Fiduciary_Image

Fiduciary Obligations

According to Wikipedia, a fiduciary “is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person.”

In the case of a Subdivider/Developer/Builder, the relationship of trust may include proper set up and operation of a homeowner association.  In a precedent-setting case, commonly referred to as “Raven’s Cove,” the court held that a developer-controlled HOA Board had a fiduciary duty to set proper reserves. When the control of the HOA turns over from the developer-controlled Board to a Homeowner-controlled Board, the reserve account must be properly funded.

Failure to properly operate or to fund the HOA accounts is a breach of fiduciary duty.  While the fiduciary duty certainly applies to any and all HOA Board members, it is particularly prudent for Developers and their representatives to ensure that the HOA is operating properly.  Dues need to be collected and banked in accordance with the governing documents.

During the DRE approval process, the budget documents that are reviewed are “projected” budgets; since there is no operating history, the budgets are based on preliminary plans and are in fact “best guess-timate” of what the anticipated day-to-day operating costs will be.  The Reserves portion of the DRE-reviewed Budget is usually based on plans, prior to completion of the common areas.  It is strongly recommended that a Reserve Study be done after the first year of operation, to ensure that the amount of reserves being collected are in fact adequate.  At minimum, the Reserve Study should be done during the third year of operation of the HOA; the law requires a full Reserve Study analysis to be conducted every 3 years, and updated annually.

We often receive requests for our firm to coordinate amendments or renewals of Public Reports for developers who still own lots or units in a development.  One of the requirements we must prepare for is a budget review.  It is important to note that the budget review package includes a Reserve Study, as well as a copy of the current Operating Budget and current Bank Statements for both the Operating Account and the Reserve Account.

If your HOA is not operating in accordance with the governing documents (holding regular meetings; circulating financial data, conducting reserve studies on schedule, etc.), prepare to provide an explanation to DRE…. being prepared up front will shorten the duration of the amendment or renewal filing.

If you have any questions or concerns about your fiduciary obligations under the Public Report, or you would like to discuss the current status of your HOA, feel free to give us a call, and one of our Consultants can help you.

Recent Comments
    California Builder Services
    Providing expert financial analysis so our clients make informed decisions and prudent budgets.

    Join the Insurdinary newsletter

    Get educational resources and news from our company.