Anonymous from Connecticut writes:
Dear Mister Condo,
Could you comment on the definition of a condo’s “reserve account” and what it is intended for and how the funds can be used? For the past 10 years, our condo has been running smoothly but this year a few events happened that is well above our control. We had 3 events where we had to vastly overspend our yearly projected budget amount and I want to take the funds out of the “reserve account” but a few on our board say we can’t do this. They say the money can only be used for “capital’ expenses, mainly the replacement of the road in our community. We are only 10 years old so our road should last 20-30 years more. In the past year, we had to trim out trees due to storm damage and went way over our normal landscape fund. We also hired a snow plow contractor who had an open-end contract. We paid extra for coming out to sand and the supplies such as salt mixture and state tax which went vastly over our estimated budget estimate. We will never do this type of contract again. We had to spend much more to get our sprinkler system maintenance contract this year to get it up and running. Had to spend lots more money on sprinkler head replacements then we had anticipated in our yearly budget.
We are now faced with an “assessment” to cover our overages or a very large HOA monthly fee increase for next year which we have never done before and dread doing. Can we tap into the reserve account to get this bad situation under control to pay for these unforeseen seen expenses? We put away 12% every year in our budget towards the reserve account which I believe is 2% more than the State of CT requires.
When we first became a board (10 years ago), the money was put into the “reserve account”. Then we called it our “emergency account” and for the last few months our newer board members call it “the capital” account.
Mister Condo replies:
Anon, regardless of what the account is called, a Reserve Account is only to be used for replacement of common elements that are owned by the association. You have given a great example by citing the roads that will last another 20+ years. The idea is that you save each year for the eventual and known replacement of the roads. The same is true for all major capital projects that the association will knowingly encounter – roofs, sidewalks, pools, clubhouses, etc.. It is not an Emergency Fund and it should not be used for anything other than capital improvement projects. The types of unexpected expenses you have described are exactly what special assessments are for. While it is true that no one likes a Special Assessment, they are needed when the Operating Budget for the year doesn’t cover the expenses for the year. Borrowing from the Reserve Fund is a very bad practice. It all but assures the money will not be put back in the Reserve Fund and create a devastating cash shortfall for the capital improvement projects that will eventually be needed. Levy the assessment and keep the Reserve Fund intact and available for when those funds will be needed. All the best!