1365 Financial & Reserve Study | California Homeowners Association

CIVIL CODE
SECTION 1365-1365.6

1365. Unless the governing documents impose more stringent

standards, the association shall prepare and distribute to all of its

members the following documents:

(a) A pro forma operating budget, which shall include all of the

following:

(1) The estimated revenue and expenses on an accrual basis.

(2) A summary of the association's reserves based upon the most

recent review or study conducted pursuant to Section 1365.5, based

only on assets held in cash or cash equivalents, which shall be

printed in boldface type and include all of the following:

(A) The current estimated replacement cost, estimated remaining

life, and estimated useful life of each major component.

(B) As of the end of the fiscal year for which the study is

prepared:

(i) The current estimate of the amount of cash reserves necessary

to repair, replace, restore, or maintain the major components.

(ii) The current amount of accumulated cash reserves actually set

aside to repair, replace, restore, or maintain major components.

(iii) If applicable, the amount of funds received from either a

compensatory damage award or settlement to an association from any

person or entity for injuries to property, real or personal, arising

out of any construction or design defects, and the expenditure or

disposition of funds, including the amounts expended for the direct

and indirect costs of repair of construction or design defects. These

amounts shall be reported at the end of the fiscal year for which

the study is prepared as separate line items under cash reserves

pursuant to clause (ii). Instead of complying with the requirements

set forth in this clause, an association that is obligated to issue a

review of their financial statement pursuant to subdivision (b) may

include in the review a statement containing all of the information

required by this clause.

clause (ii) of subparagraph (B) equals the amount determined for

purposes of clause (i) of subparagraph (B).

(D) The current deficiency in reserve funding expressed on a per

unit basis. The figure shall be calculated by subtracting the amount

determined for purposes of clause (ii) of subparagraph (B) from the

amount determined for purposes of clause (i) of subparagraph (B) and

then dividing the result by the number of separate interests within

the association, except that if assessments vary by the size or type

of ownership interest, then the association shall calculate the

current deficiency in a manner that reflects the variation.

(3) A statement as to all of the following:

(A) Whether the board of directors of the association has

determined to defer or not undertake repairs or replacement of any

major component with a remaining life of 30 years or less, including

a justification for the deferral or decision not to undertake the

repairs or replacement.

(B) Whether the board of directors of the association, consistent

with the reserve funding plan adopted pursuant to subdivision (e) of

Section 1365.5, has determined or anticipates that the levy of one or

more special assessments will be required to repair, replace, or

restore any major component or to provide adequate reserves therefor.

If so, the statement shall also set out the estimated amount,

commencement date, and duration of the assessment.

will fund reserves to repair or replace major components, including

assessments, borrowing, use of other assets, deferral of selected

replacements or repairs, or alternative mechanisms.

(D) Whether the association has any outstanding loans with an

original term of more than one year, including the payee, interest

rate, amount outstanding, annual payment, and when the loan is

scheduled to be retired.

(4) A general statement addressing the procedures used for the

calculation and establishment of those reserves to defray the future

repair, replacement, or additions to those major components that the

association is obligated to maintain. The report shall include, but

need not be limited to, reserve calculations made using the formula

described in paragraph (4) of subdivision (b) of Section 1365.2.5,

and may not assume a rate of return on cash reserves in excess of 2

percent above the discount rate published by the Federal Reserve Bank

of San Francisco at the time the calculation was made.

The summary of the association's reserves disclosed pursuant to

paragraph (2) shall not be admissible in evidence to show improper

financial management of an association, provided that other relevant

and competent evidence of the financial condition of the association

is not made inadmissible by this provision.

Notwithstanding a contrary provision in the governing documents, a

copy of the operating budget shall be annually distributed not less

than 30 days nor more than 90 days prior to the beginning of the

association's fiscal year.

(b) Commencing January 1, 2009, a summary of the reserve funding

plan adopted by the board of directors of the association, as

specified in paragraph (4) of subdivision (e) of Section 1365.5. The

summary shall include notice to members that the full reserve study

plan is available upon request, and the association shall provide the

full reserve plan to any member upon request.

be prepared in accordance with generally accepted accounting

principles by a licensee of the California Board of Accountancy for

any fiscal year in which the gross income to the association exceeds

seventy-five thousand dollars ($75,000). A copy of the review of the

financial statement shall be distributed within 120 days after the

close of each fiscal year.

