For some community associations, the COVID-19 pandemic has brought higher expenses from increased cleaning procedures and operating costs as well as difficulty in collecting assessments from homeowners facing economic hardship. As they brace for budgetary constraints, some boards have sought guidance about whether using reserve funds is appropriate to address potential cashflow issues.
Reserve funds are budgeted for planned maintenance, repair, or replacement of major common area components as they age over time, such as roofs, elevators, swimming pools, roads, sidewalks, and balconies. Adequately funded reserves reduce the likelihood of the association turning to special assessments or borrowing to address repair obligations by spreading costs more evenly.
Although they are typically restricted to expenses that will occur in the long term, boards may consider using reserve funds to address an operating budget gap if permitted by their governing documents and state law—with certain requirements.
“It’s no different from when an association has an emergency need” stemming from weather events, says Peter B. Miller, RS, principal and co-founder of reserve study firm Miller Dodson in Annapolis, Md. He adds that borrowing reserve funds is often quicker than issuing a special assessment.
He recommends that boards first determine if the money is needed for upcoming replacements before it can be paid back and then adopt a resolution that states how much money will be used from reserves, for what purpose, and the time period for repayment.
When considering the financial implications of the COVID-19 pandemic, it’s important for boards to obtain advice from legal counsel and their accountant in writing. That will help prevent liability, says Miller, who chairs CAI’s 2020 Business Partners Council.
“Reserve funds have to be used for reserves, but (the money) doesn’t have to sit there collecting very low interest if there’s some legitimate need to put it to good use, with the understanding that it will be paid back before it’s actually needed for those projected replacement expenditures,” Miller notes.
This information is subject to change. It is published with the understanding that Community Associations Institute (CAI) and Ungated are not engaged in rendering legal, accounting, medical, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought.
When to use reserve funds to cover operating shortfalls? NEVER. I have been representing associations throughout Florida since 1982. Anecdotally, the vast majority or plurality of condo are grossly underfunded for major repairs that are known unknowns already. Even with a required vote of the members to use the funds it’s a terrible idea. Directors have a fiduciary duty to the members to collect assessments, and must do so. Levy an assessment is you have to. Don’t socialize the debt by borrowing. Don’t be a grasshopper, be an ant, as Aesop would say.