Condo Media - July 2013 - 22

ASKED & NAME
COLUMN ANSWERED

Financial Questions
Reserve Refunds and Budget Surplus

QUESTION: Our association’s
board is puzzling over two financial questions no one currently
serving on the board has encountered before. The first: An owner
who is selling his unit has asked
that we refund his share of the
money contributed to our reserve
fund but not yet allocated for
capital projects. Are we required
to do that? The second question:
It appears that we will end the
year with a surplus in our operating account. How should we deal
with that?

CONDO MEDIA • JULY 2013

ANSWER: Let’s start with the reserves
— to give us time to recover from the
shock of hearing about your budget
surplus. The response isn’t complicated,
though it may not be popular with the
owner who posed the question:
The reserve fund belongs to
the association. The contributions owners make
— through monthly fees
or special assessments
— are not attached to
strings that they can yank
at will to reclaim the funds.
Owners can’t take pieces of the
lawn or chunks of the siding with
them when they leave either, even
though they have contributed
to the maintenance or repair of
those items over the years. Like
the buildings, grounds, and other
components, the reserves are
common property in which all
members of the community have
a percentage interest, but to which none
have an individual claim.
Associations create reserves (and it
is admirable that yours has done so)
to set aside the money they will need
to ﬁnance future capital repair and
replacement projects. If departing owners could reclaim their share of reserve
contributions, someone — other
owners, new buyers, or both — would
have to ﬁll the gap; otherwise, the
fund would fall perpetually short of its
targets. An owner’s proportionate contribution to the reserves isn’t a temporary loan; it’s a permanent investment
in the community that all members are
required to make.
As for your budget surplus, as potential problems go that’s not a bad one to
have. It is relatively rare, however, so the

board might want to review its ﬁnancial
reports to make sure all bills have been
paid and no planned expenditures have
been overlooked. After you review your
books, you should review the association’s governing documents, which may specify
how budget surpluses
are to be managed.
If the documents
are silent, Kenneth
Bloom, a principal
in the accounting
ﬁrm Bloom, Cohen,
Hayes, LLC, suggests a
couple of possible options:
• You can refund the excess
to owners. “I’ve never seen
any documents that don’t allow
that,” he says. If you elect to be
taxed as a member organization
(you’ll ﬁnd a more detailed explanation of tax ﬁling options in
this month’s cover story beginning on
page 32), you may have to refund the
surplus in order to avoid being taxed
on it, Bloom cautions.
• You can roll the surplus over into
the following year’s budget, using it to
reduce (or avoid) a dues increase, or
to create a “rainy day fund” to cover
unanticipated operating expenses.
The surplus has tax liability and
ﬁnancial planning implications for
your community; you should seek
an accountant’s advice on both. You
might also consider publishing a guide
explaining how you ended up in this
enviable position: “How Our Community Created a Budget Surplus and
How Yours Can Create One Too.” It
might become a best-seller. CM

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Condo Media - July 2013

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