(d) Instead of the distribution of the pro forma operating budget

required by subdivision (a), the board of directors may elect to

distribute a summary of the pro forma operating budget to all of its

members with a written notice that the pro forma operating budget is

available at the business office of the association or at another

suitable location within the boundaries of the development, and that

copies will be provided upon request and at the expense of the

association. If any member requests that a copy of the pro forma

operating budget required by subdivision (a) be mailed to the member,

the association shall provide the copy to the member by first-class

United States mail at the expense of the association and delivered

within five days. The written notice that is distributed to each of

the association members shall be in at least 10-point boldface type

on the front page of the summary of the budget.

(e) A statement describing the association's policies and

practices in enforcing lien rights or other legal remedies for

default in payment of its assessments against its members shall be

annually delivered to the members not less than 30 days nor more than

90 days immediately preceding the beginning of the association's

fiscal year.

(f) (1) A summary of the association's property, general

liability, earthquake, flood, and fidelity insurance policies, which

shall be distributed not less than 30 days nor more than 90 days

preceding the beginning of the association's fiscal year, that

includes all of the following information about each policy:

(A) The name of the insurer.

(B) The type of insurance.

(D) The amount of deductibles, if any.

(2) The association shall, as soon as reasonably practicable,

notify its members by first-class mail if any of the policies

described in paragraph (1) have lapsed, been canceled, and are not

immediately renewed, restored, or replaced, or if there is a

significant change, such as a reduction in coverage or limits or an

increase in the deductible, as to any of those policies. If the

association receives any notice of nonrenewal of a policy described

in paragraph (1), the association shall immediately notify its

members if replacement coverage will not be in effect by the date the

existing coverage will lapse.

(3) To the extent that any of the information required to be

disclosed pursuant to paragraph (1) is specified in the insurance

policy declaration page, the association may meet its obligation to

disclose that information by making copies of that page and

distributing it to all of its members.

(4) The summary distributed pursuant to paragraph (1) shall

contain, in at least 10-point boldface type, the following statement:

"This summary of the association's policies of insurance provides

only certain information, as required by subdivision (f) of Section

1365 of the Civil Code, and should not be considered a substitute for

the complete policy terms and conditions contained in the actual

policies of insurance. Any association member may, upon request and

provision of reasonable notice, review the association's insurance

policies and, upon request and payment of reasonable duplication

charges, obtain copies of those policies. Although the association

maintains the policies of insurance specified in this summary, the

association's policies of insurance may not cover your property,

including personal property or, real property improvements to or

around your dwelling, or personal injuries or other losses that occur

within or around your dwelling. Even if a loss is covered, you may

nevertheless be responsible for paying all or a portion of any

deductible that applies. Association members should consult with

their individual insurance broker or agent for appropriate additional

coverage."

1365.1. (a) The association shall distribute the written notice

described in subdivision (b) to each member of the association during

the 60-day period immediately preceding the beginning of the

association's fiscal year. The notice shall be printed in at least

12-point type. An association distributing the notice to an owner of

an interest that is described in Section 11212 of the Business and

Professions Code that is not otherwise exempt from this section

pursuant to subdivision (a) of Section 11211.7 may delete from the

notice described in subdivision (b) the portion regarding meetings

and payment plans.

(b) The notice required by this section shall read as follows:

"NOTICE ASSESSMENTS AND FORECLOSURE

This notice outlines some of the rights and responsibilities of

owners of property in common interest developments and the

associations that manage them. Please refer to the sections of the

Civil Code indicated for further information. A portion of the

information in this notice applies only to liens recorded on or after

January 1, 2003. You may wish to consult a lawyer if you dispute an

assessment.

ASSESSMENTS AND FORECLOSURE

Assessments become delinquent 15 days after they are due, unless

the governing documents provide for a longer time. The failure to pay

association assessments may result in the loss of an owner's

property through foreclosure. Foreclosure may occur either as a

result of a court action, known as judicial foreclosure or without

court action, often referred to as nonjudicial foreclosure. For liens

recorded on and after January 1, 2006, an association may not use

judicial or nonjudicial foreclosure to enforce that lien if the

amount of the delinquent assessments or dues, exclusive of any

accelerated assessments, late charges, fees, attorney's fees,

interest, and costs of collection, is less than one thousand eight

hundred dollars ($1,800). For delinquent assessments or dues in

excess of one thousand eight hundred dollars ($1,800) or more than 12

months delinquent, an association may use judicial or nonjudicial

foreclosure subject to the conditions set forth in Section 1367.4 of

the Civil Code. When using judicial or nonjudicial foreclosure, the

association records a lien on the owner's property. The owner's

property may be sold to satisfy the lien if the amounts secured by

the lien are not paid. (Sections 1366, 1367.1, and 1367.4 of the

Civil Code)

