As budgeting season approaches, community associations must once again grapple with the continuing issues of reserves. Under ordinary circumstances, reserve funding increases the amount owners need to contribute to the association every month, since reserves are required above and beyond the association’s operating expenses. In light of the recent economic changes, reserves may be something some associations view as a luxury and possibly dispensable in order to reduce the load on their owners. They are not, however.
Florida community association law requires condominiums and homeowners associations to establish and collect reserves as part of their annual budgets. This means that an association must create a separate budget that will ensure it collects enough money every year so that when the estimated useful life of the component is expired, the association will have saved the amount necessary to replace the component without the need for a special assessment. Condominium associations are required by law to collect reserve amounts for roof, building painting, and pavement resurfacing, regardless of the amount of the replacement costs of these, and for any item for which replacement or deferred maintenance will exceed $10,000. Homeowner associations’ reserve funding is mandatory only if the developer of the community established reserve funding or if the owners at some point voted to establish statutory reserve accounts. In either of those cases, then the homeowners associations are required to continue to fund such reserves.
Of course, even the best laid plans can go awry, and associations may find themselves in situations where they need money immediately for some unexpected reason. If the association has healthy reserve accounts, the average owner may believe the board can simply use the money in those accounts to solve the problem instead of levying a special assessment or borrowing the money. However, the statutes state that in order to use reserve monies for any reason other than that for which they were reserved, the owners must vote to approve the move. The condominium statutes even require that the voting documents for such alternative use have special language warning owners of the risk that may arise in using reserve funds for other purposes. Similarly, while the associations must include full funding of statutory reserve accounts in each year’s budget, the statutes allow the owners to vote to waive full funding of reserves. The warning language must still be in place in condominium voting documents, but this allows associations to give their owners the option to pay a little less into the reserve accounts or skip reserve funding altogether in any given year.
In terms of how much money to put into reserves, professionals must usually be engaged to assist in the analysis and valuation of the components’ deferred maintenance and/or replacement costs and their estimated remaining useful life. The statutes state, “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.”
Another consideration related to reserve funding is what funding method is currently being used. Component funding requires reserves to be collected and kept separate for each component. For example, the reserve account for building painting would be calculated and kept separately from the reserve account for pavement resurfacing. Under this component system, the money for each separate reserve item can only be used for that reserve item unless a vote of the owners allows an alternative use. The other type of reserve method is the pooled method of reserve funding, sometimes called the cash flow method. This system allows the collection of monies for replacements and/or repairs of a group of components to be put into one account. Under the pooled method, all of the money in the pooled account is still restricted such that it could not be used for anything other than the components in the pool, but it could be used for any of the components in the pool.
There are at least two benefits of pooled reserve funding. First, because of the way that pooled method of funding is calculated, the contributions required by law each year as a whole are usually less than with the component method, while still allowing an association to maintain adequate monies on hand to
address major replacements as they become necessary.
Additionally, the pooled funding method gives boards more latitude in how to utilize funds which have been collected for any reserve item that requires attention, perhaps sooner than expected. Under the component method, if roof work became necessary before it was anticipated, and there was not enough money in the roof reserve account at the time, the board would be required to obtain a vote of the owners to use money from another reserve item or specially assess or seek a loan for the needed money. Under the pooled method, if the roof required repairs or replacement sooner than expected, the association could use the money reserved for the other components in the pool along with the roof component. Since all the monies would be in the pool together, an owner vote would not be necessary.
Associations considering moving to the pooled method should consult with their professionals to determine how this switch would affect their reserve collections and what approvals are required. It may also consider moving money currently being held in straight line or component funding methods to the pool. Keep in mind that since moving money in this way would allow the funds to be used for items other than what they were reserved for, a unit owner vote is required.
The bottom line is, don’t forget about reserves. Reserve funding should be part of the budgeting process. Though the law allows flexibility on how, whether, and how much to fund reserve accounts, associations should not leave these decisions to the last minute because reports, calculations, potential owner votes, and time-sensitive coordination of these will ultimately be needed in order to fund them properly.