When an association repeatedly borrows from reserves to pay predictable annual expenses, it is not solving a cash-flow problem – it is exposing a budgeting problem.
HOA Detective™ | June 9, 2026: One of the most common and misunderstood financial practices in the homeowner association arena is the routine borrowing of reserve funds to pay operating expenses. While the practice can take many forms, one of the most frequent examples occurs when an association uses reserve cash to pay its annual insurance premium.
At first glance, the arrangement appears harmless. The board borrows money from reserves, pays the insurance bill, and gradually reimburses the reserve account throughout the year. Industry professionals often defend the practice by noting that insurance premiums arrive as a single large payment while assessment income is collected monthly – even better, the Association gets to pay itself the interest the insurance company would otherwise charge if the premium is paid in installments throughout the policy period.
Inquiring Minds Want to Know: The argument sounds reasonable until two simple questions are asked:
- Why is the association borrowing money to pay a bill that everyone knew was coming?
- Why aren’t the owners paying their share of the annual insurance premium each month in advance, just like a homeowner with a mortgage is required to do when they pay into an escrow account from which insurance premiums and property taxes are paid?
The Purpose of Reserve Funds: Reserve funds exist for one purpose – to finance the future repair and replacement of major common-area components maintained by the HOA. Roofs, elevators, paving, siding, and mechanical systems all deteriorate over time.
Reserve contributions are collected so future owners are not forced to absorb the entire cost when the common elements eventually fail, by which time the first, second, or perhaps third generation owners may be long gone.
Therefore, reserve funds are not “excess cash.” It is not a “rainy-day fund.” It is not a line of credit available whenever the operating budget is strained. Every dollar in reserves has already been assigned a future purpose.
Eroding Financial Discipline: When reserve funds are diverted to pay operating expenses, even temporarily, the distinction between operating funding and capital funding begins to blur. Once that line becomes flexible, financial discipline often starts to erode.
Insurance expense is not a surprise, nor is it optional in the common interest setting. The strongest argument against reserve borrowing for insurance premiums is that insurance is one of the most predictable expenses any association faces, akin to death and taxes in this regard. There is no surprise when the premium notice arrives. The due date is known in advance.
The approximate amount is usually known months before payment is required. Because the expense is predictable, it should be budgeted accordingly. This is precisely how mortgage lenders handle insurance and property taxes for individual homeowners.
Escrow Mechanics: Each homeowner with a mortgage makes a payment each month, and a portion of that mortgage payment is deposited into an escrow account. The funds accumulate throughout the year so that when insurance and taxes become due, the money is already available.
The homeowner is not allowed to ignore the obligation for eleven months and then borrow from a retirement account to cover the bill.
Associations should operate under the same principle. No exceptions. By handling the insurance expense in this manner, the true cost of ownership becomes transparent. If you are looking to buy a condo in a high-rise building that pays half a million a year for insurance, and you are required to make a $2,000 deposit into the insurance escrow at the closing, you know immediately what your insurance burden will be; every year until you sell – payment expected in advance, every single year, thank you very much!
If the Board expects a $500,000 insurance premium each year, approximately one-twelfth of that amount should be collected and set aside every month. By the time the premium comes due, the funds should already be waiting. That is budgeting.
Borrowing from reserves to pay for a recurring annual expense is improper budgeting, and poor governance.
The Illusion of Repayment: Supporters of reserve borrowing frequently point out that the money is eventually repaid. Technically, that may be true. However, if an association borrows from reserves every year, repays the loan over twelve months, and then immediately borrows again the following year the reserve account has effectively become a permanent operating subsidy.
A decade of annual reserve borrowing for insurance premiums is strong evidence that the operating budget was never structured properly to begin with.
Liquidity Matters when it Comes to Reserves: Reserve studies are built on estimates. Actual events rarely occur exactly as projected. A roof may fail earlier than expected. A major plumbing system may require emergency replacement. Hidden structural problems may surface during a repair project. When a reserve fund is used as a recurring source operational cash flow subsidy, the Association’s flexibility to respond to these events is reduced.
Eventually the practice of borrowing from the reserves may come back to haunt the Board that engages in this dubious practice.
A reserve account may appear healthy on paper while possessing far less liquidity in reality because portions of its cash balance are tied up supporting operating activities. This is one of the overlooked risks of chronic reserve borrowing.
The Bigger Problem: In many communities, repeated reserve borrowing is simply a symptom of assessments that are too low. This is an uncomfortable conclusion because nobody enjoys increasing dues. Boards often face pressure to keep assessments artificially low, particularly during inflationary periods when owners are already struggling with rising costs.
Yet insurance premiums throughout the country have increased dramatically during the past several years. Those costs are real whether owners like them or not.
Borrowing from reserves does not reduce the insurance expense. It merely shifts the burden temporarily from one account to another. Eventually the underlying financial reality must be addressed.
The Myth of the “Temporary Reserve Loan:” Boards and managers often defend reserve borrowing by emphasizing that the money is eventually repaid. While that may satisfy the accounting treatment, it does not necessarily reflect the economic reality. Consider an association that borrows from reserves every year to pay its annual insurance premium. The funds are transferred from reserves to operations, gradually repaid over the following months, and then borrowed again when next year’s premium comes due. This cycle repeats year after year, perhaps for a decade or longer.
At some point, it becomes difficult to honestly describe the transaction as a “temporary borrowing event.” The reserve account has effectively become a permanent operating subsidy.
Imagine a homeowner who repeatedly borrows from a retirement account every year to pay property taxes, repays the loan, and then immediately takes another loan the following year. Technically, each loan may be repaid. Functionally, however, the homeowner is relying on retirement savings to support ordinary living expenses.
The same principle applies to association finances. If reserve cash is routinely required to pay a predictable annual expense, the problem is not a short-term cash-flow mismatch. The problem is that operating revenues are insufficient to fund operating obligations as they come due.
Calling the transfer a “loan” does not change the underlying economics. It simply places a more comfortable label on a budgeting deficiency that should have been addressed years earlier. That is not good accounting or good governance.
The Better Approach: The solution is remarkably simple. Treat insurance premiums exactly the way mortgage lenders treat insurance and property taxes:
- Accrue the expense monthly.
- Collect the necessary funds monthly.
- Warehouse those funds throughout the year within the operating structure.
- When the premium comes due, pay it without borrowing from reserves.
This approach preserves reserve liquidity, improves transparency, and provides owners with a more accurate picture of the association’s true financial condition.
Most importantly, it keeps reserve funds dedicated to the purpose for which they were collected, which was not to serve as the Association’s in-house line of credit.
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