Can the HOA Board Borrow Money from the Reserves?

August 29, 2023    Education

Homeowner associations (HOAs) are organizations responsible for maintaining and management of common areas and community amenities. To achieve their objectives, HOAs need funds, which are collected through member assessments.

Most of the time, a portion of the assessments goes toward future expenses, such as extensive restorations or replacements of common areas. But what if the HOA incurs an unexpected expense and must use the reserve funds? Can the HOA board borrow from the reserve fund without a formal motion or resolution at a public board meeting?

The brief response is "no." The only way for a HOA board to borrow money from the reserves is to make a formal motion or decision during a public board meeting. However, committees may borrow from reserves without member approval. Reserve funds must be kept safe so they can be used for what they were meant for, and HOAs must follow a specific process if they need to take money from reserves.

This article will clarify how to borrow from reserves, the importance of transparency and openness, and how to avoid having to borrow from reserves.

How to borrow money from the reserves

If an HOA board is in a bind and needs to borrow from reserves, they should first consult with the business that conducted its Reserve Study to determine if a short-term loan from reserves will cause any unforeseen problems. If borrowing is an option, a specific procedure must be followed to ensure legality and safeguard the community's interests.

1. Make Your Choice

The first step is for the board to determine whether or not to borrow the money. This decision should be made at a board meeting, with all board members present and in an open and transparent discussion. A resolution or a vote may be used to determine the outcome. However, a resolution is preferable because it provides more information and explains the board's decision-making process.

2. Write down the choice

The meeting minutes should also record the decision to borrow from reserves. The board meeting minutes are a legal record of what was discussed and agreed upon. They should accurately chronicle the meeting's discussions, decisions, and actions, including the decision to borrow from reserves.

3. Agree to a plan for paying it back

In addition to deciding whether or not to withdraw funds from reserves, the board must explain how the funds will be returned to the reserve. Borrowing from savings is a temporary solution that should be repaid as soon as possible. Some states, such as California, have strict loan repayment regulations. For instance, the board must repay the loaned funds annually. The repayment period can be extended, but the board must inform the members of the extension. As a general principle of fiscal responsibility, a government should dislike when funds collected for one reason are used for another.

4. Be Transparent

When borrowing from savings, it is crucial to be forthright and honest. Boards of HOAs have a fiduciary duty to act in the community's best interests and manage funds responsibly. Therefore, it is essential to communicate with the public and provide them with accurate and current information about borrowing from reserves.

The loan repayment plan should be outlined in detail and shared with the community to ensure transparency and accountability. At least once a year, the board can disclose details about the borrowing process, including how much was borrowed, why it was necessary, and how it will be repaid.

Avoid the Need to Borrow Funds from Reserve

Reserves should be used only as a last resort. The best method to avoid borrowing from the reserve is to ensure that the group has sufficient funds. It is typical for boards to attempt to keep assessments modest, which can result in unforeseen expenses or emergencies that necessitate borrowing from the reserve.

If an HOA is constantly dipping into its reserves to pay for routine expenses, it may indicate that the assessments are insufficient to meet the community's requirements. In this situation, the HOA board should examine the number of assessments and contemplate modifying them to ensure sufficient funds.

In Summary

HOA boards must make a formal motion or resolution at a public board meeting to borrow money from the reserve fund. The reserve fund is established to secure the interests of homeowners and ensure that the money is only used for its intended purpose.

To borrow money from the reserve, the board must decide, clarify how the money will be repaid, inform the members of the process and repayment schedule, and repay a portion of the borrowed funds within a year. By providing sufficient funds to the association, the board will not have to use the reserve fund, which can be used for its intended purpose.

If your HOA board has questions about running your association in other ways, ask an experienced industry leader. Crummack Huseby offers a free consultation and a complimentary customized overview outlining specific resources to help you resolve your concerns. 

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