A discussion of routine & complex issues which confront all types of shared ownership communities.

Condo and HOA Law Blog By Donna DiMaggio Berger, Esq.

Condo and HOA Law Blog By Donna DiMaggio Berger, Esq.
This blog covers every topic under the sun related to condominiums, cooperatives, HOAs, timeshares and mobile home communities from the unique perspective of attorney Donna DiMaggio Berger.

Monday, November 23, 2009

How much do you know about the proper handling of condominium reserve accounts?

Section 718.112 (2)(f) of the Condominium Act provides that the annual budget prepared by the board each year shall include reserve accounts for capital expenditures and deferred maintenance. A condominium budget MUST include reserves for roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost for these items, and must also include reserves for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000.

The formula to determine how much to put away in reserve 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 or extension of the useful life of a reserve item caused by deferred maintenance.

Even though the board must create a budget with full reserves, the members of an association have the right, by a majority vote at a duly called meeting of the association, to provide no reserves or less reserves than required by the Condominium Act. If a meeting of the unit owners is called to determine whether to waive or reduce reserves and majority approval is not obtained or a quorum is not established at that meeting, the board's budget must go into effect with FULL reserves.

Prior to turnover of control of an association by a developer to unit owners, the developer has the statutory right to unilaterally waive the reserves or reduce the funding of reserves for the first 2 fiscal years of the association's operation, beginning with the fiscal year in which the initial declaration is recorded. After that time, reserves may only be waived or reduced with the consent of a majority of all nondeveloper voting interests voting in person or by limited proxy at a duly called meeting of the association.

Reserve funds and any interest accruing thereon MUST remain in their individual reserve account or accounts, and shall be used only for authorized reserve expenditures unless their use for other purposes is approved in advance by a majority vote at a duly called meeting of the association. This means that the funds in the roof reserve can be used only to maintain, repair or replace the roof and for no other purpose unless the membership consents to such different use.

Given the serious ramifications that can occur in communities where reserves have been waived for years, the Florida Legislature amended the Condominium Act several years ago to provide that the following prominent disclaimer language be put in bold on any proxy or ballot used by owners to waive or reduce reserves:

WAIVING OF RESERVES, IN WHOLE OR IN PART, OR ALLOWING ALTERNATIVE USES OF EXISTING RESERVES MAY RESULT IN UNIT OWNER LIABILITY FOR PAYMENT OF UNANTICIPATED SPECIAL ASSESSMENTS REGARDING THOSE ITEMS.

The idea behind reserves is quite simple: put away money for a rainy day a little at a time so it doesn't hurt as much when that rainy day finally arrives. However, there will always be folks who don't like to be forced to save because they might not be around to enjoy the benefits of those savings (the "I no longer buy green bananas" crowd) as well as those folks who don't like to put any more funds than absolutely necessary at the disposal of an elected board. There have been legislative proposals the last few years that would take away the members' rights to waive or reduce reserve funding; this means that all condominium budgets would automatically include reserve amounts regardless of majority membership opinion on the matter. How many of you would support such legislation and how many of you would see that as unnecessary governmental meddling in your private community affairs?

7 comments:

Anonymous said...

Right now there are probably a lot of condo and homeowner's associations that wished they had put aside more reserves over the years.

flymike said...

I would not support mandatory reserves because condominium boards cannot necessarily be expected to spend accumulated funds wisely, or even legally.
Florida Condominium law leaves open enormous loopholes regarding the spending of reserve funds. This is particularly true of pooled reserves (not mentioned in this article). My board interprets pooled reserves to mean that the funds can be spent on any item where the replacement cost exceeds $10,000 - regardless of whether it was specified in the pooled reserves schedule.

Donna D. Berger, Esq. said...

The associations that fared the best after the tumultous hurricane seasons four and five years ago were the ones that had fully funded reserves which they could tap instead of having to specially assess their members.

Anonymous said...

Our building owners just received the proposed budget for 2013 and our board is changing to pooled reserves. Is this legal to just suddenly move to Pooled Reserves without a majority vote of the owners? The builder set our Association up with straight line funding of Reserves. It doesn’t seem legal for a board to just change the method of reserves without a majority vote of the owners. Although the original intention of Pooled Reserves might have had good intent, however when put in human hands; I believe pooled reserves opens the door for a board to abuse their authority with complete flexibility with how they choose to spend reserve funds with no ability for owners to have a say. I don't believe Florida laws are protecting owners with Pooled Reserves.

Is there any way to stop a board from moving towards pooled reserves? I believe strait line funding is a more conservative approach and protects owners better. The board has asked owners to vote on moving the reserve funds collected from past years into Pooled Reserves (which they are required to by law) but I don’t think most owners understand how a board could deplete the funds and leave owners blind-sided with special assessments when we run short of the pooled reserve funds.

flymike said...

A (condo) board can decide to start funding pooled reserves without a vote of the owners. However, they cannot transfer existing funds designated for roofs, painting, etc with a vote of owners - since that would be using those funds for a purpose which was not intended. But, as a practical matter, they may not need to actually transfer any existing funds - as they could accumulate new funds in the pooled reserve, and spend on designated repairs from the old funds until depleted.
I was involved in a condo which switched to pooled reserves for entirely wrong reasons. But then, as luck would have it, the board changed to a far more sensible one and managed its pooled funding very successfully.
While I agree that, theoretically, straight line funding should provide better protection for owners - in practice a foolish board will always find a way to squander a large accumulation of funds.
In the end, I think that the quality of the board is far more important than the choice of reserve funding.

Donna DiMaggio Berger said...

I couldn't agree more. Considerate, thoughtful boards can make either reserve method work to the benefit of the membership.

Anonymous said...

Pooling has been used by some boards to reduce budgeted reserves to less than a straight line method. Any reduction in budgeted reserves is a material revision that adversely affects all mortgagees and is covered by 718.110, at least arguably.

A board cannot arbitrarily switch over to any method that reduces reserves without consideration of its declaration and bylaws first. most declarations and bylaws completely protect mortgagees and unit owners from such arbitrary changes and would override any decision by a board to switch to pooling or any other method not permitted in the condominium documents due to their affect.

Even just for voting, your declaration and bylaws take precedence. See the following:

718.112(2)(b) Quorum; voting requirements; proxies.--

1. ... Unless otherwise provided in this chapter or in the declaration, articles of incorporation, or bylaws, ... decisions shall be made by a majority of the voting interests represented at a meeting at which a quorum is present.

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