AB 2100 - Imposing Additional Disclosure Requirements on the Board of Directors of Associations With Respect to Reserve Funding

Feldsott & Lee
A Law Corporation

Assembly Bill 2100 (“AB 2100”), imposes new disclosure requirements for the board of directors and also sets forth the requirement that the Board adopt a reserve account funding plan should it be determined that the reserve accounts are not adequately funded. The author of AB 2100 sought to accomplish the following goals with the amendments to the Civil Code effectuated by AB 2100:

1) Require the pro forma operating budget to also include the current deficiency in reserve funding expressed on a per unit basis, a statement as to whether the board of directors of the association has determined to defer or not undertake repairs or replacement of any major component, and a statement whether the association has any outstanding loans, as specified.

2) Require that the reserve study also includes a reserve funding plan that indicates how the association plans to fund the annual contribution to meet the association’s obligation for the repair and replacement of all major components, as specified. This bill would require, if the board of directors determines an assessment increase is required to fund the reserve funding plan, any assessment increase the board adopts to be approved in a separate board action from the action to adopt a reserve funding plan. Commencing January 1, 2009, the bill requires a summary of the reserve funding plan to be distributed to all members.

3) Make the provisions applicable to any contract or other transaction authorized, approved or ratified by the board of directors of an association or a committee of the board regardless of whether the association is a corporation.

In order to accomplish the above referenced goals, AB 2100 makes several revisions to the Civil Code and more particularly the Davis-Stirling Common Interest Development Act. The first amendment by AB 2100 is to add Civil Code §1365(a)(2)(D), which provides:

“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.”

The applicable Civil Code provisions in effect prior to and after this amendment by AB 2100 required associations to distribute to their members various documents, including a pro forma budget that summarized the associations’ reserves based upon the most recent review or reserve study. The amendment to the Civil Code by AB 2100 now requires an association, to also disclose the deficiency in reserve funding on a per unit basis in addition to providing other required budget documents. The method for calculating the deficiency on a per unit basis is included within the statute and if applicable to a particular association must take into account whether the assessments vary depending on the size or type of ownership interest. The added disclosure requirement should not impose any significant burden on an association as an association is already required to conduct a reserve study and the per unit calculation is based on a rather simple formula.

The next amendment to the Civil Code by AB 2100 is the addition of §1365(a)(3)(A), which provides that:

“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.”

The overarching goal of the amendments to the Civil Code by AB 2100 appears to be to provide homeowners with more detailed information pertaining to the financial condition and financial decisions of the association. This amendment requires an association to also include within its operating budget an explanation as to whether certain repairs will be deferred. Clearly, if the association has chosen not to undertake certain repairs that are or may have been budgeted for, the members affected by that decision would want an explanation as to why the repairs are not going to take place. This amendment and addition to the Civil Code addresses that concern and provides the members with necessary information pertaining to the association’s budgeting decisions. Naturally, because the association’s budgeting decisions and justifications for same will be subject to close scrutiny, the association must be more careful in its decision making and should seek the advise of professionals as necessary.

Next, AB2100 adds Civil Code §1365(a)(3)(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.”

Again, with the overreaching goal of AB 2100 being to provide homeowners with more detailed information pertaining to the financial condition and financial decisions of the association, this addition simply requires disclosure of information pertaining to any outstanding “long-term” loans.

AB 2100 also adds §1365(b) to the Civil Code, which goes into effect on January 1, 2009 and provides that the summary of the reserve funding plan must 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.”

The next addition to the Civil Code by AB 2100 is §1365.2.5(a)(5), (6) and (7). Sections (a)(5) and (6) provide that:

“(5) All major components are included in the reserve study and are included in its calculations.

“(6) Based on the method of calculation in paragraph (4) of subdivision (b) of Section 1365.2.5, the estimated amount required in the reserve fund at the end of the current fiscal year is $____, based in whole or in part on the last reserve study or update prepared by ______ as of ____(month) _____(year). The projected reserve fund cash balance at the end of the current fiscal year is $ ____, resulting in reserves being _____ percent funded at this date. If an alternate, but generally accepted, method of calculation is also used, the required reserve amount is $___. (See attached explanation).”

Further, §1365.2.5(a)(7) provides that:

“Based on the method of calculation in paragraph (4) of subdivision (b) of Section 1365.2.5 of the Civil Code, the estimated amount required in the reserve fund at the end of each of the next five budget years is $____, and the projected reserve balance in each of those years, taking into account only assessments already approved and other known revenues, is $_____. Leaving the reserve at ____percent funding. If the reserve funding plan approved by the association is implemented the projected reserve fund cash balance in each of those years will be $____ leaving the reserve at ____percent funding. Note: The financial representations set forth in this summary are based on the best estimate of the preparer at that time. The estimates are subject to change.”

These additions to the Civil Code are in actuality additions to the disclosures required to be made on the “Assessment and Reserve Funding Disclosure Summary” form that an association must fill out as per now existing Civil Code §1365.2.5(a) (“The disclosures required by this article with regard to an association or a property shall be summarized on the following form. . .”).

Next AB 2100 amends §1365(e) by addition of §1365(e)(5). The existing provision of Civil Code §1365(e) requires an association to conduct a thorough visual inspection of the accessible areas of the major components that the association is obligated to maintain and repair as part of a study of the reserve account requirements of the common interest development. The study referenced in §1365(e) is required to include: identification of the major components that the association is obligated to maintain and repair; identification of the probable remaining useful life of the major components; an estimate of the cost of repair of the major components; and an estimate of the contribution necessary to defray the cost of repair (see Civil Code §1365(e)(1-4). Now, AB 2100 adds a fifth element to be included within that study, by adding §1365(e)(5), which provides that:

“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.”

This addition now requires an association to include within its reserve study, a reserve funding plan, adopted by the board at an open meeting, that indicates how the association will meet its repair and replacement obligations, including whether changes in regular or special assessments are necessary.
The final amendment by AB 2100 is the addition of §1365.6 to the Civil Code. Section 1365.6 provides that:

“Notwithstanding any other law, and regardless of whether an association is a corporation, as defined in Section 162 of the Corporations Code, the provisions of Section 310 of the Corporations Code shall apply to any contract or other transaction authorized, approved or ratified by the board or a committee of the board.”

This addition simply requires that unincorporated associations are subject to the same disclosure, approval, and ratification requirements as incorporated associations as it relates to contracts or transactions between the association and other entities when an interested director is involved.