How does Your Board Interpert the Declaration and Statues?

The rules and regulations of the community are adopted from the provisions within the declaration.  However, there are portions of the declaration that are ambiguous and only act to restrict or limit the board.  The board may have policies and procedures to follow but, these aren't derived from provisions in the declaration.


When provisions that restrict the board aren't done it leaves the association open to board member abuse.  Here is an example of an interpretation of a commonly posted sign.  A gentleman is driving down the highway and sees a sign, "Watch for falling rocks".  He reduces his speed and cautiously looks for falling rocks.  He soon pulls over and stops on the shoulder, gets out of his car and picks up several golf ball and fist sized rocks.  He drives to the transportation department in the nearest city and hands them the rocks.  The clerk asks him why he is giving him these rocks.  The man says, "The sign said, Watch for Falling Rocks."  The clerk said yes.  The man says, "Where is my watch?"

This example of an interpretation which most drivers know to mean to look out for falling rocks from above to avoid injury or accident.  This man took it as if it were in the context of a trade offering.  In an HOA the phrases and statements can be interpreted to mean one thing to someone who only reads one section of the document or who is looking for loopholes and something totally different to someone who has read the entire document and uses the business definitions for words.  Someone who uses the technical definitions would interpret it slightly different even still.  The declaration provides definitions to describe portions of the property or to identify portions of the property at the beginning.  Then relays on the context of the sentence for other definitions.

For example, 4 business definitions of maintenance exist but, only one of them applies; based on the context of the sentence.  If an HOA must perform maintenance to keep the property in a first class condition then definition number one is the correct meaning intended.  Not number 2 since the sentence is not providing information pertaining to bookkeeping.  It's talking about the condition of the property and the standard used to determine proper maintenance.

 Maintenance

1. Activities required or undertaken to conserve as nearly, and as long, as possible the original condition of an asset or resource while compensating for normal wear and tear.

2. Accounting: A periodic cost incurred in activities that preserve an asset's operational status without extending its life. Maintenance is an expense that, unlike capital improvement (which extends an asset's life), is not capitalized.


3. Engineering: Actions necessary for retaining or restoring a piece of equipment, machine, or system to the specified operable condition to achieve its maximum useful life. It includes corrective maintenance and preventive maintenance.


4. Law: (1) Meddling in litigation (without having a genuine stake) by taking sides, and/or giving financial or other assistance to one of the litigant parties. See also champerty. (2) Financial support or supply of necessities given on court orders by one party to another such as upon a divorce or legal separation.

Now if the context of the sentence is directing that a reserve fund must be created and adequate to cover the costs and expenses of those common areas that need replacement and repairs on a periodic basis. And that money used to establish and maintain such a fund shall be derived from regular dues and not from special assessments.  Including that a special assessment can only be assessed for unanticipated (unknown or unexpected) expenses.

 It's easy to determine that this fund should be totally separate from the operations cost and act as a way to save up over time money needed to replace and repair items known to last many years.  The best description of this is called a replacement fund.

To determine the kinds of expenses it will incur based on the context of the sentence means none of the definitions of maintenance accurately describes the costs or expenses for which the reserve fund be responsible for paying.  However, the definition of periodic expense and replacement costs do describe the types of costs or expenses a reserve fund would incur based upon the context of the sentence and other sentences around it.

Calling the fund an accumulated fund is incorrect because AZ Statue 33-1254 states that any surplus funds shall be contributed to the reserve fund or refunded back to the ownership.  Statues also state that only the total amount of expenses may be assessed.  And that the budget must be prepared annually and approved by the majority of the membership.  Calling it a capital improvement fund is incorrect because capital is used to generate a profit.  Since HOAs are not in the business to generate a profit (income - expenses) and can only assess an amount equal to the expenses (includes money contributed to the reserve fund/replacement fund) there isn't any capital of which a profit can be generated.

Replacement Reserves

Funds set aside for replacement of wasting assets. Not to be confused with replacement capital.

Accumulated Fund

Capital fund of a non-profit organization, such as an association, charity, or club. Surpluses of income over expenditure are added to this fund, and deficits are withdrawn.

Periodic Maintenance

Significant activities carried out regularly (according to predetermined schedule) to maintain the condition or operational status of a building, equipment, machine, plant, or system. Also called time based maintenance.

Replacement Cost

1. Current cash outlay necessary to duplicate an item.

2. Current cost of replacing an existing asset or property with the same quality of construction and operational utility, without taking depreciation into account. Replacement cost is usually higher than the item's book value. Also called replacement value.

Capital

 Money invested in a business to generate income.



  If board members use the wrong or twist the definitions of phrases they can cause a great amount of loss to the ownership.  Calling a reserve/replacement fund a capital improvement fund will result in the fund becoming inadequate to meet the need of known scheduled expenses.  Which in turn will cause the property to deteriorate far beyond the point it was scheduled causing unseen damage and higher costs to replace. 

Although the declaration doesn't specifically state what the money can be used for.  The statues and other sentences and provisions within the document does provide the clues to determine the meaning and intent behind it.  As the state statues change so does the declarations, rules, etc.  Hiding behind old and repealed statues and outdated documents results in losses to everyone.  You don't want to be the one responsible for costing owners thousands of dollars in addition to regular dues.