Condo Media - July 2013 - (Page 22)

ASKED & NAME COLUMN ANSWERED Financial Questions Reserve Refunds and Budget Surplus Q A 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? 22 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

Table of Contents for the Digital Edition of Condo Media - July 2013

Condo Media - July 2013
From the CED’s Desk
President’s Message
CAI News
CAI Regional News
Asked & Answered
Homeowner’s Corner
Volunteer Spotlight
Vendor Spotlight
2013 CAI-NE Financial-Reserves Directory
Classified Service Directory
Advertisers Index

Condo Media - July 2013