Several clients have recently dealt with situations requiring them to consider the feasibility of borrowing from their reserve accounts in order to satisfy various financial obligations.
California law authorizes Association Boards of Directors to borrow from reserves to supplement monthly operating expenses under certain conditions. Such borrowing is usually done to fulfill an Association’s maintenance, repair, litigation or short-term cash flow needs.
When borrowing from reserves, Association members must be primarily notified of (1) of the intent to borrow from reserves, (2) the reasons for borrowing, and (3) the manner in which the funds will be repaid. Boards of Directors must be diligent in complying with these notice and disclosure requirements and in ensuring that they have a feasible plan for restoring the reserve account within one year.
Prior to electing to borrow from their Association’s reserves, Boards of Directors should consider all available sources of money in addition to other factors. Consideration of (1) realistic repayment sources (e.g., loans from financial institutions, special assessments, etc.), (2) the amount of money actually needed, and (3) the estimated length of time required to restore the reserve account may have a substantial bearing on a Board’s decision whether or not to borrow from reserves. Proper consideration of these factors and diligence in complying with the attending legal requirements will help to ensure that any decision to borrow from reserves is made in the best interest of the Association.
Content by: Jeffrey M. Hylton, Esq.