Q: Are reserves required and why? How much must be in reserves? In what form must reserves be held? When must reserves be replenished? How should reserves be "line-itemed" in the budget? – D.E., via email
A: Thank you for writing and congratulations on packing that many questions into one paragraph!
Your questions come at a good time. Many associations operating on a calendar fiscal year are working on 2014 proposed budgets right now.
You did not indicate whether your questions apply to a condominium association or to a HOA. The applicable law on reserve funding for each is moving closer together in content, but is still very different.
For a condo, one of the most comprehensive and easily available guides is an 86-page publication of the Florida Department of Business and Professional Regulation, Division of Condominiums, Florida Condominiums, Timeshares and Mobile Homes, titled Budgets and Reserve Schedules -- A Self-Study Training Manual. It is available on the Department's website at myflorida.com/dbpr/lsc/documents.
Reserves for deferred maintenance (performed less frequently than yearly, to maintain the asset's useful life) and capital expenditures (purchasing or replacing assets that have a useful life over one year, or extending the useful life over one year) are required for certain building components, unless the membership votes annually to waive or reduce reserve funding.
Unless properly waived in whole or in part, condominium associations must reserve funds for roof replacement, building painting and pavement resurfacing (all regardless of cost) as well as for any other item for which the replacement or deferred maintenance cost exceeds $10,000.
The amount required to be annually set aside in reserve is computed by a formula that takes the estimated cost of deferred maintenance, or the replacement cost, and divides it by the remaining useful life of the asset.
As an example, assume the estimated cost to replace the roof of a condominium building is $100,000, and it is also estimated that the roof will have to be replaced in 10 years. Therefore, the current annual contribution that must be placed in the roof-replacement reserve account is $10,000.
Deposits to reserve accounts must be made in the same installments that assessments are collected. If the association collects assessments quarterly, then the board will need to make four deposits (one each quarter) in the amount of $2,500 into the roof-reserve account. If operating and reserves are collected in a single assessment payment, as is usually the case, the board has 30 calendar days to transfer the reserve portion from the operating account to the appropriate reserve. Also, keep in mind that reserves are required to be funded (unless properly waived), even if some owners are delinquent in their payments. This can create a cash flow problem that must be adequately addressed.
The primary purpose of establishing and funding reserves is to spread the costs of major expenditures over the lives of the assets to be maintained or replaced, in order to avoid large annual assessment increases or the need to levy special assessments, which some owners may be unable to afford all at once.
I can't answer all your questions about reserves here. I am not sure all aspects are addressed even in the state's 86-page manual. The procedures for waiving reserves, pooling them and for using reserve funds, including interest, for other purposes, are technical in nature.
For HOAs, those boards should review Section 720.307(6), Florida Statutes, and the governing documents for the HOA to determine if the association is required to fund reserves, and, if so, for what categories.
Generally, an HOA is deemed to have provided for reserve accounts if the accounts were originally established by the developer, or if the membership affirmatively elects, by majority vote of all voting interests, to provide for reserves.
The determination of whether reserves need to be established in a particular HOA community, what needs to be reserved for and whether funding for those categories can be waived are all questions that I cannot address here.
Above all, board members must remember they are fiduciaries. It is the highest position of trust that there is in dealing with the money and assets of others. The formulas, the disclosures, the voting procedures and decisions relating to the investment of reserve funds are all traps for the unwary. I urge boards to seek professional assistance. The financial stability of the association and the value of the real property that owners have invested in the community depend on getting it right.
Tamela Eady is a Florida Bar board-certified real estate attorney with 25 years' experience. She is an attorney with the the Law Offices of Kevin T. Wells PA in Sarasota, concentrating her practice on community association and real estate. The subjects discussed in her columns are not intended as specific legal advice to anyone and are subject to principles that may change. Questions may be modified for clarity or for brevity. Email questions for possible inclusion in a future column to teady@kevinwellspa.com.
