Reserves to the Rescue!

By Robert Nordlund, PE, RS & Will Simons, RS, EBP / Published May 2021

     Author’s note: This article has been adapted from an e-book of the same title, originally published in summer 2020 by Association Reserves.

Although it feels like we’re (hopefully!) seeing the light at the end of the COVID-19 tunnel, it may still be several years before we know the lasting economic effects of this pandemic. Seemingly every organization on earth has had to adapt and adjust to changing circumstances, and community associations have not been immune to the challenges of the last year. For association board members and managers, the normal stresses of budgeting and managing cash flow have only increased as the atmosphere has been charged with “FUD”—fear, uncertainly, and doubt. Hopefully, this article will calm the nerves of those responsible for overseeing their association’s finances and offer some helpful suggestions for ways to alleviate any financial concerns that may have arisen over the last year. 

     “Can we use reserves to cover an operating fund shortfall?” is a question we are asked all the time. Under normal circumstances, our standard response would be an emphatic “No!” In any normal year, this would be wise advice—not to compromise the long-term physical and financial health of the property by plundering the reserve fund. But, these times have been anything but normal. For associations that may be experiencing higher levels of bad debt than normal, their short-term financial health may need to take priority when it comes to decision-making. Yes, the roof might still need to be replaced in five years, but the management company, insurance, and trash bills all need to be paid today! Since reserve contributions often represent 15–40 percent of an association’s total budget, the reserve fund is a very powerful financial resource that can be used to help an association survive a temporary disruption to their operating cash flow without sacrificing the future. However, it must be done with caution and care.

     If your association has found itself with higher-than-expected operating costs (perhaps due to increased cleaning/sanitizing requirements) or other financial headaches, there are some practical steps you can take to help get things back on track. As a first step, we would encourage the association to analyze (and possibly re-prioritize) its upcoming reserve expenses. Board members should review the most recent reserve study and identify repairs and replacements scheduled to be completed in the next few years. Keep in mind that not all expenses are of equal priority, and those happening soonest may not necessarily be the most critical. If your association has been planning on a lobby remodel or hallway renovation to “freshen up” the place, but a more critical project might also be coming due soon—think elevators or HVAC systems—then the mostly aesthetic “wish list” items may need to be postponed to address higher-priority items first. However, remember that deferred projects do not represent savings. Any such projects will still need to be accomplished eventually, so they should be considered “on hold,” not canceled. 

    Once the list of projects has been examined carefully, the next step is to take a close look at your association’s balance sheet. Most accounting professionals recommend keeping at least two to three months’ worth of operating expenses on hand in the operating account. In the event your association is having trouble keeping that margin of safety, reallocating cash from reserves to operating can take three different forms: reducing contributions to the reserve fund, suspending contributions entirely (i.e., diverting that cash to operating), or borrowing existing cash from reserves. Moving money from reserves to operating is permissible in Florida, but it requires the approval of the ownership as it is viewed as a “non-scheduled” use of those funds. (Homeowners associations with non-statutory reserves may be able to avoid the voting requirements.) Keep in mind your governing documents may also contain borrowing restrictions, so it is important to check with your legal counsel before making any decisions. If the association is depriving the reserve fund of cash through one of these three strategies, even on a temporary basis, create a payback plan. Document what you’ve done and create a detailed plan to restore those funds to reserves as soon as possible. Otherwise, when reserve components require replacement, the likelihood of special assessments and/or loans will be much greater. 

     When examining your future reserve cash needs, you may find your association has time on its side when it comes to major expenses. For example, consider a townhome or villa-style association with tile roofs. For most such properties, the eventual replacement of those roofs constitutes the single largest expense in their reserve planning forecast. However, the lifespan of tile roofs is typically a few decades. So, if the roof replacement project in your association is many years down the road, but there’s already a healthy amount of reserve cash in the bank for that eventual project, then it may be possible to take some of that cash and deploy it for more immediate needs. In our experience, associations that have been fully funding their reserves will likely have more flexibility in these circumstances. 

    As a final suggestion, in these times of financial uncertainty and economic downturn, there may be opportunities to work with vendors and service contractors to renegotiate pricing, scheduling, or other conditions. For example, valet parking operations that may have struggled to get by with reduced demand for their services may be more willing to work with clients on a new pricing structure. Other examples could include fitness equipment suppliers or other vendors that were affected by prolonged closure of amenity areas. 

    Despite all of the changes and adjustments we’ve all had to make while adapting to the “new normal,” some things haven’t (and will never) change: board members are entrusted to make decisions in good faith, in the best interests of their associations, and with appropriate due diligence. No matter what else may be going on in the world, they should communicate clearly and transparently to homeowners and maintain the association’s interests to the best of their ability. Managing the association’s financial picture is only one critical aspect of that duty. While it may be tempting to use the pandemic as an excuse for short-sighted decision-making, those associations that think strategically and respond carefully to the economic impacts of the last year will be those best situated to thrive as we all move forward. 

Will Simons, RS, EBP

President, Association Reserves’ Florida regional office

     Robert M. Nordlund, PE, RS, is the founder, owner, and CEO of Association Reserves. Robert is a professional engineer and reserve specialist. In addition, he is a past Chairman of CAI’s Reserve Professionals Committee and a frequent speaker in industry sponsored seminars and presentations throughout the United States.
     Will Simons, RS, EBP, is the President of Association Reserves’ Florida regional office. Will has completed and overseen more than 1,800 reserve studies since joining the firm in 2008. For more information, call (954) 210-7925, email wsimons@reservestudy.com, or please visit www.ReserveStudy.com.