In a judicial or nonjudicial foreclosure, the association may

recover assessments, reasonable costs of collection, reasonable

attorney's fees, late charges, and interest. The association may not

use nonjudicial foreclosure to collect fines or penalties, except for

costs to repair common areas damaged by a member or a member's

guests, if the governing documents provide for this. (Sections 1366

and 1367.1 of the Civil Code)

The association must comply with the requirements of Section

1367.1 of the Civil Code when collecting delinquent assessments. If

the association fails to follow these requirements, it may not record

a lien on the owner's property until it has satisfied those

requirements. Any additional costs that result from satisfying the

requirements are the responsibility of the association. (Section

1367.1 of the Civil Code)

At least 30 days prior to recording a lien on an owner's separate

interest, the association must provide the owner of record with

certain documents by certified mail, including a description of its

collection and lien enforcement procedures and the method of

calculating the amount. It must also provide an itemized statement of

the charges owed by the owner. An owner has a right to review the

association's records to verify the debt. (Section 1367.1 of the

Civil Code)

If a lien is recorded against an owner's property in error, the

person who recorded the lien is required to record a lien release

within 21 days, and to provide an owner certain documents in this

regard. (Section 1367.1 of the Civil Code)

The collection practices of the association may be governed by

state and federal laws regarding fair debt collection. Penalties can

be imposed for debt collection practices that violate these laws.

PAYMENTS

When an owner makes a payment, he or she may request a receipt,

and the association is required to provide it. On the receipt, the

association must indicate the date of payment and the person who

received it. The association must inform owners of a mailing address

for overnight payments. (Section 1367.1 of the Civil Code)

An owner may, but is not obligated to, pay under protest any

disputed charge or sum levied by the association, including, but not

limited to, an assessment, fine, penalty, late fee, collection cost,

or monetary penalty imposed as a disciplinary measure, and by so

doing, specifically reserve the right to contest the disputed charge

or sum in court or otherwise.

An owner may dispute an assessment debt by submitting a written

request for dispute resolution to the association as set forth in

Article 5 (commencing with Section 1368.810) of Chapter 4 of Title 6

of Division 2 of the Civil Code. In addition, an association may not

initiate a foreclosure without participating in alternative dispute

resolution with a neutral third party as set forth in Article 2

(commencing with Section 1369.510) of Chapter 7 of Title 6 of

Division 2 of the Civil Code, if so requested by the owner. Binding

arbitration shall not be available if the association intends to

initiate a judicial foreclosure.

An owner is not liable for charges, interest, and costs of

collection, if it is established that the assessment was paid

properly on time. (Section 1367.1 of the Civil Code)

MEETINGS AND PAYMENT PLANS

An owner of a separate interest that is not a timeshare may

request the association to consider a payment plan to satisfy a

delinquent assessment. The association must inform owners of the

standards for payment plans, if any exist. (Section 1367.1 of the

Civil Code)

The board of directors must meet with an owner who makes a proper

written request for a meeting to discuss a payment plan when the

owner has received a notice of a delinquent assessment. These payment

plans must conform with the payment plan standards of the

association, if they exist. (Section 1367.1 of the Civil Code)"

facsimile transmission or United States mail to the association of a

secondary address. If a secondary address is provided, the

association shall send any and all correspondence and legal notices

required pursuant to this article to both the primary and the

secondary address.

1365.2. (a) For the purposes of this section, the following

definitions shall apply:

(1) "Association records" means all of the following:

(A) Any financial document required to be provided to a member in

Section 1365.

(B) Any financial document or statement required to be provided in

Section 1368.

containing any of the following:

(i) Balance sheet.

(ii) Income and expense statement.

(iii) Budget comparison.

(iv) General ledger. A "general ledger" is a report that shows all

transactions that occurred in an association account over a

specified period of time.

The records described in this subparagraph shall be prepared in

accordance with an accrual or modified accrual basis of accounting.

(D) Executed contracts not otherwise privileged under law.

(E) Written board approval of vendor or contractor proposals or

invoices.

(F) State and federal tax returns.

(G) Reserve account balances and records of payments made from

reserve accounts.

(H) Agendas and minutes of meetings of the members, the board of

directors and any committees appointed by the board of directors

pursuant to Section 7212 of the Corporations Code; excluding,

however, agendas, minutes, and other information from executive

sessions of the board of directors as described in Section 1363.05.

