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Funding Your Reserves

 

hoa reserves

Bill and Martha Jensen bought a new condominium in Miami in 1995 and lived there for 19 years. In 2014 they sold the apartment to Max and Rita Diaz. A year later, the condo board voted to replace the building’s roof and imposed a special assessment to pay for the project. The Diaz complained, insisting that they shouldn’t have to pay to full assessment to replace a roof that sheltered the Jensens for 95 percent of its life.

It wasn’t fair – but major components and systems don’t last forever, and big assessments are what happens when a board doesn’t set aside funds on a regular basis to update those components and systems.

“The number one mistake a board can make is characterizing such things as future expenses,” says Robert Nordlund, founder and CEO of Associations Reserves, Inc., a Calabasas, California-based, reserve study firm with clients in every state.

“It’s human nature to worry about future things at a future time,” he explains, “but if you characterize reserve expenses as offsetting onging deterioration, the future takes care of itself. Associations that don’t pay this ongoing bill doom themselves to deferred maintenance, special assessments, and declining property values.”

In addition to roofs, long-lived common assets meeting that criteria include masonry walls (which may need concrete restoration or repointing to renew the mortar between bricks); chillers, cooking towers, and other parts of a building’s climate-control system; elevators; the fire-alarm system; interior décor in common areas such as administrative offices, hallways, lobbies, and recreation rooms; sidewalks, streets, parking lots, and garages; balconies and decks; and swimming pool surfaces, pump motors, and filtration systems.

In cooperatives, the building’s underlying mortgage should be a reserve item, too, says Annette Murray, a certified public accountant and a shareholder with Wilkin & Guttenplan, PC, an accounting firm with offices in New York City and East Brunswick, New Jersey.

Many states—including Florida – require reserves, and some even specify the minimum acceptable percentage of the budget that an association must set aside in reserve. Robert L. Kaye, managing member of the law firm Kaye Bender Rembaum, which has offices in Pompano Beach and Palm Beach Gardens, “Section 718.112(2)(f) of Florida Statutes provides that the annual budget of an association must include full reserves. Whether or not to present the option to the membership to waive all or a portion of the full reserves is first up to the board of directors.”

“If the board does not wish to reduce the reserves,” Kaye continues, “there is no requirement in the law that it be offered for membership vote. Each year, the proposed budget must include the formula for computing the full reserves set forth in Section 61B-22.005 of the Florida Administrative Code, which requires an indication of the estimated replacement cost of each of the items that must be included in reserves. This suggests the need to undertake a reserve study on a periodic basis.”


For HOA and condominium association management in Miami, contact American Management Group.

 

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