HOA Law Blog

2005 - 2006 ANNUAL DISCLOSURE CHECKLIST FOR COMMUNITY ASSOCIATIONS

NOT LESS THAN 30 DAYS NOR MORE THAN 90 DAYS PRIOR TO THE BEGINING OF THE FISCAL YEAR:

 Pro Forma Operating Budget Civil Code § 1365(a)
The association must distribute its operating “pro forma” budget within the “60-day window” to retain its ability to unilaterally increase assessments. If this requirement is not met, the members must approve any increase to the regular assessments.

The budget must contain the following:
• an estimate of revenue and expenses on an accrual basis;
• a summary of the reserves printed in bold type;
• with respect to construction or design defect cases, the summary must also include a separate line
item for:
(1) funds received from compensatory damage awards or settlements; and
(2) expenditure or disposition of funds, including amounts for direct/indirect costs of repair of
defects (If the association is required to have a CPA conduct a review of its financial
statements, the above information may instead be contained in such review);
• a statement as to whether the board anticipates the levy of one or more special assessments; and
• a basic description of the procedures used to calculate the reserves.

 Summary of Pro Forma Operating Budget Civil Code § 1365(c)
(Alternative to Above) The association may distribute a summary of the operating budget in lieu of the pro forma budget.

The summary budget must give members notice that:
• the complete budget is available for review at the association’s business office or other
suitable location within the development; and
• copies of the complete budget will be provided upon request at no charge to a member within
five (5) days of the request.

These notices must be printed in at least 10-point bold type on the front page of the summary.

 Assessment and Reserve Funding Disclosure Summary
The association must distribute an Assessment and Reserve Funding Disclosure Summary in the form prescribed by Civil Code Section 1365.2.5. This disclosure requires more than just a description of the amount of reserves and/or the association’s budget contributions. Disclosure of, among other things, the components being reserved for, their anticipated remaining life and how much money is currently in reserves allocated to that component must be disclosed.

 Assessment Increases Civil Code § 1366(d)
Notice of an assessment increase or special assessment must be provided by first-class mail to members not less than thirty (30) nor more than sixty (60) days before the increase or assessment is due. Note: Even if the budget shows the increased assessments, prepare and distribute a general notice.

 Assessment Collection Policy Civil Code § 1365(d)
Members must receive a description of the policies and practices which the association will apply to enforce payment of assessments. The failure to adopt and distribute this assessment collection policy may affect an association’s ability to collect delinquent assessments.

This notice usually describes:
• how, when and under what conditions the association will record and foreclose upon assessment liens;
• the nature and amount of late charges, interest and collection costs; and
• owners’ rights to demand Internal Dispute Resolution (“IDR”) and Alternative Dispute Resolution (“ADR”) at different times during the collection process.

 Secondary Addresses Provided by Owners
The association shall notify owners of their right to submit secondary addresses to the association for purposes of collection notices. Upon receipt of a written request by an owner identifying a secondary address for purposes of collection notices, the association shall send additional copies of any notices required by Section 1367.1 of the California Civil Code to the secondary address provided. The owner’s request shall be in writing and shall be mailed to the association in a manner that shall indicate that the association has received it. The owner may identify or change a secondary address at any time, provided that, if a secondary address is identified or changed during the collection process, the association shall only be required to send notices to the requested secondary address from the point that the association receives the request.

WITH THE BUDGET SUMMARY, OR IN ANY GENERALY MAILING DURING THE YEAR:

 Notice of Right to Minutes of Board Meeting Civil Code § 1363.05(d)
On an annual basis, the association must notify members of their right to receive copies of the minutes from board of directors’ meetings (which does not include executive session meeting minutes).
The notice should state:
1. that members have the right to receive approved minutes, an unapproved draft, or a summary of the minutes within thirty (30) days of a board meeting upon member’s request and upon reimbursement of association’s costs to distribute minutes; and
2. how and from whom those minutes may be obtained.

 Arbitration/Mediation of CC&Rs Disputes Civil Code § 1369.510 et seq.
Annually, the association must distribute a summary of Civil Code Section 1369.510 et seq. to its members.

