Understand the Importance of Fully Funding Reserves

Understand the Importance of Fully Funding Reserves

By Sundeep Jay / Published August 2019

Photo by iStockphoto.com/Slphotography

To determine the funding of an association’s reserves, most associations order a reserve study. A reserve study is a report completed by a professional with experience who gathers information on the association’s assets. Based on this report, a budgeting analysis is created to determine the annual reserve contribution needed in order to have the funds available for present and/or future replacement of those assets. These assets include, but are not limited to, roofing, painting, paving, pool pumps, interior lobby renovations, fire system(s), light posts, elevators, etc.

     Once the board receives and reviews this report, they should make a presentation to their members with the options they have available to fund the association’s reserve account. Florida Statute 718.112(2)(f) states that associations must annually fully contribute to their reserves account(s) unless a majority vote (51 percent) is obtained by its members to either waive (not to collect) or partially fund their reserves. By waiving or partially contributing to the reserve account, the association then greatly increases the likelihood of future assessments. This information should be communicated not only to its members but also to all future potential buyers inquiring to purchase a unit in your association. To avoid future problems, lawsuits, and/or complaints made to the State of Florida, full transparent disclosure(s) to all parties that are affected and or potentially affected is crucial.

     Association members typically forget that the legal structure of the association is a business. More importantly, it is a non-profit business owned by multiple people/families. The ownership is of an asset called a “home.” So, the same logic of a single business owner or partners who run their business with medium to high debt and/or take unusual risk against his or her own assets cannot apply to associations. There is a legal fiduciary responsibility that all board members must adhere to when making decisions on behalf of their owners: that is to protect their home against asset failures, have funds available for these asset replacements, and, in turn, maintain the market value of the building.

     Please keep in mind that even though an association is fully contributing toward reserves, that does not mean that special assessments will not occur. Expenses related to weather, underground utilities, drainage pipes, and city/county/state code changes are just some of the factors that will occur in a life of an association. Since many of these items cannot be forecast, legal issues are typically limited due to its nature. A new homeowner most likely will not complain of an assessment if a hurricane destroys the clubhouse roof and/or a condominium’s pool area. By fully contributing to reserves, a more accurate reserve budget number is used, which allows current owners to pay the current cost, which is their fair share of future costs to maintain the assets of the association.

     Reserves are the collection of money for the usage/depreciation of assets used today but for its replacement in the future. Each homeowner is responsible to put money aside today for their usage or non-usage of the pool, elevator, roof, paint, mailboxes, etc. The best example to use to give a better understanding of reserves is for associations to put a bucket on the entry drive prior to members driving into the community. Each day, every member must put in their fair share of the reserve contribution before driving on the pavement that is owned by the association. Whether or not they use the pool that day, they must still put money into this bucket to pay for the normal wear and tear on the pool surface walls and equipment. So, though the reserve contribution is being collected monthly and or quarterly, the monies collected apply to the present-day usage/depreciation of all asset items that are community property. If your association has not been properly collecting reserves in the past, then changing to a fair system of collecting reserves will require effort and a greater understanding.

     Once the association decides to fully or partially contribute to reserves, the members must decide on their own whether they can afford to live in an association. Living in an association requires greater financial responsibility then living in a single-family home that is not a part of an association. I believe that 35–40 years ago most Americans could move to New York City and find a reasonably priced home/condominium to live in, but this is not the case today. Most Americans cannot afford to live in New York City now. Areas throughout the State of Florida will change with time; some will become more affordable, and some will become less affordable. The general trend of Florida for the last 30 years is that the price of owning a home and living here has increased and does not show current signs of slowing down to the point of having any major impact on reserves.

     For associations that choose not to collect annual reserves and only operate on collecting special assessments, use extreme caution. I believe that in communities that opt not to collect reserves, the majority vote should be close to 80 percent or higher—not 51 percent or higher, this is my professional opinion. This is a business. All businesses, corporations, partnerships, and non-profit organizations should put monies aside for future asset replacements and or growth. This money that is owed to the association on assets that are daily depreciating belongs to the association, not to individual unit owners, to self-invest these association reserve dollars. The argument that “I” can invest the association-owned reserve monies in a fund that yields interest is not a reasonable argument for an association. One reason is that a member could, through bad investments, lose the money, and/or worse… the member may move out without paying his/her fair share for the daily usage of the association-owned assets.

     In conclusion, whether your association fully contributes to reserves or partially contributes to reserves, it is important to be transparent to not only current owners but also potential buyers. Lastly, if your association has not been properly collecting reserves for the last 5 to 30 years, the initial change will be a shock to the community (accept it), but in the long run, with effort and understanding of reserves, the association will maintain its market value and will operate fairly toward all of its current and future owners.

Sundeep Jay

JR Frazer, Inc.

Sundeep Jay has been completing reserve studies and condo/HOA property & flood valuation reports for a little more than three 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. Lastly, his other skills and experience include repairing commercial washers and dryers along with managing a couple of franchise hotels in the Central Florida area. For more information, call (561) 488-3012, email JRFrazerENT@aol.com, or visit www.JRfrazer.com.