying to clarify.

MaryA1
As I see it now, and from re reading the CCR's, IMO the reserves must be kept for the improvements of the common areas. If the homeowners want to set up a special fund with 100% participation then I assume they can do that. I can see for instance, that the reserves are there for the benefit of other interests like a mortgage company that could possibly sue saying that the reserves are for the purpose intended (nothing that I anticipate) but the mortgage company could easily say we should not have used the reserves for anything other than a new street and the common areas. Otherwise, the funds are not there if they need to be there and if the street deteriorated the value of the property would possibly be less.

KirkW1... my math must still be suspect. THE HOA pays a TOTAL of $300 a month to a landscaper that comes every week. We at one time broke it down that he was doing the extra lawn mowing for approximately $70 a month but that may have changed since his rates went up from $250 / month to $300 / month. You have mentioned $90 a week and I just don't get it.

Janice

KirkW1 (Texas)
Posts: 1,665

Posted:

Quote:

... my math must still be suspect. THE HOA pays a TOTAL of $300 a month to a landscaper that comes every week. We at one time broke it down that he was doing the extra lawn mowing for approximately $70 a month but that may have changed since his rates went up from $250 / month to $300 / month. You have mentioned $90 a week and I just don't get it.

Well for some reason I thought it was about $90 a week spent on the mowing of the lawns. At $90 a month, the payoff comes out at 89 months of savings. (Assuming you don't spend any additional funds on the new artificial turf.) Doesn't take much to figure out that this is a very long time to pay off. In fact, if you are paying $90 a month 12 months a year, then it will be nearly 7.5 years. If you add in the cost of water that comes down some. And when considering the pros and cons it is a legitimate portion to think about.

MaryA1 (Arizona)
Posts: 7,043

Posted:

Quote:

Posted By JaniceF1 on 09/04/2008 4:52 PM
KirkW1 and MaryA1,

I really didn't think we were still debating this.
Just had a few questions that I was trying to clarify.

MaryA1
As I see it now, and from re reading the CCR's, IMO the reserves must be kept for the improvements of the common areas. If the homeowners want to set up a special fund with 100% participation then I assume they can do that. I can see for instance, that the reserves are there for the benefit of other interests like a mortgage company that could possibly sue saying that the reserves are for the purpose intended (nothing that I anticipate) but the mortgage company could easily say we should not have used the reserves for anything other than a new street and the common areas. Otherwise, the funds are not there if they need to be there and if the street deteriorated the value of the property would possibly be less.

Janice

Janice,

That's correct; the reserves are for repair and improvements to the common areas. The key here is "common areas". You stated yourself the h/o's own these grassy areas in the front of their home; therefore it is NOT common area. I agree the h/o's can set up a special fund but this shouldn't be done through the HOA, it should be done on their own. You gave the impression the HOA's reserves were going to be used to replace the grass.

Based upon your remark that a mortgage co could sue the assn for not having a reserve fund, tells me you are a bit confused about resreve funds. A reserve fund is set up to provide funding, when needed, for major repair and/or replacement of capital assets. That is, capital assets owned by the assn. -- not anything owned by the individual h/o's. The reserve fund should only be used for the designated items contained in the reserve study.

GeraldT4
Posts: 1,022

Posted:

Just a general statement: Reserves are for the replacement of elements, not for repairs. Perhaps the replacement will be an improvement once the element is replaced. For example, the roof shingles used at conveyance have had many upgrades since then, or materials have a longer life expectancy. Capital improvements and repairs are funded from other maintenance accounts, not Reserves.

KirkW1 (Texas)
Posts: 1,665

Posted:

Where reserve funds and mortgage companies come to intermix is when someone tries to get financing on their unit. Fannie Mae recently released guidelines that involve reserve funding. Generally they require:

a healthy reserve account

10% of annual budget going to reserves (unless you can show that this is excessive such as my organization)

This of course could affect any owner who either wants to refinance (perhaps to get out of an ARM), or sell their house. While this currently only affects notes that are to be sold to Fannie Mae, it likely become the norm as most organizations like to keep their options open. Also Freddie Mac is expected to follow suit with similar guidelines.

JaniceF1 (California)
Posts: 8

Posted:

Mary, Yes, that is what 2 of the board members want to do and it was brought up at the last meeting that they thought we should use 3/4 of the reserves for replacing the grass by doling out the money individually. I did not agree or disagree at the meeting but said I would look into it. So that's why I brought this up to the HOATalk. You guys are very informative. Thanks for all your help,
Janice
PS just found out that synthetic turf has a heat factor of 240 degrees, needs to be replaced every so many years, and the lesser priced turf loses its color. I will probably not be voting for this project no matter what.

I really didn't think we were still debating this.
Just had a few questions that I was trying to clarify.

MaryA1
As I see it now, and from re reading the CCR's, IMO the reserves must be kept for the improvements of the common areas. If the homeowners want to set up a special fund with 100% participation then I assume they can do that. I can see for instance, that the reserves are there for the benefit of other interests like a mortgage company that could possibly sue saying that the reserves are for the purpose intended (nothing that I anticipate) but the mortgage company could easily say we should not have used the reserves for anything other than a new street and the common areas. Otherwise, the funds are not there if they need to be there and if the street deteriorated the value of the property would possibly be less.

Janice

BettyM3 (Arizona)
Posts: 1

Posted:

Even if legal it is an irresponsible use of Reserve Fund.

JeannieraeO (California)
Posts: 27

Posted:

If the lawns are privately owned, you can't spend Association money, reserve or operating funds, on them. Period. It is an illegal allocation of funds and the board members who vote to spend the money would become legally liable. You could lose your non-profit status and your board members could even be criminally prosecuted. If the lawn owners want astro-turf, they can pay for it.

I would also like to add that a $12,000 reserve fund is grossly inadequate should any major repairs come due. (Yes, this can happen even in a new developement) Using three-fourths of that money for something that is of dubious benefit is just bad business.

KirkW1 (Texas)
Posts: 1,665

Posted:

I don't buy that spending the funds in this manner would risk putting the non-profit status of the organization at risk. First, all funds from the HOA came from the members of the HOA. Thus it would really constitute a return of funds to those who put them in. And for the general education there are many non-profit organizations that exist to enrich their membership. If the profits go to the members, then the organization does not see a profit and remains as a non-profit. You are getting non-profit and charity confused.

As for the amount of funds needed: how can you even start to project what they need? What is their common areas consist of 100 square foot patch of grass and a sprinkler system? At no point should the reserve fund hold much more then the actual cost of replacement/repair of the system components. Grass and trees simply don't cost that much.

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