Tuesday, October 26, 2010

Reserve Accounts and Your Association!


Many of you are in the midst of creating association budgets for 2011. As you know, in a condominium and cooperative association, in addition to annual operating expenses, the budget must also include reserve accounts for capital expenditures and deferred maintenance.

The Condominium and Cooperative Acts require reserves for roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost, and for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000. The statutes state that the amount to be reserved shall be computed via a formula which is based upon the estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item. A condominium or cooperative association may adjust replacement reserve assessments annually to take into account any changes in estimates or extension of the useful life of a reserve item caused by deferred maintenance.

While a condominium or cooperative board MUST adopt a proposed budget with statutorily required reserves, the statutes also allow association members, by a majority vote at a duly called meeting of the association, to provide no reserves or less reserves than required by statute. If a community is still under developer control, however, the developer is only permitted to vote to waive the reserves or reduce the funding of reserves for the first two (2) fiscal years of the association’s operation, beginning with the fiscal year in which the initial declaration is recorded, after which time reserves may be waived or reduced only upon the vote of a majority of all nondeveloper voting interests voting in person or by limited proxy at a duly called meeting of the association. It is important to remember that if a meeting of the unit owners has been called to determine whether to waive or reduce the funding of reserves, and the vote fails or a quorum is not attained, the reserves as included in the proposed budget MUST go into effect. After the turnover, a developer may vote its voting interest to waive or reduce the funding of reserves.

In a Homeowners’ Association, if the operating budget does not provide for reserve accounts and the association is responsible for the repair and maintenance of capital improvements in the community that may result in a special assessment if reserves are not provided, the association’s financial report for the preceding fiscal year must contain the following statement in conspicuous type: THE BUDGET OF THE ASSOCIATION DOES NOT PROVIDE FOR RESERVE ACCOUNTS FOR CAPITAL EXPENDITURES AND DEFERRED MAINTENANCE THAT MAY RESULT IN SPECIAL ASSESSMENTS. OWNERS MAY ELECT TO PROVIDE FOR RESERVE ACCOUNTS PURSUANT TO SECTION 720.303(6), FLORIDA STATUTES, UPON OBTAINING THE APPROVAL OF A MAJORITY OF THE TOTAL VOTING INTERESTS OF THE ASSOCIATION BY VOTE OF THE MEMBERS AT A MEETING OR BY WRITTEN CONSENT.

An HOA is deemed to have provided for reserve accounts if reserve accounts have been initially established by the developer or if a majority of the total voting interests of the association votes to establish reserves. Upon approval by the membership, the board must include the required reserve accounts in the budget in the next fiscal year following the approval and each year thereafter. Once established, the reserve accounts must be funded or maintained or have their funding waived in the same manner provided for condominium and cooperative owners. As with condominiums and cooperatives, the amount to be set aside in reserves shall be computed by using a formula that is based upon the estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item. The association may adjust replacement reserve assessments annually to take into account any changes in estimates of cost or useful life of a reserve item.

When creating a proposed budget each year, how many of you rely upon a Reserve Study to determine just how much should be put aside for a rainy day? While the Florida Statutes don’t require the use of specific reserve studies, many association documents do. Whether or not your community traditionally waives or only partially funds reserves, the amounts reflected in your proposed budget must still be accurate.

18 comments:

  1. Donna, Is there a FLA Statute that states if you waive fully funding your reserves 3 consecutive years then it is mandatory to obtain an audit? If so, can the board vote to waive an audit? If you are required to have an audit and you don't what are the ramifications of not doing so?

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  2. Donna Dimaggio Berger, Esq.,
    Our community is being developed and our clubhouse is only about 65% completed. Should we be collecting assessments for Reserves for this or wait until the time when it is completed.
    Is there any guilds that we can use for this situation.
    Thanks,
    Stephen

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  3. Tami,
    You don't state whether or not your community is a condominium but I'm going to assume it is. No, there is currently no language saying that you cannot waive fully funding reserves for any number of consecutive years. You can go on waiving reserves indefinitely although whether or not that is a good idea is debatable. Develoeprs can only waive reserves for the first two fiscal years after the association's declaration is recorded. There was language in a proposed bill that said as much but it did not pass. If the association is required to have an audit either statutorily as a result of its budget amount or due to its governing documents' requirements, only the membership can waive that audit requirement and NOT the board alone. However, Section 718.111(13) DOES say that the membership cannot waive the statutory financial reporting requirement for more than 3 consecutive years. This means that if the association's annual budget is $400,000 or more, the membership cannot waive an audit for more than three consecutive years. Failing to adhere to these guidelines could result in both a breach of fiduciary duty lawsuit brought against the board or a complaint filed with the Division of Florida Condominiums, Timeshares and Mobile Homes which has jurisdiction over disputes pertaining to financial issues such as this.

