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Nurturing a Green Thumb
By: Nena Groskind

Is sex necessary? We thought the question humorist James Thurber once posed, would get your attention so we could ask the admittedly less enticing but nonetheless important question we want you to consider: Is landscaping necessary? And the answer - to the landscaping question - is an unequivocal yes.

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Borrowing From Reserves

Question: Q: Despite our best efforts to budget for this past winter’s snow removal costs, we have exceeded our budget and are looking for funds to pay our contractors. Is it ok to tap our reserves to cover these expenses?

Answer: A: That depends on your definition of “ok.” Borrowing from your reserves is legal (unless your governing documents prohibit it), but it is not the best idea, according to Kenneth Bloom, CPA, a principal in Bloom, Cohen, Hayes, LLC.
He sees both practical and theoretical problems with this solution. The practical problems are tax-related. Reserves are created specifically to finance capital expenditures that will be required as major components of your community (roofs, heating equipment, etc.) deteriorate over time. If you use reserves to cover operating expenses (such as snow removal) or for other non-capital purposes, Bloom notes, you could threaten the fund’s tax-exempt status; an IRS audit of the association’s finances could result in a sizable tax bill.
That risk may be reduced if you borrow from your reserves rather than simply withdrawing the funds, Bloom says. The IRS has never taken a position on whether borrowing triggers tax concerns, he notes, so “you’re skating a bit on virgin ice here.” But if you structure the transaction at arm’s length, as if you were borrowing from a third party, with a reasonable interest rate and repayment period, he says, “you stand a pretty good chance of being ok” from a tax standpoint. But that’s not the only issue to consider.
Borrowing from your reserves is problematic, he believes, for the same reason that borrowing from your retirement account is a bad idea – it sets a dangerous precedent. Borrow once and it becomes easier to borrow again; borrow again and using your reserves to subsidize your operating budget becomes a habit, easy to establish, but hard to break.
He thinks associations should have two reserve funds: a capital reserve fund for capital expenses, and a non-capital fund – “call it a rainy day fund,” he suggests ¯ to cover unanticipated operating expenses. “Managers and boards do the best they can to estimate operating costs,” Bloom says, “but no one can foresee the future.” A rainy day fund, he believes, is the best way for associations to cover occasional operating shortfalls.
Because you presumably don’t have such a fund in place, Bloom suggests that the board approve a temporary increase in common area fees to close your current budget gap. Note that he described the increase as “temporary” and as a fee, not a special assessment. Both distinctions are important. The increase should be temporary, Bloom says, because the unusual snow removal costs you incurred last year won’t necessarily be repeated, and you shouldn’t base your budget on the assumption that they will. You don’t want to set common area fees any higher than they need to be to cover the association’s expenses.
As for imposing a fee rather than a special assessment – fees are covered by the condominium superlien, included among the payments you can collect from delinquent owners, Bloom explains; special assessments fall outside of that umbrella.

 
 

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