You serve on your homeowners association’s board of directors. You work hard preparing for and attending meetings and listening to the homeowners that elected you. And you do all this on your own time.
Despite your best efforts, your HOA board may be putting itself in legal jeopardy. Specifically, do you and your board know and understand what is required for annual disclosures?
California, like most states, has passed legislation defining how HOAs manage their affairs. In California, it is the Davis-Stirling Act.
Davis-Stirling includes provisions for many aspects of HOA governance, but especially important are the requirements for annual disclosures to your homeowners and to the California Secretary of State. These disclosures can be broken down into three broad categories:
- The Annual Budget Report
- The Annual Policy Report
- Miscellaneous other requirements
*A complete list of the required disclosures (in California) can be found here. Below is an overview of this list.
Requirements of the Annual Budget Report
These disclosures must be provided 30 to 90 days prior to the start of your HOA’s fiscal year. The requirements include:
- Either a full budget or a summary of your HOA’s pro forma budget, showing anticipated revenue and expenses on an accrual basis.
- A summary of the HOA’s reserves and the procedure(s) used to calculate them.
- A summary of the reserve funding plan and the mechanism(s), such as assessments, borrowing, etc. to those reserves, and whether or not special assessments will be needed.
- Any outstanding loans and associated information (balance, payee, term, interest rate, etc.).
- A summary of your HOA’s insurance.
Providing these disclosures can get complicated. For example, some of the elements are interrelated, e.g., the summary of the reserves, the procedure(s) to calculate, and the reserve funding plan/mechanism(s). Furthermore, the law often requires the use of specific forms, formats, and even font-size.
Requirements of the Annual Policy Statement
Your HOA’s Annual Policy Statement must be provided 30 to 90 days prior to the start of your fiscal year. Specific requirements to be provided include:
- Name and address of the person designated to receive official communications with your HOA.
- Policies for topics such as: rules enforcement, assessment collections, enforcement of liens or other legal remedies when a homeowner is failing to pay assessments.
- Rights of your HOA members, such as the right to: receive general notices via individual delivery and receive copies of meeting minutes.
- Procedures your HOA uses to resolve disputes.
- Procedures and requirements your HOA uses to oversee (approve/deny) physical changes (architectural, landscaping, etc.) to property.
The Davis-Stirling Act defines precisely what must be disclosed, in what format, etc. for associations in California. Check your state's law for specific HOA requirements.
This is a mix of requirements for disclosure, some mandatory every year and some only when needed, including:
- At least 30 days prior to distributing the Annual Budget Report, your HOA must send a notification requesting updated contact information from association members.
- Within 120 days of the close of the fiscal year, your HOA must distribute a review of the HOA’s financial statement prepared according to Generally Accepted Accounting Principles (GAAP) by a certified public accountant.
- Statements of information that must be filed with the Secretary of State.
- Such “as needed” information as:
- Assessment increases
- Board and committee meeting notices and minutes
- Election results
- Change in HOA management
Keeping your HOA in compliance with state requirements for disclosures is important because failure can lead to your HOA losing its “Certificate of Good Standing,” creating management headaches, like:
- Inability to file lawsuits in court, even to recover unpaid assessments.
- Difficulty or impossibility to obtain capital or financing, and damage to your association’s credit score.
- State imposed fines and penalties, loss of the rights to your HOA’s name, and even dissolution of your association.
- Some states can administer fines and penalties on individual board members who conduct business for an HOA not in good standing.
To avoid these problems, HOA board members must insure their association remains in compliance with all legal requirements for disclosure. However, it's often difficult for board members to have the expertise and the time to handle these matters properly.
An HOA manager can help you and your colleagues keep your association in good standing.
*Check your local state law for specific requirements in your state.