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  4. Stephen,
    You don't say why the clubhouse is only 65% completed. Did the developer stop working or is the work continuing and this is as far as they've gotten? If it is a condominium, the developer can waive reserves for the first two fiscal years and members like you sadly don't have anything to say about it. It's never too soon to start setting aside money for a rainy day when it comes to deferred maintenance on a high-ticket item like a Clubhouse building. Good luck.

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  5. Donna

    What happens if the Florida HOA does not file a lien for back HOA dues and the property transfers? Is the new owner responsible for the previous owners back dues?

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  6. Donna:
    I have tried to find information on my question below to no avail. Maybe you can shed some light on this. Recently I received the Proposed DRAFT of the upcoming Budget from our PM. Over the course of this year I have found numerous errors on our line item accounts. Such as wrong accounts are being charged, We use a coding system for each account and after reviewing invoices this is how I found out that the PM is making (big ticket item mistakes) In addition there has been work done on property that involves our Reserve Accounts and the monies should of come out of those accounts but the PM directed it out of the general operating budget account. Therefore looking over the proposed draft, the numbers in certain line items are incorrect and are showing huge overage. (-14,000)in one instance. The current board is extremely inexperienced and uninformed and they take everything the PM says as etched in stone, without any fact finding or investigation. They are going to base the 2011 budget on the PM's figures.
    Does the membership have any rights to not let this budget pass? and would they need to present an alternative budget. And if so what would be the time frame? If membership is allowed to present their alternative budget would it have to happen at the Official Budget Meeting? or before?
    Thank you. (FLA CONDO ASSOCIATION)

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  7. Donna....

    In regard to reserves for an HOA.....our Board continues to reserve a large sum in our operating budget even though the members (47) have never voted to maintain a reserve! When I question this procedure...they tell me that they are required by State law to maintain a reserve. Isn't this requirement applicable only to Condo associations and, if the answer is "yes" what can I do to stop this practice!

    Len

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  8. Cliff,
    The HOA Act imposes joint and several liability on new purchasers for all past amounts due. Having a recorded lien is not a condition precedent to enforcing that liability. An estoppel request prior to closing would reveal the amount of any outstanding assessments and fees owed.

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  9. What if a president uses the reserve account for his own realty business unbeknownest to owners?

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  10. If a president uses the reserve account as his own private piggy bank, it's time to call the police and your D&O insurance carrier to start the recovery process.

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  11. We are just now taking over our HOA from the developer, and have discovered that there are NO reserves funded at all. The bank is foreclosing on the developer. Do we have any leverage with the bank to get them funded?

    Do we have ANY recourse at all?

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  12. We have just taken over the HOA from the developer, and have discovered that there are NO FUNDED RESERVES at all.

    The bank is foreclosing on the developer. Do we have any leverage against the bank? Do we have any recourse at all? There is supposed to be 40+K in reserves. How did the owners get financing without someone asking for proof of the reserves?

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  13. We are just now taking over our HOA from the developer, and have discovered that there are NO reserves funded at all. The bank is foreclosing on the developer. Do we have any leverage with the bank to get them funded?

    Do we have ANY recourse at all?

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  14. Please clarify how Condominium and Homeowner Association boards are to allocate interest generated by the reserve accounts? i.e. can they allocate all of the interest to one reserve and/or allocate evenly to all established reserves?

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  15. can a matching amount of money from operating account be used along with reserve money to make major repair...the estimates we are getting for a new roof, old tar style are without mercy and only providing a five (5) year warranty. We will have to assess one thousand from each unit (36, 000) to fill the void for this replacement. At this time I know approxmetly 20% dont have this amount but could afford half, say 500.00 Any laws stopping us from using operating cash to ease the pain?
    PLEASE help,

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  16. I have just inherated a little condo which I treasure being we have had it so long. Now that I am involved with the community I have found out there seems to be a promblem. It seems that the President of so many years does not want to pay his fair share of the maintance. He has put in his own water meter and duducts what he feels he should pay. Now He is a snowbird and visits 3 months a year. But I do not think he is correct in ths deduction being the maintance cover much more than water. What can I do as a new owner?

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  17. Dear Counselor: MY Fla. developer-controlled HOA has a budget surplus and we're being told our only options are to spend the excess or have it added to the Due-to-Developer account. There is nothing in the HOA documents addressing a surplus situation. Do we have any other options like funded our deficit reserves? THANX!

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  18. Dear Counselor: MY Fla. developer-controlled HOA has a budget surplus and we're being told our only options are to spend the excess or have it added to the Due-to-Developer account. There is nothing in the HOA documents addressing a surplus situation. Do we have any other options like funding our deficient reserves? THANX!

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