Is Your Condo Following the Proper Reserve Protocol?

The start of a new year represents a slew of new beginnings for most community associations. From holding annual elections to the preparation of annual budgets, the first quarter of the year marks a pivotal time for many associations. With that comes a great deal of confusion, particularly with regard to the proper way to fund reserves.

Contrary to common misconceptions, Florida Statutes require that associations must present a fully funded reserve to their fellow unit owners. An association may also present to the membership the option of either waiving reserves, or funding reserves less than fully, but it is not required to do so.

Reserves are used by associations to fund capital expenditures and items of deferred maintenance. Some reserve categories are mandatory (e.g., roofing, painting, paving, and any item expected to cost in excess of $10,000), while others are discretionary (e.g., insurance premiums). However, once a reserve fund is established, the monies dedicated to each category, including interest, may only be used for that category (unless the membership approves an alternate use).

According to Chapter 718.112(2)(f) of Florida Statutes, Florida condos must fully fund reserve accounts for capital expenditures and deferred maintenance. The amount to be reserved must be computed using a formula based upon the estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item.

Now, what happens if once presented with a fully funded reserve account the association becomes interested in waiving or reducing all or specific reserve items? A vote must occur. Not only must a quorum be established in order for voting to take place, but a majority of the owners must be present either in person or by proxy in order to approve any changes.

Keep in mind that it is possible that certain owners will be voting via limited proxies. Should that be the case, special language must be included on the face of the proxy ballot, in capitalized, bold lettering, that should read as follows: WAIVING OF RESERVES, IN WHOLE OR IN PART, OR ALLOWING ALTERNATIVE USES OF EXISTING RESERVES MAY RESULT IN UNIT OWNER LIABILITY FOR PAYMENT OF UNANTICIPATED SPECIAL ASSESSMENTS REGARDING THOSE ITEMS.

Should a majority of the quorum of members not agree to waive or reduce the reserve account, then the association is responsible for fully funding the account. Whatever your association decides, keep in mind that the decision is only good for the particular year in question, and the whole process will have to be done again on the following year.