Condo Association Management Blog

You need to establish two different accounts. The first is a reserve account which if properly defined and fully funded will provide the replacement cost for major equipment installed in your property. Examples could be elevators, air conditiong and heating, hot water boilers etc. Associated with these equipments are normal maintenance costs which should appear as a line item in your operating budget and not be part of the reserve fund. This has nothing to do with the federal IRSregulations you quoted. It is simply good management and accounting practice.

Your frustration is understandable. It does seem odd to have had two Special Assessments within 5 years for a community thats only 7 years old and $120K in the bank. My recommendation would be to sit down with the Association Manager and Board to sort it all out. As already mentioned by Charles, two accounts are needed. An Operating Account and Reserve Fund. Review your Reserve Study (get one if you don't have one) it to determine your current Reserve Fund status/health and make a plan to ensure that all future anticipated expenses are covered. Generally, if the Reserve Fund is adequately funded it will cover unexpected expenses and reduce the chances of a Special Assessment. Good luck. Let me know if I can be of any assistance.

Thank you Charles and Ray for your comments. I mentioned Res.70-604 because this was given by the property mgr. as an explanation why any and all excess funds must go into the Cap. Reserve. We'd be taxed at a different rate, otherwise. The condo rules say we should have separate accounts, but I guess the rules aren't meant for everybody. Thanks again.

Frankly I've never heard of Cap Reserve. What is it designed to provide for???

The correct process to comply with IRS regulations as explained by the leading CPA with Community Associations Institute several years ago is a practice that I advise my clients to follow: 
 
1. All yearly budgets are Zero based - meaning that the income and expenses in the budget for the year will balance out at the end of the year to -0-. (Life itself doesn't work that way.) Likewise, a budget should never express a negative balance. 
2. The initial budget was approved by the developer and the fees were kept low as a sales incentive. That may be the reason for the Special Assessments. It is also possible that there were some construction repairs that needed to be made and the developer/builder response was lacking. Therefore the condo board made some repairs that were cheaper and perhaps necessary - and less expensive than litigation against the developer. 
3. Only members can authorize a carry-over of income from one year to the next; therefore a vote must be held authorizing the board to carry over any excess funds to the following year. 
4. Accounting for associations are processed on an accrual basis, not a cash basis. Therefore expenses incurred (for instance - snow removal, electric bill in Dec) are invoiced and paid the in the following months.  
5. Checking accounts with banks shouldn't drop to $0.00; therefore a balance should be maintained. The carry-over should be maintained in the Operating Account for the association. It does not go into Reserves.  
6. The budget process for this next year should look into the cause of special assessments in your recent past. It is possible that there was a valid explanation. Or the budget itself needs to be adjusted and the condo fee increased. This process should start soon before the information is lost as can happen.  
7. The Operating Budget should include approximately 10% line-item for an Operating Reserve - separate from the Reserves for long-term maintenance and repairs. The Reserve Fund should not be utilized as a source of income for excess operating expenses. It has a specific purpose and should be based on a Reserve Study.  
8. Request a meeting with the CPA who is your vendor, not the mgmt co's. That person should be able to assist the board in reviewing your recent financial history.  
 
Hope this is helpful to all new boards.  
PS - the mortgage industry expects to see a line item for the Insurance Deductible expense the condo may incur during the year. This is one item that has been ignored by the mortgage industry in the past.  

Re IRS Resolution 70-604. I've been a BD member in a small HOA (35 units)for many years. Each year our election ballot contains a section asking owners to approve an unexplained action pertaining to IRS Resolution 70-604. The content of the IRS Resolution is not explained nor are the options or any pros or cons of the options. From research I've done, I understand one option is to return excess funds to owners at the end of the fiscal year. I strongly suspect that owners would choose that if they were really aware of the rather substantial amounts that are typically involved and that the option exists. Yearly dues are increases have become just par for the course and are needless to say, are not popular with owners. I feel the owners are not getting the information they should on these questions, although technically the HOA appears to be complying with the requirement of a yearly vote by owners. I asked recently if we were compliant with this Resolution and our property management firm said we were. Any thoughts or advice from the pros on this situation?