Reserves: The Great Misunderstanding
There is a good deal of confusion out there about capital reserves and operating reserves in the condominium and HOA context. My last blog article was about how to read your governing documents. The answer to the reserve question is usually found in the governing documents. In short, capital reserves are for the repair and replacement of "capital" or long term physical assets, like roofs and roadways. Operating reserves are designated for everyday operating expenses, so that if there is a cash flow shortfall, the Board will have a small cushion to pay the water bill, the electric bill, or the landscaper without having to special assess or dig into the "capital" reserve fund. Usually, both kinds of reserves are required to be in the budget.
Whether the condominium is required to have "operating reserves" is determined by looking at your Declaration or Deed Restrictions to determine if the Board must budget for operating reserves each year. If the governing documents say that the budget must contain operating reserves, typically equal to two months regular fee assessments, then the budget should contain a line item for operating reserves, and the monthly assessments levied accordingly to include an amount for operating reserves.
If the budget is required to have operating reserves, the Board is violating the governing documents if it does not budget for operating reserves. Check your documents. Budget time is upon us. If you don't have to budget for operating reserves, great, but you need to know before the next year's budget is voted on. Williams & Strohm is here to help you understand capital and operating reserves. If you can't find the operating reserve requirement in your documents, call us and we'll have a look.
Charles T. Williams
Charles T. Williams is the founder and a principal in the firm. A native of Columbus, Ohio, and a veteran of the Vietnam war, Mr. Williams earned his law degree from Boston College Law School. He is widely recognized as one of Ohio’s foremost attorneys practicing homeowner association law and condominium law. Read Charles T. Williams's full bio.