HOAleader.com - Tip of the Week - November 9, 2013
Published: Sat, 11/09/13
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"Let's Go Raid the Reserve Fund!" Is This Your HOA's Financial
Plan?
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In this week's tip, we discuss whether an HOA that made a
"temporary transfer" of reserve funds for litigation did
anything wrong.
This is common, and associations can generally use reserves for
any reason, says Bob Diamond, a partner at the law firm Reed
Smith in Falls Church, Va., who helped write the Washington,
D.C., condo act in 1976 and worked on the Uniform Condo Act,
which 24 states have adopted.
But there's a catch. "The catch in dealing with reserves is that
you don't pay income tax on reserve funds," says Diamond. "So if
you use them for an improper purpose, like to cover ordinary
operating expenses, you convert your reserves into taxable income.
However if you properly structure your use for the money, like by
making a loan to your operating fund, you can use that cash for
anything you want. But you have to pay it back. I'd advise any
board to consult with their accountant and maybe their lawyer to
make sure they structure that properly to protect the nontaxable
nature of the reserve funds."
Randy Opotowsky, a partner at The Steeg Law Firm in New Orleans,
who represents 15-20 associations at any given time, agrees. "You
can use reserves for pretty much anything the board deems
appropriate," he says. "You may get yourself involved
in litigation and may have to do a special assessment or pull from
reserves. That would be something for which you could pull
from reserves. The standard for doing this is probably a little
higher than a reasonable man standard and a little less than a
fiduciary obligation. The Louisiana condo act just says you can
have and provide for reserves. It doesn't say money held there
must be used for replacement of building components or capital
improvements. So if funds get low, associations end up using
reserves on a short-term basis until they replenish them or do a
special assessment."
Other states, however, do expressly provide for the use of
reserves in nonreserve situations. Find out their rules, and get
details on the risks in dipping into reserves all too often, in
our new article: http://www.hoaleader.com/members/915.cfm
Best regards,
Matt Humphrey
President
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