Borrowing from Reserves
Unless required by an association's CC&Rs, boards are allowed to borrow from reserves to meet short-term cash-flow problems to pay or other expenses without a vote of the members. Examples include:
- To cover shortfalls created by delinquencies.
- To pay legal fees.
- To pay for unexpected increases in insurance premiums.
- To pay for unplanned termite treatment.
- To settle claims against the association.
- To pay to amend or restate the CC&Rs / or bylaws.
Suspending reserve deposits is the same as borrowing from reserves. Funds allocated to the reserve account are pledged in the reserve funding plan annually published to the membership, as well as the operating budget mailed to all members prior to the beginning of the fiscal year. Those funds are collected from the membership for that specific purpose. Intercepting reserve funds before they are deposited into the reserve account or waiting until after they are deposited has the same result. Reserve funds are being used for non-reserve expenses. Such actions are permitted if done properly.
Boards are required to provide notice of their intent to borrow reserve funds by listing it as an agenda item in its notice of board meeting. The notice must include the reasons the reserve transfer is needed, some of the options for repayment, and whether a special assessment will be considered. If the board authorizes the transfer, the board must issue a written finding, recorded in the meeting minutes, explaining the reasons for the transfer, and describing when and how the money will be repaid to the reserve fund.
Money borrowed from the reserves must be repaid to the reserve fund within one year of the date of the initial transfer, except that the board may, after giving the same notice required for considering a transfer, and, upon making a finding supported by documentation that a temporary delay would be in the best interests of the association, temporarily delay the repayment. Associations are permitted to levy special assessments to replenish reserve funds.
The proper place for anticipated legal expenses is the association’s operating budget not the reserve account.
American HOA Management