Should your HOA borrow from The Reserve Fund?

Should your HOA borrow from The Reserve Fund?

Should your HOA borrow from the Reserve fund?

The short answer to this question is, “It depends.”

In this article, we discuss the advantages (if any) and disadvantages of borrowing from the reserve account.
Every state has different rules regarding borrowing from the reserve account. For example, in California it is possible to borrow from your reserves, if the board meets specific criteria. The board must hold a special meeting to discuss how the funds will be repaid. Reserve loans are required to be paid back within a year unless the board submits written documents to support the need to extend the loan beyond the initial year.

Florida has very strict statutes regarding Reserve funds and their use. Reserve borrowing is largely prohibited. However, there are individual circumstances when borrowing from the reserve account is permitted in Florida. Florida statute provides an opportunity to borrow from reserves if a supermajority vote is met. This would require a significant amount of political engineering and attorney fees to comply with the documentation.

There is no specific law regarding reserve fund borrowing in Arizona. However, Arizona law states: The Board of Directors is required by state statute to discharge their duties in good faith, under the prudent person test, acting in the best interests of the corporation. Current Reserve balance must be disclosed to prospective buyers.
Borrowing from reserves is risky. If you reduce your reserves with a loan and one of your major reserve components requires repair, the funds to make the repair will not be available. In this situation, the board has two choices, kick the can down the road which results in deferred maintenance or levy a special assessment to fund the repairs. Deferred maintenance results in lower property values and an emergency special assessment puts financial stress on the homeowners. In either case, the board would not be exercising “Prudent” fiscal management.
Bottom line – the board has a fiduciary obligation to use prudent fiscal management to maintain the integrity of the reserve funds. Rarely is borrowing from the reserve fund a “prudent” move. There are some cases when borrowing from the reserves is a good thing. If the HOA has sufficient reserves, a short-term loan would save the HOA money in terms of interest rate and avoiding the need to special assess. These cases are certainly the exception and not the rule.

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