I have lived in my condo over 2 years and I feel the President is in violation for multiple things. I also feel they are using the money for their own personal needs. I was told nothing has been done on property for a long time yet there is only 5K in the account…. help!
What you are alleging here is a pretty serious crime, if it is, indeed, the case. It is illegal for condo association officers to divert association funds for their own personal needs. It is also illegal for them to commingle these funds with their own. If anything like that is going on, that’s a law enforcement issue – and the owners may have a civil claim against the president, board of directors or both for a violation of their fiduciary duty to the members of the association.
However, just the fact that the reserve fund seems small despite the lack of recent repairs or improvements does not necessarily mean the president or the board of directors are up to any shenanigans.
California law does not require any specific minimum cash reserve.
It may be that the board has not asked for an assessment from the owners in a while because they don’t feel it’s necessary – either because the monthly maintenance fees have been sufficient to cover their needs, or because they’d rather let owners keep their money, or both.
California laws make it difficult for condo boards and officers to get away with underfunding or stealing from reserve accounts for very long. The State of California mandates a regular reserve study, under the Davis-Stirling Common Interest Development Act Civil Code Section 1365. Depending on the circumstances, your association will have to produce a reserve study every three to five years, at minimum. If you believe there is a problem with fund accountability, you can pressure your board to demand a study from a third-party.
A reserve study is an independent analysis of expected liabilities – including planned repairs and items due for replacement or rebuilding – against the assets available in the reserve fund. At minimum, condo associations must have an on-site inspection done every three years. Also, at a minimum, the reserve study must address the following items:
- estimated revenue and expenses on the accrual basis of accounting;
- identification of total cash reserves currently set aside;
- estimated remaining life of major components;
- estimated current replacement cost of major components;
- If applicable, the amount of any construction defect related award or settlement and the disposition of such funds;
- The total cash reserves expressed as a percentage of the current replacement cost, and the current deficiency in reserve funding on a per-unit basis;
- identification of methods of funding for future repair, replacement or additions to major components (including notification of any deferred repairs or replacements, anticipated special assessments, or certain outstanding loans to the association)
- Statement of methods used to develop estimates and funding plan.
Note that the reserve study requirement doesn’t obligate the board to take any specific action. The board is free to underfund the reserves, if they so choose, by collecting insufficient reserves to fund expected liabilities. But the report also brakes down the shortage per unit. Any experienced condo buyer looking at purchasing a unit in your development is going to be very interested in that number, because sooner or later the board will have to replace a roof or some other vital component – and no new buyer is going to want to be stuck with a huge assessment when the board should have been collecting all along.
If the per-unit shortfall is large, it’s going to depress the market value of the unit.
We hope, of course, that the small reserve fund in your condominium association’s ledgers is simply the result of low assessments… ideally because of low expected liabilities.
Unfortunately, it is true that condo association officials can and do embezzle money from their reserve funds all the time. These cases can be difficult to prosecute, though, because they do require a lot of time to sift through the financial documents. Prosecutors have also been stung by jurors falling asleep during embezzlement trials. The information presented is just too dry and some of them aren’t up to paying attention to that kind of detail at a trial. The result has been mistrials, hung juries and acquittals of people whom prosecutors have felt confident they had dead to rights!
At a minimum, I’d recommend working with your board of directors and insisting they enact these best practices:
- Know the association’s federal tax ID number and keep separate accounts.
- Use the lock-box system for deposits.
- Require dual signatures for all withdrawals.
- Require monthly reports, showing check numbers, payees and amounts.
- Segregate and safeguard reserves.
- Put longer-term savings into non-liquid accounts, such as CDs.
- Have the financial institution holding your funds send duplicate statements to the board president, treasurer, and/or one or more board members.
- Allow board members to review accounts online (but not to make transactions).
- Check invoices against checks paid.
- Balance credit card transactions against original receipts.
- Obtain fidelity insurance coverage on board members and treasurers/bookkeepers.
- Ensure any property management agreement includes these safeguard provisions.
- Retain a CPA to audit your association’s accounts every few years at a minimum.
That should go a long way to prevent future problems. And a solid system of financial management and accountability, complete with checks and balances, makes your association look good to new buyers.
If you believe you have hard evidence of criminal wrongdoing, though, you may want to report it to the California Office of the Attorney General.
Writing about personal finance and investments since 1999, Jason Van Steenwyk started as a reporter with Mutual Funds Magazine and served as editor of Investors’ Digest. He now publishes feature articles in many publications including Annuity Selling Guide, Bankrate.com, and more.