Borrowing from the Reserve Fund to Fix Condo Building Code Violations

J.C. from Morris County, New Jersey writes:

Dear Mister Condo,

Can a Condo Association, incorporated in New Jersey, borrow and pay back money from the Reserve Fund? These funds would be used for building code issues that the builder did not complete. It is for a 300 + unit association with several million dollars in reserve.

Mister Condo replies:

J.C., construction defects caused by a builder are no fun for any community. The association has little choice but to fix these issues, especially if they are building code and safety issues that could lead to significant problems for the association residents. Heaven forbid someone get injured or killed from any of these problems. As for where the money comes from, the Reserve Fund is a tempting source. The association cannot simply raid the Reserve Fund without replenishing it but, they may be able to borrow from it as long as there is an earnest plan to repay the funds that are borrowed. After all, the Reserve Fund is typically invested in a secure money-earning account such as a CD or other low-risk investment. Borrowing from its own Reserve Fund, the association may be able to save thousands in loan costs and interest over the years. However, the association’s own governing documents may need to be examined to make sure that this practice is allowed. Of course, local and state laws also must be observed. I am not an expert in New Jersey law but I am not familiar with any law that forbids the association from borrowing from its own Reserve Fund. I would encourage the Board to check with their association attorney to make sure they are within the law but other than that, I don’t see why they couldn’t. All the best!