By Sundeep JAY, RS / Published April 2022
Tallahassee has reviewed a bill in 2022 that has been recommended by our industry leaders and a task force that was designed to help condominiums and cooperatives better handle their reserve accounts to avoid potential catastrophes such as Champlain Towers faced in 2021. Though we are far away from anything passing, here are some of the highlights of the bill that will be recommended to our State governor:
“Applies to buildings that are three stories or higher”
If the association elects to waive and/or partially fund reserves, there will also be other disclosures that will need to accompany year-end budgets regarding the status of reserves; for example,
THE BUDGET OF THE ASSOCIATION DOES NOT PROVIDE FOR FULLY FUNDED RESERVE ACCOUNTS FOR CAPITAL EXPENDITURES AND DEFERRED MAINTENANCE CONSISTENT WITH THE ASSOCIATION’S RESERVE STUDY. FAILURE TO FUND RESERVES CONSISTENT WITH THE ASSOCIATION’S RESERVE STUDY MAY RESULT IN UNANTICIPATED SPECIAL ASSESSMENTS REGARDING THOSE ITEMS.
Whether or not the above bill passes legislation, it is still important to understand the purposes of reserving for all association types that exist in Florida. First, it is still the fairest way to distribute the maintenance costs between present owners and future owners. By fully funding reserves, unit owners and potential buyers have a realistic budget to determine whether the property they are either living in or will be purchasing is one the individual can afford. Otherwise, it creates a false illusion that a certain association type is affordable.
With all living costs rising, another $50 to $100 a month might be a lot of money for a family on a budget. But, the flip side is that a special assessment of $1,500 to $5,000 might be just as devastating to a family. The other drawback that occurs with not properly funding annual reserves is that the unit owner and or the homeowner can gain large profits from the sale of their home/unit in today’s real estate market and walk away without paying their fair share of reserves. This truly needs to be evaluated by board members when considering waiving and or partially funding reserves.
There have been many conversations with property managers who have stated that the unit owners have all decided to keep their monies instead of putting them towards reserves. The understanding was that the unit owners through their own investment skills can gain much more interest and appreciation on their monies versus having the association put monies aside into the association’s savings account. There are a few problems with this scenario. First, as mentioned above, what if the unit owner/homeowner sells the unit before the day of the special assessment? Does the unit owner/homeowner provide a lump sum check to the association on the sale of their property from past due partial funding of reserves? The answer is “usually no.” Second, what happens if that person files bankruptcy? Third, in the year of the special assessment, what happens if the stock market and economy crash?
On an annual basis, in a scenario of properly fully funding reserves, the association owns the money, not the unit/homeowner. The money set aside for reserves by the association is safeguarded in a savings/checking account to help pay for the maintenance and upkeep of the property. When there is not sufficient money set aside for reserves, projects are delayed, and items are repaired when they should be replaced. Since board members all work for free, it is not unreasonable for boards to make decisions on replacing items instead of repairing items that are past due on their useful life. By replacing asset items that are past due on their useful life, the association most likely will not need to revisit the maintenance of those items for a period of 10 to 30 years. Otherwise, the association is constantly running behind on maintenance items that are really due for a full replacement.
In 2022, the State of Florida will most likely put legislation forward to guide associations towards properly funding reserves for the maintenance of the building and safety-related items within an association. Boards must also understand that not just the maintenance and safety of buildings but also the beautification of communities is their fiduciary responsibility. So, though reserve funds are extremely important in the maintenance of buildings, sidewalks, etc., the attractiveness of a community and/or a condominium building preserves and potentially increases the market value of all units/homes. All of this requires money. The fairest way to equitably distribute these costs is through an annual process of fully funding reserves.
Senior Reserve Specialist, J.R. Frazer Inc.
Sundeep Jay is certified as a senior reserve specialist. He has been completing reserve studies and condo/HOA property & flood valuation reports for a little more than six years with J. R. Frazer Inc. He graduated with a degree in accounting and computer science from the University of Central Florida. Throughout his career, he assisted in building more than 70 to 80 residential homes as a real estate broker while also operating his own mortgage company. For more information, call (561) 488-3012, email JRFrazerENT@aol.com, or visit www.JRfrazer.com.