Complying with Reserve Disclosure Law

Federal & State

Complying with Reserve Disclosure Law

It is our understanding that the purpose of the CA Civil Code 1365.2.5 form is to summarize
Reserve Study results and clarify the current status of an Association’s Assessments and
Reserves in a standard format on an annual basis, minimizing the chances of misrepresentation
or surprise.

Proper completion of the 7 questions that appear on this form can only be accomplished with a
current-year Reserve Study and finalized budget information. Since finalized budget information
typically occurs after the Reserve Study has been completed, one cannot expect the Reserve
Professional to complete and finalize this form at the time the Reserve Study is completed.
Furthermore, if the Association establishes a Reserve contribution rate other than was
recommended in the Reserve Study, additional Reserve calculations will need to be made in
order to answer Question 3 and Question 4. Thus preparation of this form will require the
coordinated involvement of Association/Management and the Reserve Study provider.

Below is a detailed Discussion of each of the form’s 7 questions:

Question #1: Budgeted assessment rate for upcoming year comes from the association or
mgmt, after budget has been finalized. If the association does not have equal assessments
throughout, a table summarizing assessments per unit is to be provided by association/mgmt.

Question #2: Approved Special Assessments for upcoming year comes from the
association/mgmt, after budget has been finalized.

Question #3: A “yes” answer requires the association to have implemented a Reserve Funding
Plan that will not run out of money for projected Reserve expenses over the next 30 years with
no special assessments other than those listed in #2 above. If the association’s current Funding
Plan (based on Reserve contributions for the initial year found in #1 above) projects cash deficits at any point in time over the next 30 years, a “no” answer should be checked and at least one
special assessment should be entered in Question #4. A “yes” answer does not give assurance
that there will be “clear sailing” for 30 years. This is only an opinion (not a promissory note) at
this time, based on the association’s current 30-yr Funding Plan (to be attached to this form). It
is our expectation that this Funding Plan will be reviewed and revised annually, and the
disclosure updated accordingly.

Note 1: “Sufficient” Reserve balances are interpreted to describe a requirement to not run out of
cash (defined as “Baseline Funded” in National Reserve Study Standards). This question is not
interpreted as having anything to do with the measurement tool “Percent Funded” or the
conservative position of “Fully Funded”.

Note 2: It is recommended that a one-page summary of the association’s 30-yr Funding Plan
used to fill out this form be Board be attached to the form to demonstrate and document the
income and expense assumptions used to answer this question.

Question #4: List additional array of assessments (year of assessment and total amount per unit
assuming equal assessment rates), scattered through the next 30-yrs as necessary, needed for
an association to avoid running out of money (see Question #3 above). This may be one large
special assessment or a series of smaller assessments, and should be considered a rough
opinion.

Question #5: All Major components (those meeting the National Reserve Study Standards fourpart funding test) should be documented and funded through Reserves. We recommend the
association document the reason that any other “major” association assets failed the National
Reserve Study Standards four-part funding test.

Question #6: Straightforward disclosure of a projection of the Reserve Fund Balance and the
Fully Funded Reserve Balance computation (“required amount in the Reserve Fund”) as-of the
first day of the upcoming fiscal year (which is equivalent to the end of the current year). This
information is contained in a current Reserve Study (provide name of organization and date of
Reserve Study).

Question #7: The original State-suggested form is currently problematic due to a requirement
for five years of information with only one set of blanks provided. Recommendation: attach a
30-yr summary table containing the following information: Fiscal Year, Starting Balance, Fully
Funded Balance, Percent Funded, Annual Contributions, Special Assessment/Loans, Interest
Income, and Reserve expenses (see attached). Note that this 30-yr table also has the dual
purpose of documenting assumptions utilized in answering Question #3. General
Recommendation: Provide the name or organization filling out the form, and the date it was
prepared.

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