Tuesday, March 16, 2010

How much do you know about association reserves?

In addition to annual operating expenses, the budget for condominiums and cooperatives MUST include reserves for capital expenditures and deferred maintenance. Mandatory reserve categories include: roof replacement, painting, pavement resurfacing and any other item for which the maintenance expense or replacement cost exceeds $10,000.

In an HOA, the budget MAY include reserve accounts for capital expenditures and deferred maintenance for which the association is responsible. However, the association is not required to include reserve amounts in its budget unless such reserves were established by the developer OR approved by the association members.

Amounts for reserve items must be computed using a formula which is based on the estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item.

Reserve funds and any interest accruing thereon MUST remain in the reserve account or accounts and MUST be used only for authorized reserve purposes unless their use for any other purpose is approved in advance by a majority of owners (for condos and HOA’s) and by 3/4 of owners (for a cooperative association) at a duly called meeting of the membership.

The members of an association may partially or fully waive funding of reserves by a majority vote at a duly called meeting of the association. However, a vote to waive reserves is only effective for the fiscal year proposed and a new vote must be conducted each year that the membership wishes to waive reserves. In a condominium association, proxies and ballots related to waiving reserves (partially or fully) must contain bold disclaimer language cautioning owners that they may be subject to a special assessment as a result of such waiver.

In an HOA, once an association provides for reserve accounts in the budget, the association must thereafter maintain and waive reserves in the same fashion required for condominium associations.

Most years there is a legislative attempt to remove the ability to waive reserves in common interest ownership communities which has been resisted vehemently by associations who wish to decide for themselves whether or not they wish to save for a rainy day. Personally, I am a saver so I am a fan of reserves but I also appreciate the countervailing argument given by many that they would rather spend funds at the absolute moment they are needed and not a minute before.

10 comments:

  1. Great Article Donna!

    I am also a firm believer that community association owners should pay as they go. Special assessments are not an equitable way to run a community and can result in claims of financial mismanagement by the Board.

    The Florida Administrative Code also says that Community Associations (Condos, HOAs and Cooperatives) can calculate reserves based on a pool of one or more elements. This method of "pooling" or the "Cash Flow Method" typically results in adequate funding at a lower level than the traditional "straight line" or "Component Method."

    Regardless of the method used to calculate the Reserves, Association Boards should minimize liability by putting a capital funding plan in place that will protect the community and its owners' investments.

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  2. Can the BOD just guess the remaining life. Just what makes my guess better than the next guy who makes a guess. Are there some legal guide lines on this?

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  3. If a condo has as part of it's common element a canal, some type of water way, is the condo responable for maintance of the waterway such as cleaning, dredgeing, and removal of hazards?

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  4. An association's responsibility to maintain certain waterways depends on what agreements were entered into by the developer at the time the community was built or thereafter by the association. You will need to search the public records to determine if there are any agreements of record addressing the responsibilities for maintaining and safeguarding that body of water. If, as you say, that body of water constitutes a part of the common elements, then the association is ordinarily responsible for maintaining, repairing and insuring the common elements unless there is an agreement to the contrary with a third party.

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  5. There is nothing in the Statute which requires an association to use an expert to perform a reserve study when estimating useful remaining life of the components. That being said, a board has a fiduciary duty to take the time to correctly estimate useful life in order to arrive at the right amounts to be reserved. A prudent board would rely on something more than just a guess in that regard.

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  6. My condo association was a conversion in 2006. Despite having reserves within the budget, there is only 16,000 in the reserve account. I maintain that for this years upcoming budget, there should be the amounts assessed for reserves from 2006-2011; less what was spent on improvements; should equal the amount that should be funded in 2011. The "new" board says they aren't responsible for providing the nonfunding of past reserves. How should this be handled? Am I correct?

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  7. We've had 11 reserve funds for 17 yrs.
    Our lawyer has told us we can waive 3 funds into 1 unspecified fund with a vote by our members at an annual meeting. The funded items have a value of over $10,000 each. He says that even mandatory reserves can be waived out of existance with a vote. How can anything mandatory be dissolved?

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  8. Association reserves which are mandated by statute cannot be waived "out of existence". The requirement for those reserves doesn't disppear. However, each year the membership can vote to waive fully funding those reserves entirely or they can choose just to partially fund them. The proxies and ballots used to obtain that membership vote must contain bold statutory language advising the membership of the financial risks associated with continually waiving reserves.

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  9. If previous years have left the reserve funds underfunded, a board must still adopt a budget with funds sufficient to cover the replacement costs of the community components covered by the reserves and then it is up to membership to vote to waive or only partially fund those reserves. The board cannot just take a "hands off" approach to the reserve issue.

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  10. Can a Board ask its owners to vote for ONLY Full or Partial Reserves and not give the owners the option of waiving reserves altogether?

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