(I) (i) Membership lists, including name, property address, and

mailing address, if the conditions set forth in clause (ii) are met

and except as otherwise provided in clause (iii).

(ii) The member requesting the list shall state the purpose for

which the list is requested which purpose shall be reasonably related

to the requester's interest as a member. If the association

reasonably believes that the information in the list will be used for

another purpose, it may deny the member access to the list. If the

request is denied, in any subsequent action brought by the member

under subdivision (f), the association shall have the burden to prove

that the member would have allowed use of the information for

purposes unrelated to his or her interest as a member.

(iii) A member of the association may opt out of the sharing of

his or her name, property address, and mailing address by notifying

the association in writing that he or she prefers to be contacted via

the alternative process described in subdivision (c) of Section 8330

of the Corporations Code. This opt-out shall remain in effect until

changed by the member.

(J) Check registers.

(2) "Enhanced association records" means invoices, receipts and

canceled checks for payments made by the association, purchase orders

approved by the association, credit card statements for credit cards

issued in the name of the association, statements for services

rendered, and reimbursement requests submitted to the association,

provided that the person submitting the reimbursement request shall

be solely responsible for removing all personal identification

information from the request.

(b) (1) The association shall make available association records

and enhanced association records for the time periods and within the

timeframes provided in subdivisions (i) and (j) for inspection and

copying by a member of the association, or the member's designated

representative. The association may bill the requesting member for

the direct and actual cost of copying requested documents. The

association shall inform the member of the amount of the copying

costs before copying the requested documents.

(2) A member of the association may designate another person to

inspect and copy the specified association records on the member's

behalf. The member shall make this designation in writing.

records available for inspection and copying in the association's

business office within the common interest development.

(2) If the association does not have a business office within the

development, the association shall make the specified association

records available for inspection and copying at a place that the

requesting member and the association agree upon.

(3) If the association and the requesting member cannot agree upon

a place for inspection and copying pursuant to paragraph (2), or if

the requesting member submits a written request directly to the

association for copies of specifically identified records, the

association may satisfy the requirement to make the association

records available for inspection and copying by mailing copies of the

specifically identified records to the member by first-class mail

within the timeframes set forth in subdivision (j).

(4) The association may bill the requesting member for the direct

and actual cost of copying and mailing requested documents. The

association shall inform the member of the amount of the copying and

mailing costs, and the member shall agree to pay those costs, before

copying and sending the requested documents.

(5) In addition to the direct and actual costs of copying and

mailing, the association may bill the requesting member an amount not

in excess of ten dollars ($10) per hour, and not to exceed two

hundred dollars ($200) total per written request, for the time

actually and reasonably involved in redacting the enhanced

association records as provided in paragraph (2) of subdivision (a).

The association shall inform the member of the estimated costs, and

the member shall agree to pay those costs, before retrieving the

requested documents.

(d) (1) Except as provided in paragraph (2), the association may

withhold or redact information from the association records for any

of the following reasons:

(A) The release of the information is reasonably likely to lead to

identity theft. For the purposes of this section, "identity theft"

means the unauthorized use of another person's personal identifying

information to obtain credit, goods, services, money, or property.

Examples of information that may be withheld or redacted pursuant to

this paragraph include bank account numbers of members or vendors,

social security or tax identification numbers, and check, stock, and

credit card numbers.

(B) The release of the information is reasonably likely to lead to

fraud in connection with the association.

documents subject to attorney-client privilege or relating to

litigation in which the association is or may become involved, and

confidential settlement agreements.

(D) The release of the information is reasonably likely to

compromise the privacy of an individual member of the association.

(E) The information contains any of the following:

(i) Records of a-la-carte goods or services provided to individual

members of the association for which the association received

monetary consideration other than assessments.

(ii) Records of disciplinary actions, collection activities, or

payment plans of members other than the member requesting the

records.

(iii) Any person's personal identification information, including,

without limitation, social security number, tax identification

number, driver's license number, credit card account numbers, bank

account number, and bank routing number.

(iv) Agendas, minutes, and other information from executive

sessions of the board of directors as described in Section 1363.05,

except for executed contracts not otherwise privileged. Privileged

contracts shall not include contracts for maintenance, management, or

legal services.

(v) Personnel records other than the payroll records required to

be provided under paragraph (2).

(vi) Interior architectural plans, including security features,

for individual homes.