Section 1369.510 et seq. provides, in part:
• An owner or the association must first offer arbitration, mediation or conciliation prior to litigating an action to enforce the governing documents, in seeking injunctive or declaratory relief, or injunctive or declaratory relief plus damages of up to $5,000 (other than assessments);
• thirty (30) days in which the responding party may accept or reject ADR

Civil Code §1369.590 requires that associations annually provide members with a summary of the ADR that specifically states:
“Failure of a member of the association to comply with the alternative dispute resolution requirements of Section 1369.520 of the Civil Code may result in the loss of your right to sue the association or another member of the association regarding enforcement of the governing documents or the applicable law.”

The summary must be provided “either at the time the pro forma budget required by Civil Code Section 1365 is distributed or in the manner prescribed in Section 5016 of the Corporations Code.”

 Insurance Coverages Civil Code § 1365(e)
The association must distribute to the members a summary of its property, general liability, earthquake, flood and fidelity insurance policies. The summary should also state:
• the name of the insurer and the type of insurance; and
• the policy limits and deductibles, if any.

To the extent the above information is contained on the policy’s declaration page, that page can be distributed in lieu of the summary.

The summary or declaration page must include the statement provided in Civil Code Section 1365(e)(4). This statement must be in at least 10-point boldface type.

Notice of a lapse, cancellation or non-renewal of any policy or of any change in policy shall be provided to the members by first-class mail as soon as reasonably practicable.

Within Sixty (60) days prior to beginning of fiscal year:

 Notice of Assessments, Foreclosures and Payment Plans Civil Code §1365.1
The association must distribute the notice specified in Civil Code Section 1365.1 pertaining to assessments, the association’s rights of foreclosure, payments of assessments and meetings and payment plans concerning a delinquent assessment.

WITHIN 120 DAYS AFTER THE CLOSE OF EACH FISCAL YEAR

 Review of Financial Statement Civil Code § 1365(b)
For any fiscal year in which the association’s gross income exceeds $75,000, a review of its financial statement must be prepared by a licensed California accountant and distributed to members within 120 days after the close of each fiscal year.

 Notice of Right to Receive Annual Report Corporations Code § 8321
For any fiscal year in which the association’s gross revenues are at least $10,000, it must prepare an annual report within 120 days after the end of the association’s fiscal year and notify members on an annual basis of their right to receive this report. The association must provide the report at its own expense to any member submitting a written request for a copy of the report.

The annual report must contain:
• a year-end financial statement;
• a notice stating where records of the association members’ names and addresses are stored; and
• disclosure of transactions with interested parties and of indemnification agreements.

The association must attach either the accountant’s report, if an independent accountant has reviewed or audited the financial statement, or a certificate by an officer indicating that the statement was prepared without review or audit.

MISCELLANEOUS DISCLOSURES

 Schedule of Monetary Penalties Civil Code § 1363(g)
Associations which impose fines on members for violating governing documents or association rules must distribute a schedule of the monetary penalties via first class mail or hand-delivery when the schedule is adopted or revised (recommended annually).

 Escrow/Sale of Unit Civil Code § 1368(a) and (b)
Within ten (10) days of written request from an owner, an association must provide the owner (or owner’s agent/escrow) with a copy of various documents and information so that the owner may satisfy certain disclosure obligations to a prospective buyer. Among the documents and information to be provided by the selling owner is a statement of unpaid fines and other monetary penalties, as well as a copy or summary of any notices of alleged violations of the governing documents that remain unresolved at the time of making the disclosure to the prospective buyer.

 Disclosure of Construction Defect Issues Before Suit Civil Code § 1368.5, § 1375(k)(1)(E)
Thirty (30) days before an association files a lawsuit for construction defects, it must provide notice to all owners of the defect issues, schedule a members meeting to discuss the claims and the available options, including any settlement offer from the builder, as referenced in California Civil Code Section 1375(k)(1)(E).

 Disclosure of Construction Defect Settlement Civil Code § 1375.1
Upon settling a construction defect claim with the builder, the association must so inform the members as soon as reasonably practicable, of the following:
(1) disclose what will be repaired;
(2) estimate when the defects will be repaired; and
(3) disclose any defects that may not be repaired.

 Reserve Fund Transfer Civil Code § 1365.5(d)
When an association uses or transfers any funds from its reserve account to fund litigation, it must notify the members of the transfer and of the availability of an accounting in the next available mailing to the membership.

 Litigation Expenses Civil Code § 1365.5(d)
Unless the association’s governing documents impose more stringent standards, the association shall prepare an accounting of the litigation expenses on at least a quarterly basis. The accounting shall be made available for inspection by members at the association’s office.

(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.