“Condominium Budget Procedures Explained; Part 1” – News-Press
Q: Can you explain how a condominium association’s budget is made and presented? What is the difference between operating expenses and reserves? What are straight-line and pooled methods for reserves? (J.D., via e-mail)
A: A condominium budget is a formal, forward-looking financial plan that estimates the association’s revenues and expenditures for a given fiscal year. Its primary purpose is to ensure the association has sufficient funds to cover both routine operating expenses and future capital needs, thereby maintaining the property and protecting the interests of unit owners. The budget also serves as the basis for determining the amount of assessments levied on unit owners.
Section 718.112(2)(f) of the Florida Condominium Act (“the Act”) and Rule 61B-22.003 of the Florida Administrative Code (“the Code”) require that the proposed annual budget be presented to all unit owners at least 14 days before the meeting at which it will be considered. The notice must include a copy of the proposed budget and be delivered by mail, hand delivery, or electronic transmission (for those who have consented) to the address provided by the unit owner. The notice must also be posted in a conspicuous place on the condominium property, as designated by board rule, at least 14 days in advance of the meeting.
The bylaws for most condominium associations authorize the board of directors to adopt the budget. The bylaws for some associations, typically older bylaws, require unit owner approval of the budget. The budget meeting must be open to all owners, and the adoption of the budget must be reflected in the association’s minutes. The Act requires that the annual budget be adopted at least 14 days prior to the association’s upcoming fiscal year.
Operating expenses are the costs incurred in the routine, day-to-day operation and maintenance of the condominium property, such as landscaping, utilities, management fees, and insurance. Reserves are funds set aside for capital expenditures and deferred maintenance – major, infrequent expenses necessary to maintain, repair, or replace significant components of the property.
Reserves are mandatory set-aside funds for capital expenditures and deferred maintenance items where the cost or deferred maintenance expense or replacement cost exceeds $25,000, and for roofs, painting and paving regardless of cost. Rule 61B-22.005 of the Code allows the association to consider each asset separately or to group similar or related assets together for reserve purposes. For example, if the association is responsible for two swimming pools, each requiring $30,000 in deferred maintenance, it may establish a single pool reserve but is not required to do so.
The “straight-line” accounting method of reserves, sometimes called the “component funding” method, requires the association to maintain a separate reserve account for each required asset. Under Rule 61B-22.005 of the Code, the annual funding for each reserve is calculated by dividing the total estimated replacement cost or deferred maintenance expense (less the current reserve balance) by the estimated remaining useful life of the asset. If a reserve account has a negative balance, the amount needed to bring it to zero is added to the annual funding requirement.
The “pooling” method, sometimes also called the “cash flow” method, allows the association to combine reserves for two or more required assets into a single account. The annual funding requirement is based on ensuring that the sum of the current reserve balance and projected annual cash inflows over the remaining useful life of all pooled assets is at least equal to the projected annual cash outflows for those assets.
Reserves must be shown as separate line items in the budget, distinct from operating expenses. Rule 61B-22.003 of the Code requires the budget to disclose the total estimated useful life of the asset, the estimated remaining useful life, the estimated replacement cost or deferred maintenance expense, and the estimated fund balance as of the beginning of the budget period.
There are other details and nuances, including several created by the 2025 changes to the condominium statutes, which I will address in my next column.
Joe Adams is an attorney with Becker & Poliakoff, P.A., Fort Myers. Send questions to Joe Adams by e-mail to jadams@beckerlawyers.com. Past editions may be viewed at floridacondohoalawblog.com.
