Homeowners associations (HOAs) are organizations responsible for maintaining and managing common areas and amenities within a community. To accomplish their objectives, HOAs require funds, which are raised through member assessments.
Typically, a portion of the assessments is earmarked for reserve components, such as major repairs or replacements of common elements, which are expected to occur in the future. However, what happens if the HOA encounters an unexpected expense, and the reserve funds are needed? Can the HOA board borrow money from reserves without making a formal motion or resolution in an open board meeting?
In short, the answer is no. An HOA board cannot borrow money from reserves without making a formal motion or resolution in an open board meeting; however boards are allowed to borrow from the reserves without a vote of the membership.
Legislatures require that reserve funds be protected for their intended purposes, and HOAs must follow a specific process if they need to borrow funds from reserves.
This article will outline the process for borrowing from reserves, explain the importance of transparency and disclosure, and offer some tips for avoiding the need to borrow from reserves altogether.
The Process for Borrowing from Reserves
If an HOA board finds itself in a bind and needs to borrow from reserves, start by checking with your Reserve Study provider to see if a short-term borrowing from reserves creates any unanticipated problems. If a borrowing strategy is an option, it must follow a specific process to ensure compliance with the law and protect the interests of the community.
1. Make the Decision
The first step is to make the decision as a board to borrow the funds. This decision should be made in a board meeting, where all board members are present, and the discussion is open and transparent. The decision can be made through a motion or a resolution. However, it’s recommended to use a resolution as it gives more detail and outlines the process by which the board is making the decision and why.
2. Record the Decision
The decision to borrow from reserves should also be recorded in the meeting minutes. Meeting minutes are a legal record of what was discussed and decided during the board meeting. They should accurately reflect the discussion, decisions, and actions taken during the meeting, including the decision to borrow from reserves.
3. Commit to a Repayment Plan
In addition to making the decision to borrow funds from reserves, the board should also provide some level of disclosure on how the funds will be repaid to the reserve. Borrowing from reserves is not a permanent solution, and the borrowed funds should be repaid as soon as possible.
Some states - such as California and Washington - have strict repayment requirements. For example, the board must make a payment toward the borrowed fund once a year. The repayment period can be extended, but the board must disclose the extension to the membership.
As a general principle of fiscal responsibility any jurisdiction should frown on money collected for one purpose being used for an entirely different purpose.
4. Be Transparent
Transparency and disclosure are critical when it comes to borrowing from reserves. HOA boards have a fiduciary duty to act in the best interest of the community and manage funds responsibly. Therefore, it’s essential to communicate with the community and provide accurate and timely information about borrowing from reserves.
The repayment plan should be clearly outlined and communicated to the community to ensure transparency and accountability. The board can also provide disclosures about the borrowing process, such as how much was borrowed, why it was necessary, and how it will be repaid, at least once a year.
Avoid the Need to Borrow Funds from Reserve
Borrowing from reserves should be a last resort. The best way to avoid the need to borrow funds from the reserve is to fund the association properly. It’s common for boards to try to keep assessments low, which can result in unexpected expenses or emergencies that could require borrowing from the reserve.
If an HOA finds itself consistently needing to borrow from reserves to cover regular expenses, it may be a sign that the assessment amounts are not sufficient to meet the needs of the community. In such cases, the HOA board should review the assessment amounts and consider adjusting them to ensure proper funding.
HOA boards cannot borrow money from the reserve fund without making a formal motion or resolution in an open board meeting. The reserve fund is established to protect homeowners' interests and ensure that the funds are used only for the specific purposes for which they were set aside.
The process of borrowing funds from the reserve includes making a decision in a board meeting, disclosing how the funds will be repaid, communicating the process and repayment plan to the membership, and paying back some of the borrowed funds within a year.
By properly funding the association, boards can avoid the need to borrow from the reserve and ensure that the reserve fund remains intact for its intended purpose.