By Karyan San Martano / Published August 2022
Like running a business, the operation of a community association requires careful and accurate financial planning and budget preparation. Budget preparation is not one-size-fits-all, and the intricacies of each association’s budget will depend on factors such as the size of the association, the age of its assets, ongoing and upcoming projects, and various maintenance obligations.
Despite the differences between associations, one aspect of financial planning and budgeting that should be understood by board members of any association and discussed with legal counsel is the legal and technical requirements of reserve funding.
Deterioration is unavoidable and can be accounted for over years, rather than upon needing replacement. Unexpected expenses will also inevitably arise. Akin to a safety net savings account, a reserve fund can cover these large and unexpected expenses. Without a reserve fund, the association may have no choice but to raise assessments or levy a special assessment on owners.
For condominium associations, the legal and technical requirements of condominium association budgets can be found in Chapter 718, Florida Statutes (the Condominium Act), and Section 61B-22 of the Florida Administrative Code. An association’s bylaws may also contain certain financial requirements to which a board and/or budget committee should pay attention.
The Condominium Act requires the association to maintain reserve accounts for capital expenditures and deferred maintenance. A capital expenditure is the purchase or replacement of an asset whose useful life is greater than one year. Deferred maintenance is any maintenance that is performed less frequently than annually or results in maintaining the useful life of an asset. This is not routine maintenance, which needs to be included in the operating section of the condominium budget. The Condominium Act also specifies that the reserves must include roof replacement, building painting, and pavement resurfacing, regardless of the amount of the maintenance or replacement cost. The association is obligated to include any other item that has a deferred maintenance expense or replacement cost that exceeds $10,000.
The board of a condominium association generally has the authority to adopt the budget without a vote of the membership. However, there are two areas of reserve funding that involve a membership vote. First, the members can vote to waive reserves or partially fund reserves. The board can put the reserves question up to a vote if it so chooses. If no vote to waive or partially fund reserves is taken or not enough members vote to do so, the board must adopt the budget with fully funded reserves. Second, reserve funds must be used for their intended purpose unless a majority vote of the members is obtained to use the funds for other purposes. This means that the board cannot use reserve funds designated for one purpose to cover an unexpected expense without approval by a membership vote. New legislation, SB-4D, effective May 26, 2022, has changed the way reserves are handled by condominium associations. Under the new law, a condominium association will no longer be permitted to waive or reduce the full funding of the ten items addressed by the structural integrity reserve study, nor will the association be permitted to authorize money placed into those accounts to be used for other purposes.
Unlike for condominium associations, the funding of reserves in homeowners associations is not always mandatory. Chapter 720, Florida Statutes (the Homeowners Association Act), does not mandate reserve accounts for all homeowners associations. Rather, reserve accounts for homeowners associations fall into two categories: statutory reserves, which are mandatory and must follow the requirements of the statute; and non-statutory reserves, which are board-created and limited by the association’s governing documents.
“Statutory reserves” are those reserves initially established by the developer or mandatory reserves affirmatively elected by members of the association. A reserve account established in one of these two ways means that the association must determine, maintain, and waive the reserves in accordance with the statutory requirements laid out in section 720.303(6) of the Homeowners’ Association Act. Once established (either by the developer or by the membership), statutory reserves must be funded or must be waived. To waive or decrease funding for such reserves, a majority vote at a meeting with quorum present must be taken. Notably, this vote to waive or reduce the reserves applies to only one budget year. The association, if it so chooses, may terminate such a reserve account by approval of the majority of the voting interests of the association. The Homeowners Association Act also explains the formulas for properly calculating the funding of these reserve accounts, and the accounting must be done as provided.
If reserves are not set up as described above, a homeowners association may nevertheless choose to maintain so-called “non-statutory reserves.” Essentially, these are board-created, and their funding is limited by the governing documents of the association. The most significant difference is that these accounts are not mandatory and do not have to be maintained or waived according to the Homeowners Association Act.
Subject to document-based limitations on assessment increases, the board decides how much to include in the reserve account as part of its regular budgeting process. The association is obligated to prepare an annual budget reflecting annual operating expenses, including estimated revenues and expenses for the year. The association should endeavor to accurately calculate its estimated expenses and revenues as overstating anticipated expenses to put into a reserve account is not consistent with the statute’s budgeting requirements.
Because these reserve accounts are not bound by the statutory requirements, the board may choose to waive, reduce, or even eliminate the reserves. Further, the board may also decide to use the reserves for purposes other than their intended purposes. Although this means that the board may have more leeway in how to spend the reserves or in deciding to underfund the reserves in times of financial hardship, it is important to remember that the board owes a fiduciary duty to the association’s members. Underfunding reserves or waiving reserves altogether may lead the association to rely on special assessments, as described above.
The directors and officers have a fiduciary duty to the members of their community association. Given this fiduciary duty, it is important to understand when reserve funding is mandatory and the legal requirements for funding and waiving reserves. Because the board may not have to fund reserves at all or may have to strictly follow statutory requirements to fund such reserves, it is important to discuss with counsel to understand if and how the reserve accounts are set up and for the same to be tailored to your specific community’s needs to ensure a continuing healthy financial future.
Karyan San Martano
Karyan San Martano is an attorney in the firm’s community association practice. Ms. San Martano was a trial court law clerk for the Fifteenth Judicial Circuit of Florida for two years before joining Becker. She is a graduate of the University of Florida and of the George Washington University Law School. During law school, she interned at the Environmental Defense Fund, the Environmental Action Center, and the U.S. Department of the Interior, Office of Inspector General. For more information, visit www.beckerlawyers.com.