Re: Use of Reserves
From: Sharon Villines (sharonsharonvillines.com)
Date: Fri, 13 Nov 2020 06:38:54 -0800 (PST)
> On Nov 12, 2020, at 10:31 AM, pam gilchrist <pamgilchrist1 [at] gmail.com> 
> wrote:

> We have a healthy Reserve of about $200,000 with a line item of $5000 every
> three years for Path's maintenance - due this year but no line item for
> this additional expense of about $40,000.

From my studies and discussions with Reserve Specialists, this is an entirely 
ordinary expense for Reserve Funds. The amounts required for items in the 
Reserve Study are estimated costs. Real costs may be higher or lower, be needed 
sooner or later or never. This is why funds are recalculated annually. It 
balances out the guesses with actual costs.

That you are doing extra work is a normal expense. The purpose of the Capital 
Replacement funds are to maintain the value of the property. Ideally, the fund 
balance plus the value of the property would be equal to market rate. A condo 
that needs some work but has a large reserve fund is more valuable than a condo 
with inadequate or no reserves.

So the issue is whether the expenditure of the funds is to preserve value. 
“Preserving value” also  means keeping the property up to market standards. No 
one would replace the HVAC system with one that was made when the building was 
built. You replace to current standards, but that is not considered an 
improvement in the same way as adding a pool might be.

In this instance the design of the walkways is inadequate and they require high 
maintenance costs. Doing the serious work would maintain the value of the 
property at market rate. And might save maintenance costs in the future. 

We borrowed from our Reserve Fund to install solar panels. We put the money 
back each month that we used to spend on electricity and the money we get from 
producing more electricity than we use.

There are certain tax laws that apply in some situations. They are related to 
how you pay taxes on the interest income on the reserve account—probably for 
very large funds or larger condos. A tax  person could say whether this is an 
issue. Otherwise, fiscally sensible practices apply to the Reserve funds just 
like the operating budget.

Sharon
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Sharon Villines
Takoma Village Cohousing, Washington DC
http://www.takomavillage.org




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