March 12, 2010

Not enough funds in your operating account to pay the insurance premium due next quarter because a number of your homeowners are behind in assessments? This week's tip offers a possible solution for boards that have a short-term cash crunch: borrowing from reserves.

States have different rules governing loans from reserve funds. California and Texas permit associations to borrow from their reserves. Florida, however, makes it very difficult.

"Reserves are like 401(k) accounts—there are controls on when and how the money is to be used," says Robert DeNichilo, an attorney at Neuland & Whitney APC in Rancho Santa Margarita, Calif., who specializes in representing community associations, of the rules governing California associations. "The board has a fiduciary obligation to use prudent fiscal management in maintaining the integrity of the reserve account."

In addition, California law specifically defines reserves and spells out how they can be used. It permits short-term borrowing if the board meets certain criteria. A board must give members notice that it's going to consider borrowing from reserves at a meeting and that the board will discuss options for repayment, including whether a special assessment will be required to repay the funds.

"The board has to have a full discussion on it," says DeNichilo, "and part of that discussion has to be about how the board is going to pay this money back."

Those aren't the only requirements before California boards can borrow from their reserve funds. And even if your state allows the practice and you can follow the rules, is it wise to borrow from your reserves?

Learn more about the rules and risks of borrowing from your reserves in our new article, HOA Finances: If Your Condo or Homeowners Association Needs a Loan, Can You Look to Your Reserves?

Best regards,
Matt Humphrey
President