Reserve accounts

I am curious: How do your covenants define "Service Area"? Look in the "definitions" section.

Barring the definition saying something surprising, I think best practices would be to have two different bank accounts. Your HOA might be complying with the covenants by having simply separate ledger accounts, and commingling the funds in one bank account, but I think two separate bank accounts would be better.

You know what a ledger account is, right? If not, please look it up. If these two covenant-defined reserve categories were not even shown in the books as separate ledger accounts, then in my opinion this is a violation of the covenants.

If separate ledger accounts exist, but the funds were commingled in the same bank account, then the board has some wiggle room IMO.

Let's see what others here think.

My HOA has a similar set up, VC, but they're called "special benefit areas." There certainly are three separate reserve accounts per our covenants. Our reserve specialist prepares 3 different reserves studies.

It sounds like you might be on the board now? If so, have the treasurer or your property manager open two accounts. Best of all, have a reserve analyst assess your reserves components and bring your reserves studies up to date. I'm thinking that if you'd have a reserve study done previously the qualified reserve specialist or analyst would have correctly treated these separately.

VC

Are the dues the same for both area?

About 150 SFH and 50 TH.

Dues are different because the SFH have to fund only the common reserve fund and townhomes have to fund both. Roughly, $350 vs $600

I don't know why you wouldn't want them in two physical accounts, even if technically they are in separate ledger accounts. It just makes sense to keep them separate and shouldn't cost more. Would certainly keep it "cleaner". If I lived in one of the THs, I would want to know that that the common area association isn't dipping into those funds.

Do you have the books audited every year?

Correct regarding your assumption.

Thanks !

I asked your question to ChatGPT. Here is the answer.

"If the reserve funds for each service area are already held in separate ledger accounts from reserves collected for common maintenance areas, then it seems that your association is already in compliance with the covenant you provided. Holding the reserve funds in separate ledger accounts would be one way to satisfy the requirement to segregate the funds.

"However, it may be worthwhile to double-check with a legal expert or your association's governing documents to confirm that holding the funds in separate ledger accounts is sufficient to comply with the specific language of your covenant. It's possible that there may be additional requirements or guidelines that need to be followed in order to fully satisfy the covenant.

"In any case, it's good practice to ensure that the association's accounting and financial management is organized and transparent, and that reserve funds are allocated and used in accordance with the governing documents and legal requirements."

We are in a new era.

That ChatGPT response is something. Doggone.

We have the problem you described,

Our Newish PM & his asst. have been using an AI writer for several months. It's better for owners because the two of them are poor writers. BUT, they also are, unsurprisingly, poor readers and let some AI stuff slip through that is inaccurate & embarrassing

Before a windy storm, for instance, re: our 300 balconies. the AI text was nice in encouraging residents to anchor down or take inside lightweight stuff, blah, blah. But it closed saying we make sure we keep leaves cleared out of our gutters. We have no gutters.

Another issue is, as MichelT suggests, many of these are waaaaay too long. If he regularly sends out 300-word memos to owners, I can promise him, most do not read them.

I asked ChatGPT:
What are some reasons that the board of directors should not borrow money from one of these reserve funds to pay expenses in another area?

There are several reasons why the board of directors should not borrow money from one reserve fund to pay expenses in another area:

Violation of Governing Documents: The governing documents of the association, such as the CC&Rs, often specify how reserve funds can be used. Borrowing from one reserve fund to pay for expenses in another area may violate the governing documents.

Legal and Regulatory Requirements: There may be legal and regulatory requirements that dictate how reserve funds can be used. Borrowing from one reserve fund to pay for expenses in another area may be in violation of these requirements.

Confusion and Misallocation of Funds: Borrowing from one reserve fund to pay for expenses in another area can create confusion and misallocation of funds, making it difficult to track how funds are being used and which areas are being adequately funded.

Risk to Future Projects: Reserve funds are set aside to cover future expenses and projects in specific areas, and borrowing from one reserve fund to pay for expenses in another area can compromise the ability of the association to fund future projects.

Potentially Risky Financial Practices: Borrowing from one reserve fund to pay for expenses in another area can be a sign of potentially risky financial practices, which can lead to financial instability and increased risk of financial problems for the association.

In summary, borrowing money from one reserve fund to pay expenses in another area can violate governing documents, legal and regulatory requirements, cause confusion and misallocation of funds, and compromise the ability of the association to fund future projects. It is important for the board of directors to ensure that reserve funds are used in accordance with the governing documents, legal requirements, and best financial practices.

