1365.5 Reserve Study
Reserve Study Code
RESERVE STUDY – CIVIL CODE Section 1365.5.
Review of Financial Affairs – Withdrawal of Funds – Reserve Funds – Study.
Statute text
1365.5. (a) Unless the governing documents impose more stringent
standards, the board of directors of the association shall do all of
the following:
(1) Review a current reconciliation of the association's operating
accounts on at least a quarterly basis.
(2) Review a current reconciliation of the association's reserve
accounts on at least a quarterly basis.
(3) Review, on at least a quarterly basis, the current year's
actual reserve revenues and expenses compared to the current year's
budget.
(4) Review the latest account statements prepared by the financial
institutions where the association has its operating and reserve
accounts.
(5) Review an income and expense statement for the association's
operating and reserve accounts on at least a quarterly basis.
(b) The signatures of at least two persons, who shall be members
of the association's board of directors, or one officer who is not a
member of the board of directors and a member of the board of
directors, shall be required for the withdrawal of moneys from the
association's reserve accounts.
(c) (1) The board of directors shall not expend funds designated
as 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
and for which the reserve fund was established.
(2) However, the board may authorize the temporary transfer of
moneys from a reserve fund to the association's general operating
fund to meet short-term cashflow requirements or other expenses, if
the board has provided notice of the intent to consider the transfer
in a notice of meeting, which shall be provided as specified in
Section 1363.05. The notice shall include the reasons the transfer is
needed, some of the options for repayment, and whether a special
assessment may be considered. If the board authorizes the transfer,
the board shall issue a written finding, recorded in the board's
minutes, explaining the reasons that the transfer is needed, and
describing when and how the moneys will be repaid to the reserve
fund. The transferred funds shall be restored to the reserve fund
within one year of the date of the initial transfer, except that the
board may, after giving the same notice required for considering a
transfer, and, upon making a finding supported by documentation that
a temporary delay would be in the best interests of the common
interest development, temporarily delay the restoration. The board
shall exercise prudent fiscal management in maintaining the integrity
of the reserve account, and shall, if necessary, levy a special
assessment to recover the full amount of the expended funds within
the time limits required by this section. This special assessment is
subject to the limitation imposed by Section 1366. The board may, at
its discretion, extend the date the payment on the special assessment
is due. Any extension shall not prevent the board from pursuing any
legal remedy to enforce the collection of an unpaid special
assessment.
(d) When the decision is made to use reserve funds or to
temporarily transfer moneys from the reserve fund to pay for
litigation, the association shall notify the members of the
association of that decision in the next available mailing to all
members pursuant to Section 5016 of the Corporations Code, and of the
availability of an accounting of those expenses. Unless the
governing documents impose more stringent standards, the association
shall make an accounting of expenses related to the litigation on at
least a quarterly basis. The accounting shall be made available for
inspection by members of the association at the association's office.
(e) At least once every three years, the board of directors shall
cause to be conducted a reasonably competent and diligent visual
inspection of the accessible areas of the major components that the
association is obligated to repair, replace, restore, or maintain as
part of a study of the reserve account requirements of the common
interest development, if the current replacement value of the major
components is equal to or greater than one-half of the gross budget
of the association, excluding the association's reserve account for
that period. The board shall review this study, or cause it to be
reviewed, annually and shall consider and implement necessary
adjustments to the board's analysis of the reserve account
requirements as a result of that review.
The study required by this subdivision shall at a minimum include:
(1) Identification of the major components that the association is
obligated to repair, replace, restore, or maintain that, as of the
date of the study, have a remaining useful life of less than 30
years.
(2) Identification of the probable remaining useful life of the
components identified in paragraph (1) as of the date of the study.
(3) An estimate of the cost of repair, replacement, restoration,
or maintenance of the components identified in paragraph (1).
(4) An estimate of the total annual contribution necessary to
defray the cost to repair, replace, restore, or maintain the
components identified in paragraph (1) during and at the end of their
useful life, after subtracting total reserve funds as of the date of
the study.
(5) A reserve funding plan that indicates how the association
plans to fund the contribution identified in paragraph (4) to meet
the association's obligation for the repair and replacement of all
major components with an expected remaining life of 30 years or less,
not including those components that the board has determined will
not be replaced or repaired. The plan shall include a schedule of the
date and amount of any change in regular or special assessments that
would be needed to sufficiently fund the reserve funding plan. The
plan shall be adopted by the board of directors at an open meeting
before the membership of the association as described in Section
1363.05. If the board of directors determines that an assessment
increase is necessary to fund the reserve funding plan, any increase
shall be approved in a separate action of the board that is
consistent with the procedure described in Section 1366.
(f) As used in this section, "reserve accounts" means both of the
following:
(1) Moneys that the association's board of directors has
identified for use to defray the future repair or replacement of, or
additions to, those major components that the association is
obligated to maintain.
(2) The funds received, and not yet expended or disposed of, from
either a compensatory damage award or settlement to an association
from any person or entity for injuries to property, real or personal,
arising from any construction or design defects. These funds shall
be separately itemized from funds described in paragraph (1).
(g) As used in this section, "reserve account requirements" means
the estimated funds that the association's board of directors has
determined are required to be available at a specified point in time
to repair, replace, or restore those major components that the
association is obligated to maintain.
(h) This section does not apply to an association that does not
have a "common area" as defined in Section 1351.