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.