CONDOMINIUM AND HOMEOWNER ASSOCIATIONS’

CAPITAL RESERVES

Condominium and homeowner associations are governed by their bylaws and CC&Rs. It is the fiduciary responsibility of the board of directors to adhere to the policies stated in these legal documents.

One important element of an Association’s bylaws is a requirement of the board of directors to prepare and follow a budget and to make sure ample reserves are set aside for future expenditures such as capital replacements and large repairs.

Once the board has determined the amounts to be reserved for future expenditures, they must then determine how best to invest these reserves. Keeping cash reserves separated is an Internal Revenue Service requirement if the Association wants to take advantage of filing Form 1120 and possibly reducing the Association’s federal tax liability.

Separating the Association’s reserves into two separate cash accounts is highly recommended. There should be an account used for capital replacement expenditures and another account for large expenditures such as painting. Besides the IRS requirement, keeping the reserve accounts separate also helps the board manage the following:

· Cash Investments – Spending for major operating expenses such as painting,

usually needs to be completed before capital assets need to be replaced. By

segregating these reserves, the Association can stagger cash investments, like

certificates of deposit, according to the required time of future expenditures.

· Future Budgets - Separating reserve accounts allows the board to easily see

if the operating cash and annual income is sufficient to fund the regular operating expenses.

· Clear and Concise Financial Reports – Explaining the financial reports and

transactions to other Association members will be much easier when these account transactions are not commingled.

If separate cash accounts are not established, the Association needs to at least document the future use of the reserves and calculate the representative amounts based on a percentage allocation. This written documentation should appear in the budget and in the board minutes.

Please call our office if you need additional information on managing your capital reserve accounts.

CURRIE & McLAIN, P.S.