An HOA reserve funds are established to cover various line items representing the different components within the associations common area for which the HOA reserve funds are being accumulated. Although the goal is to have the funds required for the maintenance, repair and/or replacement of the common area components on deposit in the reserve bank account and available for use when needed for a particular component, associations commonly experience situations where there are not sufficient funds allocated to a particular line item at a time when there is a need for those funds to address issues with that line item component. This results in a need for the associations directors to authorize the use of reserve funds that were designated for a particular line item in the associations reserve study for another reserve item that does not have sufficient funds allocated to it in the reserve account.
The need to use HOA reserve funds that were allocated for a different component generally results from: (i) a repair or replacement expense that was higher than had been planned for; (ii) a repair or replacement expense that is required sooner that had been planned for; and (iii) a repair or replacement expense that was not anticipated and thus, there were no reserve funds allocated to it.
Although individual line items for the associations common area components are established in the associations reserve study, the HOA’s reserve funds are really a pool of funds that are allocated to specific line items for components but which can be shifted between line items as needed to meet the associations needs. When there is a reallocation of funds between line items in the reserve study, the associations directors should make annual adjustments in the amounts allocated for the different line items. If the reallocation results in a shortfall in the amount that should be held in reserves, there may be a need to increase the amount being allocated to the reserves to make up the shortfall.
When faced with inadequate reserves, an associations board of directors must take the bull by the horns and address the issue. If the level of reserve funds allocated to the various common area components drops to a point where the association is not maintaining sufficient reserves as determined by periodic reserve studies and annual reviews, the association will need to make appropriate adjustments such as imposing special assessments to replenish the reserve funds. Associations that experience a shortage of reserve funds should immediately consult with their legal counsel, management personnel and their reserve specialist to develop an appropriate plan to address and correct the problem.