Borrowing From the Condo Reserve Fund: Is that OK?

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L.P. from Fairfield County writes:

Dear Mister Condo,

Can Condos in Connecticut use Capital Reserve Funds to pay for operating and general repairs? Can the Board borrow the money from the Reserve fund and then later pay it back with a Special Assessment?

Mister Condo replies:

L.P., “can they” and “should they” are two different things. They certainly “can”, they probably “shouldn’t” but many of them “do”! The Reserve Fund is used to fund those long-term items that are inevitably going to fail. The rood, the roads, the pool, the tennis courts, and so on and so forth. From the day commonly-owned items are installed they begin to age and race down the road for future replacement. The concept of the Reserve Fund is that a $1,000,000 item that will need replace in 20 years should have $50,000 set aside each year to cover that eventual replacement. That money is to be set aside in some type of interest-bearing account, only to be used when the time comes to replace the common element. That being said, that is in a utopian world where volunteer Boards always have all of the money they need at their disposal to make those everyday repairs that pop up from time to time. The reality is that it is just too easy to simply borrow from the Reserve as needed. At least your Board is talking about replacing the funds (Bravo!). Many simply take what they need and leave the problem for future owners who will inevitably get stuck with a special assessment when the time comes to make that $1,000,000 capital repair. You are wise to keep an eye on how and when the money is spent. A healthy Reserve Fund is a great sign that you live in a well-run community. As long as they are going to repay the loan from the Reserve Fund, and I would insist that they do if I were you, I would think the Special Assessment to cover this year’s operating budget and general repairs is a good idea. Also, the Board should be encouraged to increase common fees for next year’s budget less they want to find themselves dipping into the Reserve Fund again next year. All the best!

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