Is it permissible to borrow from one reserve account to fund another or to bolster the operation budget?

Generally, it is not permissible to borrow from one reserve account to fund another or to bolster the operating budget without first obtaining the necessary approvals and following proper procedures.

The purpose of reserve funds is to ensure that sufficient funds are available to cover future expenses and projects in specific areas. Reserve funds are typically allocated to specific service areas or projects, and should be used only for their designated purpose.

Borrowing from one reserve account to fund another area or to bolster the operating budget can violate the governing documents and legal requirements, and can lead to confusion and misallocation of funds. It can also jeopardize the ability of the association to fund future projects and can lead to increased risk of financial problems.

If the board of directors believes that it is necessary to borrow from one reserve account to fund another area or to bolster the operating budget, they should first review the governing documents to determine if it is permissible to do so. They may also need to obtain approval from the membership and follow proper procedures for borrowing and repayment.

In any case, it is important for the board of directors to ensure that reserve funds are used in accordance with the governing documents, legal requirements, and best financial practices, and to ensure transparency and accountability in all financial transactions.

good idea!
1. This is from Chat:
In Florida, borrowing from the reserves of a homeowners association (HOA) is generally allowed, but there are certain requirements that must be met. The Florida Statutes provide guidelines for the use of reserve funds by HOAs.

According to Florida Statute 720.303(6), an HOA may borrow from its reserve funds if:

The funds are used to meet an emergency expenditure that could not have been reasonably foreseen;
The loan is repaid within one year, unless the membership approves a longer repayment period; and
The loan is approved by a majority of the total voting interests of the association, either at a meeting or by written consent.
Additionally, the HOA's governing documents may have specific provisions related to borrowing from reserves that must also be followed.

It's important to note that borrowing from reserves should generally be avoided, as the purpose of reserve funds is to ensure that the association has funds available for major repairs and replacements in the future. If reserve funds are used for other purposes, the association may face financial difficulties down the line.

It is recommended that HOAs consult with a qualified attorney to ensure compliance with all applicable laws and regulations regarding the use of reserve funds.

2. This is from a Google search quoting an article from hoaleader.com, plus links to many more articles on the subject:
Florida statute provides a slim window of opportunity for associations to borrow from reserves if certain notice requirements and supermajority votes of memberships are met.

Thanks everybody for fruitful participation !

I think this is the key 720.303.2(h):

(h) Reserve funds and any interest accruing thereon shall remain in the reserve account or accounts and shall be used only for authorized reserve expenditures unless their use for other purposes is approved in advance by a majority vote at a meeting at which a quorum is present.

That's what we mean by "supermajority": a majority vote at a meeting at which a quorum is present", correct ?

I.e. out of 300 owners, 151 should vote to use the fund for unintended purposes.

What is the enforcement of the "supermajority"/quorum majority requirement ? My understanding - none, there's no point in fining the board because fine money would come from HOA members !

No, there is no supermajority requirement requirement in 720.303(6) (h). Example of how the latter works:

Suppose a HOA has a quorum requirement of 30% for meetings of the owners; the HOA has 300 owners; 100 owners show up to the meeting in person or by proxy. One third (= 100/300) showed up, so quorum is met. The vote occurs. 51 vote to approve reserve funds to pay fo a non-authorized reserve expenditure. The 51 is a majority of 100, so the vote passes.

Enforcement of the statute is as given in FS 720.311. This has nothing to do with fines. Instead, if the statute section is violated, a person would use the procedures in FS 720.311 to seek corrective action, such as disallowing the vote.

If the Board does this, then it has violated FS 720. As I noted above, HOA members wanting to stop this should read FS 720.311, http://www.leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&URL=0700-0799/0720/Sections/0720.311.html, and take direction from it.

So, VC, now the you're on the board, do you think you can submit an agenda item to set up two separate accounts? This would have to be addressed at an open meeting.

I'd be very concerned about one service area raiding the other. Is it that the SFHs' directors are rising the TH funds? How do they do this without voting on it at a open board meeting? And given FL codes (which I'm too slow to pursue), how is it even legal to use such funds for purposes for which they are NOT intended?

Is "they" the whole board, VC? or certain directors? Do you think you'll be able, as a new director, to persuade the rest of the board to vote to make decisions in open board meetings as is required in FL?

How are two directors able to spend reserves without, at minimum, a board vote?? if the expenditure is moving funds from one reserve account to another, it's not vn a "loan," it's an expenditure that should require a board vote.