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July 31 2014  - August 2 2014
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Looking for Alternatives
By: Nena Groskind

There are two things all condominium association boards hate. Well, probably a lot more than two, but for purposes of this discussion, two in particular: Increasing common area fees and reducing services. But with costs rising and essential (often long- deferred) renovations draining reserves, many boards are finding that they must do one or the other in order to cover their operating expenses. There is another option, however, which some boards have already discovered and many are beginning to explore: Finding alternatives sources of income to boost revenue without raising owners’ fees.

Other Feature Articles:

  • Community Associations Aren't Focusing on Water Conservation But Costs and Environmental Concerns Suggest They Should Be
  • And the Winners Are....
  • Association Managers Are Struggling with Burnout - Management Companies Are Trying to Combat It

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Recent Articles

 
Borrowing From Reserves

Question: Q: Can a condominium board borrow money short-term from the reserve fund to cover unexpected or unusually high expenses?

Answer: A: 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. And then, suddenly, you do need the funds – maybe the condominium roof has to be replaced sooner than you 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 any more, it will be an ATM.
Borrowing from your reserves may also have tax consequences, Heather Cozby, Managing Partner at the Massachusetts accounting firm Cozby & Company, LLC, points out Reserves, she explains, 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, Cozby says, but tax consequences or not, she believes, borrowing from the reserves is a poor financial management practice. And there are better ways, she says, for you to address the community’s funding needs.
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.

 
 

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