We have all heard the old adage, “Don’t judge a book by its cover.” The same is true when it comes to condominium associations—you cannot judge the “health” of a condominium association by its polished marble floors or its breathtaking gulf shore views. The true lifeline of a condominium association comes from successful financial planning, management, and budgeting that allows the association to provide a comfortable, positive, and safe living environment for all owners to properly maintain the property and to protect the value of the property over time.
Financial stability is essential to the success of an association. Without sufficient funding, the association cannot carry out the duties it is required to undertake pursuant to law or its governing documents. A director should always seek to establish sound fiscal policies, help develop a workable budget, and continually look for ways to carry out the purposes of the association in a responsible manner. Typically, owners do not like to see increases in assessments and pressure boards to look for ways to cut costs and effectively budget. However, a lean budget is not always a healthy one. If boards strategically plan and properly budget, unexpected increases in assessments may be avoided, and an association can rely on reserve accounts for when replacement costs arise.
The first step to obtaining financial stability is to establish a proper budget. The legal and technical requirements of condominium association budgets can be found in Chapter 718, Florida Statutes (the Condominium Act) and Section 61B-22 of the Florida Administrative Code. Practically speaking, the “key” when it comes to budgeting is not to simply increase your budget by a set percentage each year. Rather, the board of directors should analyze annual operating expenses and factor out non-recurring expenses and conservatively project items that will remain in the association’s budget. Delve into the association’s financial history and review the last two years of budgeting plans to make projections on spending. Review vendor contracts and consider increases in contractual obligations in the budget calculations. Consider increases in taxes, utilities, and insurance premiums. Also keep in mind that proper budgeting may require you to look further down the road, especially if there are projects that are not expected to be completed in the fiscal year.
Second, the board should ensure that the association has adequate working capital. Depending on the size of your community, an association should have at least two months of assessments in its operating fund. The board should take into account delinquent accounts and bad debt.
One of the most important components of an association’s financial health is the reserve funding. The Condominium Act requires the association to maintain reserve accounts for capital expenditures and deferred maintenance. A capital expenditure is the purchase or replacement of an asset whose useful life is greater than one year. Deferred maintenance is any maintenance that is performed less frequently than a year or results in maintaining the useful life of an asset. The Condominium Act requires the proposed budget to reserve funds for roof replacement, building painting, pavement resurfacing, and any other any other item that has a deferred maintenance expense or replacement cost that exceeds $10,000. Associations should fund reserves in sufficient amounts to ensure the maintenance, repair, and replacement of all structural and life components of the building. Reserves are calculated based on a formula contained in the Florida Administrative Code, designed to accrue money over the useful life of the individual assets so that the association is not forced to impose special assessments to repair or replace the assets. Reserves must be fully funded; however, the law does allow owners to vote to “partially fund” reserves. Partially funding reserves should be done with caution, which is why the statutes require warning language to be printed on voting documents wherein owners will be voting to waive fully funding reserve so that owners are aware that doing so could lead to special assessments in the future. Although the temptation to less than fully fund reserves may be strong (to keep assessments lower), the failure to maintain adequate reserve funds can be detrimental when the association finds itself unable to pay for necessary maintenance when it is required.
In order to properly reserve, the board should rely on a reserve study. A reserve study is an in-depth analysis and inspection of an association’s assets to determine the life expectancies and replacement costs of different components of the condominium. Florida law currently does not require associations to regularly perform reserve studies. However, associations should have a reserve study completed every three years. There are several states that require associations to perform a reserve study every three years and to review the report annually. When reserve studies are not performed (or updated) for years, the board is working with outdated information which often leads to underfunded reserves.
Directors should seek the advice of professionals such as community association managers, accountants, and financial advisors when planning the budget. The right professionals can assist the board to develop the proper controls to protect the association’s assets; to adopt realistic budgets which ensure that operating funds are sufficient to cover ordinary expenses of the association; and to obtain detailed reserve studies to provide sufficient capital for any future, or unexpected, expenses.
To read the original FLCAJ Magazine article, please click here.
Jennifer Horan is a Board Certified Specialist in Condominium and Planned Development Law and represents condominium, cooperative, mobile home and homeowners’ associations located throughout Southwest Florida including Collier, Lee, Sarasota and Charlotte Counties. She has particular experience in covenant enforcement and foreclosure law, and has also practiced in the areas of commercial, business and tort litigation. To learn more about Jennifer, please click here.