Page 6 - New England Condominium September 2020

6 NEW ENGLAND CONDOMINIUM -SEPTEMBER 2020 NEWENGLANDCONDO.COM Tapping Reserves in a Time of Financial Crisis An Option to (Carefully!) Consider BY ROBERT NORDLUND, PE, RS It’s a question we’re asked all the time: caution and care. “Can we use reserves to cover an operat- ing fund shortfall?” Under normal circum- stances, our standard response would be cisions to lead their association. Faced with ports, and your most recent reserve study. an emphatic “No!”—because reserves are difficult decisions, the ‘right’ answer may Once all that information is compiled, your for major repair and replacement projects. not be clear, because standard best prac- But now, in a time of (inter)national crisis, tices simply may not apply. Fortunately, by positioned to weigh the options available. reserves may play a valuable additional role following a three-step process that flows at your association. In March, our country went into vari- ous degrees of ‘lockdown’ to prevent the making what may seem like unorthodox rapid spread of the COVID-19 pandemic. decisions, if documentation shows that projects The resulting rapid spike in unemployment those decisions are made: means associations are, or will soon be, experiencing higher than normal assess- ment delinquencies. With most communi- ties running on tight budgets even in good ing wise counsel) times, rising owner delinquencies put the short-term financial health of associations at risk. Yes, the roof might still need to be trying to solve the problem with reserves projects. But not all projects are equal! replaced in five years, but management, in- surance, and trash bills all need to be paid ening, continue your collection (and com- now. In times like these, reserve contribu- tions and the reserve fund can also be used your legal counsel to find if you have any ects (like new carpet in the rear stairwell, to help offset a disruption to essential oper- ating cash flow—but it must be done with tions. Then make sure you’ve gathered ing the perimeter wood fence; can it last Even in the midst of uncertainty, boards financial reports with bank balances, your still need to act and make wise financial de- from the Business Judgment Rule, boards can limit their liability exposure when rescue an association in financial crisis: • In good faith • In the best interests of the association • After appropriate due-diligence (seek- What Do We Do First? First, it’s important to remember that by prioritizing expenses, including reserve is not your first step. Begin your belt-tight- munication) efforts, and get in touch with postpone less consequential reserve proj- state-law or governing document limita- current financial information, including year-to-date budget, any delinquency re- board and financial advisors will be better- What Are Board Options? There are three ways reserves can help • Conserving cash by deferring reserve • Reallocating cash from reserves to op- erating funds • Saving cash by bargain shopping Conserving Cash In a time of financial scarcity, a good standard rule is to minimize your spending Don’t defer projects that will expose own- ers to even greater problems or expenses— for example). Double-check before replac- another year with a few repairs? With the clubhouse closed because of the pandem- ic, is this really the time to spend $50,000 on remodeling it? If cash permits, sure— in fact, it might be a great opportunity to do the remodel when no one is using the clubhouse—but if cash is tight, defer the project to 2021. And anything related to maintaining building integrity, like build- ing painting or roof work should definitely not be put off. Don’t make things worse by risking expensive problems like dry-rot or water damage that could have easily been prevented. Similarly, projects that protect the best interests of the owners (like the central hot water heater, or automobile gate mechanism) are projects that you should perform on schedule. Make sure you spend precious reserve cash only on projects that cannot be readily deferred. And remember: deferred projects don’t represent savings. You’ll still need to do those projects next year. Reallocating Cash If your reserve contributions are any- where close to the 25% of total budget that most associations find is necessary to offset ongoing deterioration and avoid special as- sessments, you might consider scaling back for a few months. Dropping your contri- butions by 10% down to 15% immediately offsets a 10% increase in delinquencies. The same effect could be achieved by deferring reserve contributions entirely for a few months. You could also consider a zero- interest loan from reserves to operating. Consult with legal counsel and your re- serve study provider regarding these pos- sible approaches to determine which might be the best fit for your current needs in light of your contribution size, reserve fund size, and upcoming reserve projects. Run some cases on your reserve study software, or ask your study provider to run some cases to document both the borrowing and the re- payment plan—there should be no guess- ing! That repayment might take the form of a single or multiyear special assessment, or higher future reserve contributions, all of which might be minimized by higher- than-normal transfers to reserves next year, when delinquent owners resolve the funds owed to the association. FINANCE continued on page 12