Reserves Are for Today’s Depreciation

By Sundeep Jay, RS / Published August 2022

     Editor’s Note: The recently passed Senate Bill 4-D will affect reserve projects and funding options for many communities.

By now I am sure that everyone is a little familiar with establishing a reserve fund for assets in a condominium and or HOA community. Using a reserve study is one of the best ways to collect and budget fairly for the maintenance and replacement of an association’s assets. The person creating a reserve study will bring with them the knowledge from many other associations and their past and present experiences in the wear and tear of an association.

     Reserves are for today’s depreciation that everyone “currently” living in the association is responsible for. It is not for tomorrow’s repairs and/or replacements. If this were the case, then only special assessments would exist and not reserves. Fully funding reserves on an annual basis for condominiums is a Florida state law.  

     Partially funding reserves or waiving reserves altogether was previously allowed if there was a majority vote of the members. Even though this does not apply to HOA communities, the rules for fairly collecting reserves are no different than in a condominium association.

     Every day the sun and rain are hitting the exterior condominium building and/or clubhouse roofing system. Every day the sun and rain are hitting the asphalt, pavers, sidewalks, etc. The unit owner, owner’s friends/family, and vendors are taking away a little bit of the paving every day from the roadways that will eventually require a replacement. So, the daily payment for this depreciation is the responsibility of the owners who are living there at the present moment. 

     What has generally happened too often in South Florida communities is that minimal reserves were collected from the beginning, allowing the first set of owners to live in a new community without paying their fair share. This has now created additional burdens on the new owners who purchased 20 to 30 years into the life of an association. Not only are the current owners now responsible for paying for the full replacement of the association’s assets, but they also have to pay more into reserves for any shortfalls due to a lack of past budgeting practices. There are items that a typical reserve study does not include for budgeting purposes. These items include upgrades, surprises, code changes, structural failing items, etc. So, in many cases, not only is the association paying for the replacement/repair of asset items, but the association is also having to pay for unexpected items that are typically not a part of reserve budgeting.

     A typical reserve study will include a “normal annual contribution” for reserves. But, if there are not sufficient monies in reserves, a deficit annual funding may also be required in order to have sufficient monies to pay for painting, roofing, elevators, and other items that may be up for replacement in the near future. For example, if a roof costs $100,000 and has a useful life of 20 years, then the normal annual contribution would be $5,000 a year. But if a roof only has 10 years left in its useful life and only $20,000 is saved in reserves, then a deficit funding will also be required. To make up for the $30,000 shortfall in 10 years, the association also has to collect this amount over the next 10 years plus the normal annual contribution. The fully funding annual contribution would be $5,000, plus a deficit annual funding of $3,000 in order to save up to $100,000 in the next 10 years when the roof needs replacement.

     Though bank loans and special assessments are options that an association may choose, they  may not be the most ethical and/or fair way to handle the budgeting of reserves. For example, if a unit owner knows that in 10 years a roof needs to be replaced, and the plan is to special assess its members in 10 years, then a person may sell their home in eight years to avoid paying the special assessment. Not only does the current owner leave without paying her/his fair share, but the new unit owner now will have to pay for this special assessment for the time period of 18 years when he/she did not live there.

     Being a board member is a hard and unpaid job. Once elected, it is the fiduciary responsibility for each board member to do what is fair, equitable, and transparent for all current and future owners. It is not the board’s job to rationalize the unit owner or a homeowner’s personal budgeting situation. The board members’ job is to present the truth and the fairest way of moving the budgeting process of an association forward. Board members cannot assume, nor is it their responsibility to assess, whether a set of unit owners can afford the new annual reserve contributions for their reserve budget. Many times, the increase in reserve contributions is due to the lack of not paying sufficient monies into reserves in the past.

Sundeep Jay, RS

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 seven 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.