Major Repairs Leaves Reserve Fund Underfunded

L.G. from New Haven County writes:

Dear Mister Condo,

Can we use our reserves for a major repair if that leaves us underfunded?

Mister Condo replies:

L.G., the short answer is “it depends” and what it depends upon is the nature of the repair, the mindset of the Board and residents, and the plan to repay the Reserve Fund once the repairs are completed. In theory, the Reserve Fund is an emergency blanket that can be used to keep the association whole in the event of disaster and to handle long term repair of major items. Outside firms like banks often look at the Association’s Reserve Fund as an indicator of fiscal responsibility and governance practices by the Association. An underfunded Reserve Fund is a sign of financial risk and weakness and may prevent banks from lending to the condominium, issuing mortgages within the condominium, and may adversely affect the community’s ability to achieve or maintain FHA certification which carries its own set of risks for the association. That being said, if a Reserve Fund is considered properly funded at $100,000 and the association needed $10,000 to complete a major repair, it might consider loaning itself the $10,000 to complete the repair and repay itself within the year with a special assessment or a temporary increase to common fees. As I said, it depends on the mindset of the Board and residents because such an action would require both to vote on the plan and to implement it. A better alternative may be to consider a community association loan or special assessment to complete the major repair, especially if it were an emergency to have the repair completed. You can find a list of qualified lenders at http://www.caict.org/?page=Directory#Banking/Financial Services.