IT’S THAT TIME OF YEAR AGAIN – PART II – IS YOUR ASSOCIATION FULLY FUNDING RESERVES?
By: Steven R. Braten, Shareholder
Under Florida law, condominium associations have a duty to adopt a budget with a statutorily compliant reserve schedule and with reserves fully funded for the applicable fiscal year unless properly waived by the members. Likewise, if your homeowners’ association has established “statutory” reserves, the board must adopt a budget fully funding those reserves unless properly waived by the members. To ensure your association is “fully” funding reserves from year to year, your board should consider such factors as the estimated remaining useful life of an asset, the extension of the useful life of an asset after deferred maintenance, inflation, and earnings on invested funds, if any. “Deferred maintenance” is any maintenance or repair that is not performed yearly, which will maintain the life of the asset. An example would be painting large sections or the entire condominium building, as distinguished from touch-up painting, which is routine maintenance. To be sure, calculating a statutorily compliant reserve schedule is no easy task. If your association has not conducted a reserve study analysis in the past three to five years, we recommend the board retain an expert to do so as the first step to developing a statutorily compliant reserve schedule. The Legislature used to mandate condominiums perform a reserve study every three years, but then eliminated this requirement. You may wish to consult your community association manager or legal counsel for referrals to qualified reserve study professionals.
What is the Difference Between Funding Reserves under the Straight-Line Method and the Pooling Method?
An important consideration for any community association is what method the association should utilize to fund reserves. Both condominiums and homeowners’ associations may fund reserves based on either the “straight-line” method or the “pooling” method. In either scenario, “[t]he amount to be reserved must be computed using a formula based upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item (the “Reserve Formula”). See § 718.112(2)(f)2.a. and § 720.303(6)(e), Florida Statutes. The primary difference between the two funding methods is that under the straight-line method, each item on your reserve schedule is separately funded based upon the Reserve Formula. The pooling method, however, allows associations to create one “pool” of all of its reserve items and fund all items in one account. To calculate a proper reserve schedule under the pooling method, your association will most likely need the assistance of an accounting professional. The major advantages of using the pooling method over the straight-line method are generally two-fold: (1) the amount to fund the reserve budget year-over-year is less than the straight-line method because of the cash-flow approach to funding the pool; and (2) the board can use the funds in the pool to pay for any item within the pool. Conversely, under the straight-line method, each item in the reserve budget is considered a separate account and the board can only use the funds in each account for that item, unless the members vote to authorize the funds to be expended on a different item or for a different purpose. You may now be thinking, the pooling method is the way to go and wondering how your association can implement that method for reserve funding. It’s simple! A majority of the members at a duly called members’ meeting must vote in favor of converting straight-line reserves to pooled reserves. An association can also opt to leave the existing straight-line reserve fund accounts alone and just start funding on a pooled basis moving forward. However, again, a majority of the members at a duly called members’ meeting must vote in favor of doing so.
Fully funding reserves is critical to the long term financial health and well-being of every community association. If your association board has any doubts whether the association is fully funding reserves, contact the association’s management and accounting professionals. If your association wishes to change the method of funding reserves to the pooled method, contact the association’s legal professionals. In the end, this important requirement can be satisfied in a manner that is best for the association and its members.