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.

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.

21 comments:

Tami said...

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?

Stephen said...

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

Donna D. Berger, Esq. said...

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.

Donna D. Berger, Esq. said...

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.

Cliff said...

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?

Tami said...

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)

palmbeachman said...

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

Donna D. Berger, Esq. said...

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.

Donna D. Berger, Esq. said...

Len,

The HOA Act provides the following with regard to funding HOA Reserves:

An association is deemed to have provided for reserve accounts if reserve accounts have been initially established by the developer or if the membership of the association affirmatively elects to provide for reserves. If reserve accounts are not initially provided by the developer, the membership of the association may elect to do so upon the affirmative approval of a majority of the total voting interests of the association. Such approval may be obtained by vote of the members at a duly called meeting of the membership or by the written consent of a majority of the total voting interests of the association. The approval action of the membership must state that reserve accounts shall be provided for in the budget and must designate the components for which the reserve accounts are to be established. Upon approval by the membership, the board of directors shall include the required reserve accounts in the budget in the next fiscal year following the approval and each year thereafter. Once established as provided in this subsection, the reserve accounts must be funded or maintained or have their funding waived in the manner provided in paragraph (f).

If your members have not voted to establish reserves for certain community components then such reserves must be established by the original declaration. If that is not the case, your board may be overstepping its boundaries in funding these reserves without membership approval. What you can do is bring this matter to your board's attention and if they are not responsive, rally suport to vote in directors who are. Good luck.

Donna D. Berger, Esq. said...

Tami,

The first concern is the fact that your association manager is making these kinds of costly mistakes. Have you brought this to his or her attention? Is this an independent CAM or is he or she affiliated with a management company? If the latter is the case, you can bring the mistakes to the company's attention if the on-site manager refuses to address the matter. CAM's are regulated by the DBPR and if this particular CAM and/or management company continues to perform management duties in a reckless fashion you have the option to file a complaint with the State. Naturally, that should only be done after the matter is first brought to the manager's attention and an opportunity to correct the mistake(s) is given. With regard to the owners subtituting a budget for 2011, here is an excerpt from the pertinent language in the Condominium Act:

If a board adopts in any fiscal year an annual budget which requires assessments against unit owners which exceed 115 percent of assessments for the preceding fiscal year, the board shall conduct a special meeting of the unit owners to consider a substitute budget if the board receives, within 21 days after adoption of the annual budget, a written request for a special meeting from at least 10 percent of all voting interests. The special meeting shall be conducted within 60 days after adoption of the annual budget. At least 14 days prior to such special meeting, the board shall hand deliver to each unit owner, or mail to each unit owner at the address last furnished to the association, a notice of the meeting. An officer or manager of the association, or other person providing notice of such meeting shall execute an affidavit evidencing compliance with this notice requirement, and such affidavit shall be filed among the official records of the association. Unit owners may consider and adopt a substitute budget at the special meeting. A substitute budget is adopted if approved by a majority of all voting interests unless the bylaws require adoption by a greater percentage of voting interests. If there is not a quorum at the special meeting or a substitute budget is not adopted, the annual budget previously adopted by the board shall take effect as scheduled.

Donna D. Berger, Esq. said...

Tami,

The first concern is the fact that your association manager is making these kinds of costly mistakes. Have you brought this to his or her attention? Is this an independent CAM or is he or she affiliated with a management company? If the latter is the case, you can bring the mistakes to the company's attention if the on-site manager refuses to address the matter. CAM's are regulated by the DBPR and if this particular CAM and/or management company continues to perform management duties in a reckless fashion you have the option to file a complaint with the State. Naturally, that should only be done after the matter is first brought to the manager's attention and an opportunity to correct the mistake(s) is given. With regard to the owners subtituting a budget for 2011, here is an excerpt from the pertinent language in the Condominium Act:

If a board adopts in any fiscal year an annual budget which requires assessments against unit owners which exceed 115 percent of assessments for the preceding fiscal year, the board shall conduct a special meeting of the unit owners to consider a substitute budget if the board receives, within 21 days after adoption of the annual budget, a written request for a special meeting from at least 10 percent of all voting interests. The special meeting shall be conducted within 60 days after adoption of the annual budget. At least 14 days prior to such special meeting, the board shall hand deliver to each unit owner, or mail to each unit owner at the address last furnished to the association, a notice of the meeting. An officer or manager of the association, or other person providing notice of such meeting shall execute an affidavit evidencing compliance with this notice requirement, and such affidavit shall be filed among the official records of the association. Unit owners may consider and adopt a substitute budget at the special meeting. A substitute budget is adopted if approved by a majority of all voting interests unless the bylaws require adoption by a greater percentage of voting interests. If there is not a quorum at the special meeting or a substitute budget is not adopted, the annual budget previously adopted by the board shall take effect as scheduled.

Anonymous said...

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

Donna DiMaggio Berger said...

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.

Unknown said...

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?

Unknown said...

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?

Unknown said...

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?

Anonymous said...

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?

Anonymous said...

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,

Anonymous said...

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?

Tom T said...

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!

Tom T said...

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!

ShareThis