Review the laws and best practices regarding association reserves in Florida
Planning ahead for future maintenance needs or even replacements are crucial to the success of a community association. It's not only in the best interests for the association and the association's members, but in many cases, it's required by law that the organization have a reserve fund.
Florida law is very clear on this point
Every condominium association must fully fund reserve accounts for deferred property maintenance and replacement projects—roofing replacement, property painting, asphalt paving and other projects whose anticipated cost is greater than $10,000—unless a vote to waive them is made (Florida Statutes Section 718.122(2(f) and Florida Admin Code Rule 61B-22.005).
The Florida Homeowners' Association Act does not expressly require reserves, however, there are “HOA statutory reserves,” which are required when initially established by the developer or when the membership votes in the affirmative (Section 720.303(6)(d)). HOA statutory reserves may only be used for the purpose assigned to the reserve, unless the membership votes to authorize use for a non-scheduled purpose.
A reserve fund is critical for meeting professional, legal, and fiduciary requirements. While every association needs different amounts to support their obligations, all can learn from several best practices listed below.
Conduct a reserve study
A reserve study explores the finances and the physical property. The financial analysis looks at the fund status for the association. In analyzing the physical property, you look at:
- Replacement costs for the common areas
- Component inventory
- Life and valuation estimates
- Creating a description of the objectives and methods used to determine the status of the fund
Create a maintenance schedule for prevention
After you have explored reserve components, the next step is generating a preventative maintenance schedule for the association. There are two big reasons to create this schedule: if components are not maintained property, they may require total replacement down the road instead of repair, and the life of the reserve will be compromised unless the components are maintained on a regular schedule.
Put together a funding plan
After the funding goals have been explored with a complete inventory and a maintenance schedule has been created, use one of the following four strategies (outlined in Florida Statutes Section 718.112(2)(f)) to generate a funding plan:
- Full funding: This means aiming to have the reserves at or close to 100 percent
- Baseline funding: The goal in this scenario is to have the reserve cash balance higher than zero
- Threshold funding: Based on baseline funding, the minimum cash reserve in this situation is a set dollar amount
- Statutory funding: While this depends on local laws and codes, Florida law provides a specific formula require two calculations: (1) The total amount necessary to bring a negative account balance to zero and (2) the estimated balance of the reserve account as of the beginning of the period for which the budget will be in effect. If the remainder is above zero, it should be divided by the estimated remaining useful life of the asset. This formula may be adjusted yearly to accommodate changes in estimates and deferred maintenance performed during the year and may consider factors such as inflation and earnings on invested funds (Florida Admin Code 61B-22.005(3)(a)).
Select an investment policy
Interest-bearing and investment accounts are the most common choices for community associations because they are conservative and liquid. The association's investment goals should always be:
- The safety of the principal
- The liquidity of the investment (how easy it is to get to the money)
- The yield
Although your reserves can help maintain your community association for years to come, determining how to handle these accounts can be a complex process. For legal questions regarding your association reserves, contact PeytonBolin today.