Page 6 - CooperatorNewsSouth FLorida 2021

6 COOPERATORNEWS SOUTH FLORIDA
—FALL 2021
SOFL.COOPERATORNEWS.COM
TRENDS
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: cisions to lead their association. Faced with positioned to weigh the options available.
"Can we use reserves to cover an operat-
ing fund shortfall?" Under normal circum-
stances, our standard response would be an simply may not apply. Fortunately, by fol-
emphatic “No!”—because reserves are for lowing a three-step process that flows from
major repair and replacement projects. But the Business Judgment Rule, boards can projects
now, in a time of (inter)national crisis, re-
serves may play a valuable additional role at what may seem like unorthodox decisions, erating funds
your association.
Last year, our country went into various sions are made:
degrees of ‘lockdown’ to prevent the rapid
spread of the COVID-19 pandemic. The re-
sulting rapid spike in unemployment meant
associations experienced—or soon would ing wise counsel)
experience—higher than normal assess-
ment delinquencies. With most communi-
ties running on tight budgets even in good trying to solve the problem with reserves pone less consequential reserve projects
times, rising owner delinquencies put the is not your first step. Begin your belt-tight-
short-term financial health of associations ening, continue your collection (and com-
at risk. Yes, the roof might still need to be munication) efforts, and get in touch with perimeter wood fence; can it last another
replaced in five years, but management, in-
surance, and trash bills all need to be paid any state-law or governing document limi-
now. In times like these, reserve contribu-
tions and the reserve fund can also be used current financial information, including it? If cash permits, sure—in fact, it might be
to help offset a disruption to essential oper-
ating cash flow—but it must be done with year-to-date budget, any delinquency re-
caution and care.
Even in the midst of uncertainty, boards Once all that information is compiled, your And anything related to maintaining build-
still need to act and make wise financial de-
difficult decisions, the ‘right’ answer may
not be clear, because standard best practices
limit their liability exposure when making
if documentation shows that those deci-
• 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 even greater problems or expenses—post-
your legal counsel to find out if you have year with a few repairs? With the clubhouse
tations. Then make sure you’ve gathered ly the time to spend $50,000 on remodeling
financial reports with bank balances, your a great opportunity to do the remodel when
ports, and your most recent reserve study. is tight, defer the project to 2022 or 2023.
board and financial advisors will be better ing integrity, like building painting or roof
What Are a Board’s Options?
There are three ways reserves can help
rescue an association in financial crisis:
• Conserving cash by deferring reserve
• Reallocating cash from reserves to op-
• Saving cash by bargain shopping
Conserving Cash
In a time of financial scarcity, a good
standard rule is to minimize your spending
by prioritizing expenses, including reserve
projects. But not all projects are equal! Don’t
defer projects that will expose owners to
(like new carpet in the rear stairwell, for ex-
ample). Double-check before replacing the
closed because of the pandemic, is this real-
no one is using the clubhouse—but if cash
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 owners (like the central hot wa-
ter heater, or automobile gate mechanism)
are projects that you should perform on
schedule. Make sure you spend precious re-
serve 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 defer-
ring reserve contributions entirely for a few
months. You could also consider a zero-in-
terest 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
repayment 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.
Saving Cash
Certain industry sectors are offering as-
sociation clients significant savings at this
time—particularly those projects with a
high labor component, like roofing, paint-
ing, and asphalt work, to name just a few. If
the cash is available, now might be a great
time to check in and negotiate with your
service providers. You may be very encour-
aged to stimulate the economy, keep their
crews working, and enjoy a 5% or even 10%
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