Condo Media - July 2014 - 24

ASKED & NAME
COLUMN ANSWERED

Borrowing From Reserves
Think Twice Before Doing It

Q
A

QUESTION: Can a condominium
board borrow money short term
from the reserve fund to cover
unexpected or unusually high
expenses?
ANSWER: Borrowing from
reserves is a tempting solution to a
short-term funding gap, but it may
not be possible (the governing
documents in some condominiums
prohibit it), and even if your documents allow or don't speciﬁcally
prohibit it, industry executives
agree, borrowing from reserves is
still a bad idea.
It's like borrowing from your
retirement account: You have
every intention of replacing the
money before it's needed, but
something always interferes - another unexpected expense or just
the feeling that you don't actually
need the funds now, so there's
no urgency about repaying them.
Then, suddenly, you do need the
funds - maybe the condominium
roof has to be replaced sooner
than expected. And now, instead
of having the money set aside to
pay that bill, you'll have to levy a
special assessment (which owners
won't much like), get a bank loan
(and who knows what the interest
rates will be?), or both.
And even if you repay the money
you borrow from reserves as
quickly as planned, once you tap
the reserves, it becomes easier to
do it again and again, and your reserve
fund won't be a reserve fund anymore,
it will be an ATM.
Borrowing from your reserves may
also have tax consequences, points out

24

CONDO MEDIA * JULY 2014

Heather Cozby, managing partner at
the Massachusetts accounting ﬁrm
Cozby & Company LLC. Reserves are
supposed to be used only for capital
repair and replacement projects.

Using those funds for other
purposes could make your reserves,
which are otherwise tax-exempt,
taxable. There are tax-planning
strategies that can avoid that liability, but tax consequences or not,
borrowing from the reserves is a
poor ﬁnancial management practice.
And there are better ways for you
to address the community's funding
needs, she says.
One option is simply to forego
the association's regular annual
reserve contribution (you are contributing regularly to your reserves,
aren't you?), freeing those funds
for other uses. The FHA's condominium certiﬁcation requirements
require associations to contribute
10 percent of their annual budget
to reserves every year. But that just
means the budget has to reﬂect the
planned allocation, Cozby says. It
doesn't mean the association must
actually transfer those funds to the
reserve account. While she doesn't
recommend skipping reserve contributions repeatedly, it is a way for
communities to close a budget gap
and preferable, Cozby believes, to
borrowing from your reserves.
You might also consider creating
a "rainy-day" fund, separate from
the reserves, to cover unexpected
operating expenses, such as the outsized snow removal bills that many
associations incurred from this past
winter.
But if your board is struggling
with recurring budget shortfalls, it is
probably time - or past time - to
increase owners' common area fees,
reduce the association's operating expenses, or both. CM
Condo Media - July 2014

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