EXCESSIVE RESERVES

QUESTION: Our reserve account is currently funded at 1000%. Is this legal? Can we refund the money to owners? Thank you.

ANSWER: There may be legitimate instances when reserve funding temporarily exceeds 100%. It is not illegal and a reasonable surplus creates a contingency for unexpected expenses.

However, anything over 130% is generally considered excessive. A 1000% surplus is not appropriate unless it is a temporary condition resulting from an insurance or construction settlement. Even then, the monies should be in an account separate from reserves and used for those items for which the settlement occurred.

Restoring Balance. Assuming the 1000% is due to excessive reserve contributions rather than a one-time settlement, the account should be brought back to normal funding levels. I do not recommend writing checks to owners because it (i) creates disputes between current and prior owners over who should receive the money, (ii) is an inappropriate use of reserves funds Civil Code §1365.5(c)(1), and (iii) may create tax complications. The best way to restore balance is to gradually deplete the surplus by reducing or temporarily stopping contributions to the reserve account.

Updated by ADAMS KESSLER 8/21/2007