Homeowners’ associations are responsible for maintaining and managing common areas and amenities within a community. To raise the necessary funds, HOAs levy member assessments, a portion of which is earmarked for reserve components such as major repairs or replacements of common elements that are expected to occur in the future. Sometimes, however, the HOA may encounter an unexpected expense, requiring use of reserve funds.
HOA boards cannot borrow money from reserves without a formal motion or resolution in an open board meeting, although they can borrow from the reserves without a vote of the membership. Reserve funds must be protected for their intended purposes, and HOAs must follow a specific process if they need to borrow funds from reserves. This article outlines the process for borrowing from reserves, explains the importance of transparency and disclosure, and offers some tips for avoiding the need to borrow from reserves altogether.
The process for borrowing from reserves starts by checking with the Reserve Study provider to see if short-term borrowing from reserves creates any unanticipated problems. If borrowing is an option, it must follow a specific process to ensure compliance with the law and protect the interests of the community. The first step is to make the decision as a board to borrow the funds. This decision should be made in a board meeting where all board members are present, and the discussion is open and transparent. The decision should be recorded in the meeting minutes, which are a legal record of what was discussed and decided during the board meeting.
In addition to making the decision to borrow funds from reserves, the board should provide some level of disclosure on how the funds will be repaid to the reserve. Borrowing from reserves is not a permanent solution, and the borrowed funds should be repaid as soon as possible. Transparency and disclosure are critical when it comes to your community’s financials. HOA boards have a fiduciary duty to act in the best interest of the community and manage funds responsibly. Therefore, it’s essential to communicate with the community and provide accurate and timely information about borrowing from reserves.
Borrowing from reserves should be a last resort. The best way to avoid the need to borrow funds from the reserve is to fund the association properly. If an HOA finds itself consistently needing to borrow from reserves to cover regular expenses, it may be a sign that the assessment amounts are not sufficient to meet the needs of the community. In such cases, the HOA board should review the assessment amounts and consider adjusting them to ensure proper funding.
If you find that your HOA or Condo Association often needs to dip into its reserves, you’re not alone. Ardent Residential helps hundreds of associations every year find healthy ways to maintain their property values without breaking the bank. If you’re ready to make your life as a Board Member easier, call Ardent Residential today!
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