Condo Media - July 2014 - (Page 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

Table of Contents for the Digital Edition of Condo Media - July 2014

Condo Media - July 2014
Table of Contents
From the CED’s Desk
President’s Message
CAI News
CAI Regional News
Asked & Answered
Homeowner’s Corner
Looking for Alternatives
Vendor Spotlight
Volunteer Spotlight
2014 CAI-NE Financ-Reserves Directory
Classified Service Directory
Advertisers Index

Condo Media - July 2014