the CFM Distinction

Monday, November 8, 2010


Not less than thirty (30) days nor more than ninety (90) days prior to the beginning of the fiscal year:

Pro Forma Operating Budget Civil Code §1365(a)

The association must distribute its “pro forma” operating budget within the “60-day window” to retain its ability to increase assessments without seeking an approval of the membership. If this requirement is not met, the members must approve any increase to the regular assessments.

The budget shall contain the following:
An estimate of revenue and expenses on an accrual basis;
A summary of the reserves printed in bold type, based on the most recent reserve study
a) A Reserve study with site inspection is required every three years except in very limited cases. The funding portion of this study must be updated annually.
b) If the Association has experienced a construction or design defect case, the summary must also include a separate line item for:
• Funds received from compensatory damage awards or settlements; and
• Expenditure or disposition of funds, including amounts for direct/indirect costs of repair of defects. If the association is required to have a CPA review of its financial statements, the above information is disclosed in that review rather than in the budget.
A statement as to whether the board anticipates the levy of one or more special assessments;
A basic description of the procedures used to calculate the reserves.

The association may distribute a summary of the operating budget in lieu of the pro forma
budget as described above. 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 type.

Secondary Addresses Provided by Owners Civil Code §1367.1(k)

The association shall notify owners, at the time the association issues the pro forma operating budget, 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.

Suggestion: Along with this notice, also send a form for owners to fill out if they want to opt out of having their addresses given to other members upon request. If the association maintains a list of email addresses, new case law suggests that the association may be obligated to distribute email addresses and physical addresses upon request, so the form should give the owners the option to keep either or both addresses confidential.

This also brings up the question of the association’s ability to “mask” or “protect” those addresses and e-mail addresses from lists, labels or other methods of making owner’s lists available.

Assessment and Reserve Funding Disclosure Summary Civil Code
§§1365(a) & (b), 1365.2

The association must distribute an Assessment and Reserve Funding Disclosure Summary.
The Civil Code also requires that this disclosure include a specified statement regarding the interest rate earned on reserve funds and the assumed inflation rate applied to major component repair and replacement costs.

Because of the complexity of this disclosure, we recommend it be completed annually by your reserve specialist.

Assessment Collection Policy Civil Code § 1365(e)

Members must receive a copy of the association’s Delinquency Control Policy within the same “60-day window” unless the association’s governing documents require a narrower period of time. The failure to adopt and distribute this assessment collection policy may affect an association’s ability to collect delinquent assessments.

Insurance Coverages Civil Code §1365(f)

Within the “60-day window” described above, unless the governing documents require a narrower window, the association must distribute to the members a summary of its property, general liability, earthquake, flood and fidelity insurance policies.

The summary should disclose:
-The name of the insurer and the type of insurance; and
-The policy limits and deductibles, if any.
If this information is included in the Declaration Page of the policy, the Dec page may be distributed in lieu of the summary.
The summary or declaration page must include the statement provided in Civil Code Section 1365(f)(4). This statement must be in at least 10-point boldface type.

If there is a significant change, such as a lapse, decrease in coverage, cancellation or non-renewal to any of the insurance policies, a notice shall be provided to the members by first-class mail as soon as reasonably practicable.

During the sixty (60) days prior to the beginning of the fiscal year:

(Notice the issue of 90 vs. 60 days prior to the beginning of the fiscal year)

Notice of Assessments, Foreclosures and Payment Plans Civil Code §1365.1

The association must distribute the notice as written in Civil Code Section 1365.1.

This notice must include the following language: “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.”

With the budget or budget summary, or in any general mailing during the year:

1) Notice of Right to Minutes of Board Meetings Civil Code §1363.05(e)
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 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 the member’s request; and how and from whom those minutes may be requested.

2) Arbitration/Mediation of CC&Rs Disputes Civil Code §1369.590
Annually, the association must distribute a summary of Civil Code Section 1369.510 et seq. to its members explaining their rights to request arbitration or mediation of disputes between the member and the association related to violations of the Governing Documents.
Additionally, the summary must include description of the internal dispute resolution process

3) Within 120 days after the close of each fiscal year:
Review of Financial Statement Civil Code §1365(c)
Any year in which the association’s gross revenue equals or exceeds $75,000 a CPA must be engaged to perform a Review of the books and records of the association unless the governing documents require a higher level of service. (Audit)

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 but less than $75,000 the association must prepare a financial statement which includes:
-A year-end balance sheet and income statement, and statement of cash flow for the fiscal year;
-A notice stating where records of the association members’ names and addresses are stored;

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.

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. It only makes sense to mail the assessment notice with the budget, which would mean that the budget could not be mailed until 60 days prior to the fiscal year end, not 90 days. The alternative is to mail your budget early and send out a separate notice of assessments in the 60 day window.

Notice of Intent to Borrow from Reserves Civil Code §1365.5(c)
The board may authorize the temporary transfer of money from the reserve fund to the association's operating fund to meet short-term cash-flow requirements or other expenses, if the board has provided notice of the plan to make the transfer in a notice of the board meeting.

-The reasons the transfer is needed
-How the Board intends to repay the borrowing and whether a special assessment may be considered

Notice of Intent to Postpone Repayment of Borrowed Reserves Civil Code §1365.5(c)
The board may determine and disclose that delay of the repayment of borrowed reserve money would be in the best interests of the association. This action does not “forgive” the borrowing only allow the board to plan a longer period of repayment.

Item for discussion:

Is the failure of the association to transfer the amount budgeted to reserves during the fiscal year a borrowing?

This question is answered differently by various law firms in California. I can only voice my own research and opinion:

Your budget was a notice to the membership of how you intended to spend the assessment paid by each owner. You disclosed the amount to be funded into the reserves based on the suggestions of your reserve specialist.

If, due to cash flow problems, you are unable to make the total deposit to the reserve fund during the year, it is no different than if you had made the transfer and then “borrowed” the money back. Failure to fund does create an interfund liability.

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