IT’S THAT TIME OF YEAR AGAIN – FORMULATING A BUDGET AND GRAPPLING WITH WHETHER TO WAIVE OR NOT TO WAIVE RESERVES?
By: Steven R. Braten, Shareholder
If you are a board member or manager of a Florida community association, then you are probably familiar with the trepidation surrounding the “dreaded” annual budget meeting. Section 718.112(2)(e) of Florida’s Condominium Act and Section 720.303(6)(a) of Florida’s Homeowners’ Association Act require condominium and homeowners’ associations to hold an annual budget meeting. The Condominium Act requires at least 14 days’ notice of the annual budget meeting, while the Homeowners’ Association Act permits the board to adopt a budget upon 48 hours’ notice. However, homeowners’ association boards should consult legal counsel to confirm the amount of notice required to be provided to members under the governing documents before adopting a budget because there may be additional requirements. For condominiums, prior to the budget meeting, the board shall hand deliver to each unit owner, mail to each unit owner at the address last furnished to the association by the unit owner, or electronically transmit to the location furnished by the unit owner for that purpose a notice of the budget meeting and a copy of the proposed annual budget. If your condominium association has at least 150 units, then the notice of the budget meeting along with the proposed budget must also be posted on the association’s website in the manner specified by Section 718.111(12)(g). The notice requirements for adopting a budget are less stringent under the Homeowners’ Association Act, but, again, your association’s counsel should check your governing documents before mailing the notice for the budget meeting, and determine whether you need to include the proposed budget in the mailer or satisfy any other requirements.
In terms of what line items should be in your association’s operating budget, any expenses that are recurring from year to year should be included. In addition, for condominium associations, Section 718.112, Florida Statutes, requires certain minimum line items to be in the operating budget (See Section 718.112(2)(f)1 and 21718.504(21)). For homeowners’ associations, you should review the governing documents for what is considered an “operating expense.” Section 720.303(6)(a), Florida Statutes, also requires the budget to set out separately all fees or charges paid for by the association for recreational amenities, whether owned by the association, the developer, or a third-party.
BUDGETING FOR RESERVES
A. What Should Be Included in the Reserve Schedule?
Generally speaking, reserves are funds set aside for specific expenditures that will not be incurred in the upcoming fiscal year, but rather, at some point in time in the future. The Division of Condominiums defines “reserves” as “funds, other than operating funds, that are restricted for deferred maintenance and capital expenditures, including the items required by Section 718.112(2)(f)2.a., and any other funds restricted as to the use by the condominium documents or the condominium association.” The Legislature mandated long ago that condominium associations must reserve for “roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost, and any other item that has a deferred maintenance expense or replacement cost that exceeds $10,000.” Other typical items that should be included in the reserve calculations are balcony restoration, sidewalk replacement, seawall replacement, boardwalk replacement, and for some communities, air-conditioning replacement.
In the case of homeowners’ associations, the budget “may” include reserve accounts for capital expenditures and deferred maintenance for which the association is responsible. Therefore, reserves are not statutorily mandated, unless reserves were “initially established by the developer or if the membership of the association affirmatively elects to provide for reserves”, which can be accomplished by an affirmative vote of a majority of the total voting interests of the association. See § 720.303(6)(b), Fla. Stat. (2018). If reserve accounts are established, either by the developer or subsequently by the membership, the association’s budget is required to designate the assets or components for which the reserve accounts may be used. If your association board is not sure whether it has established “statutory reserves”, the board of directors should consult its accounting and legal professionals.
Should We Waive Reserves, Partially Fund Reserves, or Fully Fund Reserves?
The Condominium Act requires boards to adopt a budget that includes a statutorily compliant list of reserve items with the operating budget for the new fiscal year showing all those reserve items fully funded. Wait a minute; I thought we can allow the members to waive reserves? Yes, you can: Just as the Legislature giveth, it can taketh away. In Section 718.112(2)(f)2.b., Florida Statutes, the Legislature authorizes condominium boards to permit unit owners to vote “whether to waive or reduce the funding of reserves.” So the board must first approve the budget to fully fund reserves and then the membership may vote on whether to waive or partially fund reserves at a stated percentage. So, this is it . . . the point at which the board must make that critical decision, do we fully fund reserves, or, as many of you have heard me say at seminars, do we “kick the can down the road.” But, as I also say, “you can only kick the can down the road so far.” So, condominium association boards have to decide which “pill” will be easier for their owners to “swallow” – fully funding reserves, or the dreaded special assessment. If your association is not funding reserves, chances are your board will have to specially assess to pay for the projects the reserves were intended to fund in the future.
If your homeowners’ association has established “statutory reserves”, the board of directors is required to adopt a budget with the statutorily established reserve component accounts fully funded. The obligation to fully fund those reserve accounts can, however, be waived or reduced if a majority of the members vote at a meeting at which a quorum is present, to provide for no reserves or lower reserves than required. See § 720.303(6)(b), Fla. Stat. (2018).
C. Make Sure the Notice Package Is Prepared Correctly.
If the board elects to give unit owners the option to waive or partially fund reserves, then a notice of special meeting of the unit owners should be included with the annual budget mailer, along with a limited proxy. The limited proxy may include the question of whether to waive reserves all together, or whether to partially fund reserves. Alternatively, both questions can be included in the limited proxy. There is a statutory disclaimer that must be included in the proxy, as well as other statutory requirements for the proxy. Therefore, we recommend you have your association’s legal counsel prepare the proxy for the members’ meeting, if not the entire notice package. Bear in mind that giving the owners the choice of voting on either to waive or partially fund reserves rather than only one of those options has some risk because a majority of a quorum of the owners must vote in favor of one of the two questions.
D. Which Meeting Occurs First – The Board Meeting or The Owners’ Meeting?
For condominiums, the board is supposed to first hold its meeting to adopt the annual budget fully funding reserves. Many associations hold the members’ meeting first or hold one meeting and then count the proxy votes on reserve funding first before the Board votes to approve the budget. The problem with these approaches is that you may not have a quorum of the owners to proceed with counting votes. Regardless, the board must adopt a budget and has no choice but to adopt the budget with reserves fully funded, unless a successful vote of the owners is obtained to waive or partially fund reserves. Therefore, if you hold the members’ meeting after the budget has been adopted by the board, the owners are more motivated to vote in favor of waiving or partially funding reserves. If a quorum is not achieved, the members’ meeting can be adjourned or continued to a later date and time so that a quorum can be achieved. Once the quorum is achieved, and enough unit owners vote in favor of the option or one of the options given to them, the budget can be adjusted to provide for only operating expenses or operating expenses and partial reserves. We recommend you immediately consult legal counsel if the members’ meeting is continued to a later date.
Interestingly, homeowners’ associations cannot adjourn or continue a members’ meeting to waive or partially fund reserves. Section 720.303(6)(f), Florida Statues, states that “[i]f a meeting of the unit owners has been called to determine whether to waive or reduce the funding of reserves and such result is not achieved or a quorum is not present, the reserves as included in the budget go into effect.”
Formulating a community association budget is not an easy task. Significant planning is necessary and a number of issues must be taken into consideration before presenting the proposed budget to the full board of directors and members of your community. We recommend that community association boards consult their management, accounting and legal professionals well in advance of the annual budget meeting to obtain compliance with Florida law and the community governing documents.