(2) Except as provided by the attorney-client privilege, the

association may not withhold or redact information concerning the

compensation paid to employees, vendors, or contractors. Compensation

information for individual employees shall be set forth by job

classification or title, not by the employee's name, social security

number, or other personal information.

(3) No association, officer, director, employee, agent or

volunteer of an association shall be liable for damages to a member

of the association or any third party as the result of identity theft

or other breach of privacy because of the failure to withhold or

redact that member's information under this subdivision unless the

failure to withhold or redact the information was intentional,

willful, or negligent.

(4) If requested by the requesting member, an association that

denies or redacts records shall provide a written explanation

specifying the legal basis for withholding or redacting the requested

records.

(e) (1) The association records, and any information from them,

may not be sold, used for a commercial purpose, or used for any other

purpose not reasonably related to a member's interest as a member.

An association may bring an action against any person who violates

this section for injunctive relief and for actual damages to the

association caused by the violation.

(2) This section may not be construed to limit the right of an

association to damages for misuse of information obtained from the

association records pursuant to this section or to limit the right of

an association to injunctive relief to stop the misuse of this

information.

(3) An association shall be entitled to recover reasonable costs

and expenses, including reasonable attorney's fees, in a successful

action to enforce its rights under this section.

(f) A member of an association may bring an action to enforce the

member's right to inspect and copy the association records. If a

court finds that the association unreasonably withheld access to the

association records, the court shall award the member reasonable

costs and expenses, including reasonable attorney's fees, and may

assess a civil penalty of up to five hundred dollars ($500) for the

denial of each separate written request. A cause of action under this

section may be brought in small claims court if the amount of the

demand does not exceed the jurisdiction of that court. A prevailing

association may recover any costs if the court finds the action to be

frivolous, unreasonable, or without foundation.

(g) The provisions of this section apply to any community service

organization or similar entity, as defined in paragraph (3) of

subdivision (c) of Section 1368, that is related to the association,

and to any nonprofit entity that provides services to a common

interest development under a declaration of trust. This section shall

operate to give a member of the organization or entity a right to

inspect and copy the records of that organization or entity

equivalent to that granted to association members by this section.

(h) Requesting parties shall have the option of receiving

specifically identified records by electronic transmission or

machine-readable storage media as long as those records can be

transmitted in a redacted format that does not allow the records to

be altered. The cost of duplication shall be limited to the direct

cost of producing the copy of a record in that electronic format. The

association may deliver specifically identified records by

electronic transmission or machine-readable storage media as long as

those records can be transmitted in a redacted format that prevents

the records from being altered.

(i) The time periods for which specified records shall be provided

is as follows:

(1) Association records shall be made available for the current

fiscal year and for each of the previous two fiscal years.

(2) Minutes of member and board meetings shall be permanently made

available. If a committee has decisionmaking authority, minutes of

the meetings of that committee shall be made available commencing

January 1, 2007, and shall thereafter be permanently made available.

(j) The timeframes in which access to specified records shall be

provided to a requesting member are as follows:

(1) Association records prepared during the current fiscal year,

within 10 business days following the association's receipt of the

request.

(2) Association records prepared during the previous two fiscal

years, within 30 calendar days following the association's receipt of

the request.

(3) Any record or statement available pursuant to Section 1365 or

1368, within the timeframe specified therein.

(4) Minutes of member and board meetings, within the timeframe

specified in subdivision (d) of Section 1363.05.

(5) Minutes of meetings of committees with decisionmaking

authority for meetings commencing on or after January 1, 2007, within

15 calendar days following approval.

(6) Membership list, within the timeframe specified in Section

8330 of the Corporations Code.

(k) There shall be no liability pursuant to this section for an

association that fails to retain records for the periods specified in

subdivision (i) that were created prior to January 1, 2006.

(l) As applied to an association and its members, the provisions

of this section are intended to supersede the provisions of Sections

8330 and 8333 of the Corporations Code to the extent those sections

are inconsistent.

(m) The provisions of this section shall not apply to any common

interest development in which separate interests are being offered

for sale by a subdivider under the authority of a public report

issued by the Department of Real Estate so long as the subdivider or

all subdividers offering those separate interests for sale, or any

employees of those subdividers or any other person who receives

direct or indirect compensation from any of those subdividers,

comprise a majority of the members of the board of directors of the

association. Notwithstanding the foregoing, this section shall apply

to that common interest development no later than 10 years after the

close of escrow for the first sale of a separate interest to a member

of the general public pursuant to the public report issued for the

first phase of the development.

(n) This section shall become operative on July 1, 2006.