BORROWING FROM RESERVES

QUESTION: I went to a recent board meeting where it was discussed that instead of charging residents a special assessment to pay for an insurance deductible, they would suspend reserve deposits for three months. Is that legal and if so do they need homeowners' approval to suspend reserve deposits? 

ANSWER: Without a vote of the membership, boards are allowed to borrow from reserves to meet short-term cash-flow problems or other expenses. Civil Code §1365.5(c)(2). Suspending reserve deposits, in my opinion, qualifies as borrowing from reserves. Monies allocated to the reserve account are pledged in the reserve funding plan annually published to the membership, as well as the pro forma budget mailed to all members prior to the start of the fiscal year. Those funds are then collected from the membership for that purpose. Intercepting reserve monies before they are deposited into the reserve account or waiting until after they are deposited is a distinction without meaning. The result is the same--reserve monies are being used for non-reserve expenses. Such actions are allowed if done properly.

Notice of Intent to Borrow. Boards who plan to use reserve funds for non-reserve expenses must give notice to the membership of their intent. The notice must include the reasons why reserve monies are needed, the options for repayment, and whether a special assessment may be considered. Discussions by the board must take place in an open, noticed meeting of the board.

Notice of Decision. If directors authorize the borrowing of reserve funds, the board must issue a written finding, which is recorded in the minutes, explaining the reasons for the borrowing and describing when and how the money will be repaid. Civil Code §1365.5(c)(2).

Repayment Obligation. The borrowed money 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. Civil Code §1365.5(c)(2).

RECOMMENDATION: Reserve funds are important to the financial health of an association. Accordingly, boards must make every effort to build and preserve the association's reserves. Failure to do so will inevitably result in deferred maintenance, deteriorating facilities, damage to common areas and owner's units, painful special assessments, and potential litigation.



 
Adrian J. Adams, Esq.
Adams Kessler PLC