Category: Reserves

As the end of 2015 nears, so too does the end of the fiscal year for many condominium associations throughout Florida. Most condominium association boards have begun to prepare their association’s annual budget for the upcoming year. Sometimes there is confusion amongst condominium association boards as to whether or not they must fully fund reserves as part of the budget adoption process and the timing as to when it is appropriate to present the opportunity to waiver or reduce the reserves to the unit owners. In short, the condominium association’s budget, with the reserves fully funded, must be presented to the unit owners. At that time, alternative budgets may also be presented that show the effects of waiving or reducing the reserves, too. At the sole discretion of the board, the unit owners can be presented the opportunity to waive or reduce the reserves before or after the board’s adoption of the budget.

A reserve must be established for roof replacement, building painting, pavement resurfacing and any other project that has an anticipated cost of greater than $10,000. Pursuant to section 718.112(2)(f) of the Florida Statutes and Rule 61B-22.005 of the Florida Administrative Code, Florida condominium associations must fully fund reserve accounts for deferred property maintenance and replacement projects. Only after the budget has been presented to the owners with fully funded reserves can the board, if it so desires, present to the unit owners the opportunity to vote to waive or reduce the reserves.

At the discretion of the board, the owners should be presented with the opportunity to waive or reduce the reserves based on the presented budget that establishes the reserves as fully funded. Pursuant to section 718.112(2)(f), Florida Statutes, in order for reserves to be either waived or reduced by the unit owners, at least a majority of those unit owners present, in person or by proxy, at the meeting at which a quorum of the unit owners is attained must approve the waiver or reduction of reserves. The amount or percentage of the reserve reduction that is presented for vote is set at the discretion of the board. Moreover, the vote to waive or reduce reserves can be with regard to all reserve items or for only select reserve items. It would not be correct for the board to present the budget without reserves and then provide the owners the opportunity to partially or fully fund the reserves. Remember, that the process requires the board present the budget with reserves fully funded and then the unit owners can have the opportunity to waive or reduce.

If voting by limited proxy is used, the proxy must include the following disclosure in bold, capital letters and in a font size larger than any other font used in the limited proxy:

WAIVING OF RESERVES, IN WHOLE OR IN PART, OR ALLOWING ALTERNATIVE USES OF EXISTING RESERVES MAY RESULT IN UNIT OWNER LIABILITY FOR PAYMENT OF UNANTICIPATED SPECIAL ASSESSMENTS REGARDING THOSE ITEMS.

If the unit owners do not approve the waiver or reduction of reserves, the reserves must be fully funded as presented in the budget. If the unit owners do approve the waiver or reduction of reserves, the waiver or reduction is only good for the budget year in question. If the following year the condominium association board would like to propose waiving or reducing reserves, the opportunity to waive or reduce reserves must be presented to the unit owners once again.

How much is needed for a reserve account will depend on several factors, including, for example, the estimated remaining useful life of the asset and its replacement cost. Additionally, the manner in which the reserve funds are to be maintained will depends on whether the reserves are keep as separate line-item reserve accounts or as “pooled” reserves. In any event, the budget adopted by a condominium association board must first and foremost include fully funded reserves.

A multicondominium association must adopt a separate budget of common expenses for each condominium the association operates and adopt a separate budget of common expenses for the association. This can accomplished as sub-parts of the same master budget.

Reserve funds and any interest accruing thereon must remain in the reserve account or accounts, and may be used only for authorized reserve expenditures unless their use for other purposes is approved in advance by a majority vote at a duly called meeting of the association. The only voting interests that are eligible to vote on questions that involve waiving or reducing the funding of reserves, or using existing reserve funds for purposes other than purposes for which the reserves were intended, are the voting interests of the units subject to assessment to fund the reserves in question. To pass any vote regarding waiving, reducing, pooling or using the reserves for a different purpose requires a majority of a quorum of the unit owners present, in person or by proxy, at a membership meeting. In the case of a multicondominium, a majority of a quorum of the unit owners comprising a particular condominium, in the same percentage as a quorum of the members is otherwise established, present, in person or by proxy, at a membership meeting may approve the waiver or reduction of reserves.

It’s election season again and you know what that means,  right? If you live in a condominium, then typically at your annual meeting, in  addition to the election, the association’s opportunity to vote to waive or  reduce reserves takes place, too. Here are a few helpful hints to keep in mind:

Condominium association budgets must include fully funded  reserves in their annual budget for each item whose replacement costs are  greater than $10,000.00. Each such item is required to have its own line item  reserve in the budget, unless the association decides to “pool” their  reserves. This means that there is one line item for all items within the  “pooled” reserve. Reserves must only be used for their designated  purpose unless the unit owners vote to use them for a different purpose. If the  unit owners do not vote to waive or reduce the reserves, then, pursuant to  state law, the fully funded reserves go into effect.

Reserves should be budgeted based on a straight line  method. This means that if the cost to replace the roof is $100,000 and its  life is 30 years, the association should include $3,333.33 per year for  reserves (100,000 30). If repairs are made that affect the remaining useful  life, then the association can take that into account, too. Effective July 1,  2010, the requirement to have a reserve study was deleted from Chapter 718,  Florida Statutes, the Condominium Act.

To waive or reduce condominium reserves requires an  affirmative vote of the majority of the unit owners at a members’ meeting where  a quorum was present. To use condominium reserves for a different purpose other  than for which they were accrued or to begin “pooling” reserves, a  majority of all unit owners must vote in favor of this  change. The requirement that a developer controlled board cannot raise the  budget by greater than 115% over the previous year does not, amongst a few  other things, include the tabulation of the reserves in the budget calculation  that determines whether the increase is greater than 115% over the prior year.

Homeowners’ association reserves are a bit different. There  is no requirement that forces an HOA to include reserves in the budget unless  the developer initially includes them, or the majority of the entire membership  votes in favor of accumulating reserves. Therefore, if your HOA’s budget  includes a line item called “reserves” but neither the members voted  to accumulate them, nor did the developer initially vote to establish them,  then the HOA’s reserves are more akin to a voluntary savings account.

Regardless of whether you live in an HOA or a condominium,  it pays to be circumspect as to how your association board presents the choice  to waive or reduce the reserves. More often than not, the limited proxy/ ballot  provides the choice to fully waive or to reduce by either a certain percentage  or by leaving it up to the discretion of the board. Providing more than one  choice means that your association is less likely to accomplish either result,  and the unintended, but very real result, is that the required votes to pass  either option is diluted. If the Board is going to provide the option to waive  or reduce, then consider presenting only one option.

Keep in mind that, reserves are forced savings accounts to  replace items that have a limited life so that the money is accrued by the time  you need to replace the reserved item. While waiving or reducing reserves may  seem like it’s saving you money, consider the fairness of the following  scenario: Mr. Jones lives in a condominium where reserves are waived year after  year. After 20 years of enjoying his home, Mr. Jones moves. Six months later a  new roof is required. The result is that Mr. Jones enjoyed the roof for those  20 years and never had to contribute towards the savings for a new roof.  Meanwhile, the person that bought his unit is stuck with the special assessment  bill!