State laws and association governing documents mandate that homeowners associations maintain sufficient funds in reserve to allow for specified items such as the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components that the association is obligated to repair, restore, replace, or maintain. Recognizing this, state laws and association governing documents also contain specific provisions pertaining to the use of funds that are held as reserves for any other purpose than those specified. These requirements are necessary because a properly funded reserve fund is critical to the financial stability of a homeowners association.
Typical requirements that are imposed on the maintenance and use of reserve funds include: (i) the establishment of bank accounts for the deposit and withdrawal of reserve funds that are separate and distinct from an association’s operating funds and/or an account maintained by a management agent for the association; (ii) the signatures of at least two independent people (i.e. not husband and wife) for the withdrawal of funds from the association’s reserve bank account(s)- generally, those people are required to be either, two board members, or one board member plus one officer such as the treasurer of the association; and (iii) proper approval by the association’s board of directors for the removal of funds from the association’s reserve account(s).
Because associations, like other businesses can have periods of cash flow shortages caused by unexpected events, from time-to-time there may be a necessity for temporarily utilizing funds that are on deposit in the association’s reserve account for a purpose other than the permissible purposes listed above. Utilization of reserve funds for such purposes necessitates proper board procedures and actions that include: (i) providing homeowners with advance notice of the directors’ intention to borrow from the reserve funds by adding it as an item of business on the agenda for a properly noticed meeting of the board of directors; (ii) the notice provided to the homeowners should include a statement of the reasons that the use of reserve funds is needed, the options for how the funds will be repaid to the reserve account, and whether or not a special assessment to raise the funds may be considered by the directors; (iii) when a use of reserve funds has been properly authorized at the board meeting, the board must document it through proper findings / resolutions that are recorded in the minutes of the board meeting and which include a statement of the reasons for the use of the reserve funds, and a description of how and when the funds will be repaid to the association’s reserve account.
The following is an example of the language in a resolution that can be adopted by an association’s board of directors to authorize the temporary use of reserve funds for a purpose other than those specified above:
WHEREAS state laws and/or the Association’s governing documents allow for an association’s board of directors to authorize the transfer of funds from the Association’s reserve account to its general operating account(s) to meet short term cash flow requirements necessary for the payment of other Association expenses; and
WHEREAS, the board has determined that this Association is experiencing a shortage in its cash flow that is necessary for the payment of its current operating expenses due to a need to pay additional expenses that were not anticipated in the Association’s budget; and
WHEREAS, the Association’s board of directors has determined in an open meeting of the board that it would be in the best interests of the Association to temporarily utilize reserve funds to provide for the payment of the additional unexpected expenses.
IT IS HEREBY RESOLVED that this Association’s president and treasurer are hereby authorized and instructed to transfer the amount of $___________ from the Association’s reserve account to its general operating account in order to provide funds necessary for the payment of unanticipated expenses.
IT IS HEREBY FURTHER RESOLVED that the funds transferred from this Association’s reserve account pursuant to this Resolution shall be repaid to the Association’s reserve account in not more than one year from the date of the transfer from the following the following source:_______________________.
Name: (Association Secretary)
State laws and/or association governing documents may contain provisions that require reserve funds that are utilized to pay other expenses to be repaid to the association’s reserve account in a stated period of time (i.e. in California the time period is one year) subject to provisions that allow for extensions of that time period. Additional requirements may include a responsibility for levying a special assessment on the association members if the funds borrowed from the reserve account cannot be repaid within the required time periods. For obvious reasons, association board members, officers and management personnel should always be familiar with the provisions contained in their state statutes and their association’s governing documents concerning the use of the association’s reserve funds. Making improper decisions concerning the use of reserve funds which are in violation of the statutes and/or governing documents will expose the association to risks relative to the loss of the funds and expose the decision makers who improperly used the reserve funds to potential personal liability.