Mastering HOA Reserve Requirements in Florida: The Ultimate Guide

HOA Reserve Requirements Defined

A reserve is money that a homeowners association (HOA) saves to fund future capital expenditures or major repairs. A portion of the HOA’s annual budget is designated for the reserve. A reserve study determines the amount to reserve and when major replacements will occur. Large-ticket items that require reserving include roofs, paving, pools, exterior painting, roofing and fence replacement. The reserve study is prepared by a professional to determine the present and future replacement costs on these items as well as the estimated useful life. Florida law 720.303(6) requires an HOA Board of Directors provide a summary of reserves set in the reserve study to the members of the association. Further , Florida Statutes 720.303(6)(b)(2) provides the following explanation on reserves: "The purpose for maintaining reserves is to aid in protecting the equity value of all of the homes within the association and to keep special assessments from having to be levied against the members for replacement of those items which would normally be reserved over the years." There you have it. Reserves are not optional; they are required by Florida Law.

Florida Regulation: Overview of HOA Policies

Florida is a statutory state, meaning that associations and homeowners are required to follow certain rules and regulations enacted by the Florida legislature. Florida Statute Section 720.303(6)(a) provides in part: The board of directors of the homeowners’ association shall maintain financial records sufficiently detailed to generally identify and explain the expenditures of the association. The Department of Business and Professional Regulation, Division of Florida Condominiums, Timeshares, and Mobile Homes provides guidance regarding general record-keeping requirements. Pursuant to that guidance an association is required to maintain adequate and proper accounting of the Association’s funds and also comply with financial reporting requirements as set forth in Florida Statutes, Sections 720.303(7), 720.303(7)(b) and 720.303(7)(c).
Determining the specific type of reserves appropriate for your community requires consultation with a CPA that understands HOA reserve requirements. In addition to matters related to reserve funding, Florida has a number of laws relating to the financial operation of a Homeowners’ Association. As the financial and legal consequences of not properly managing your association’s finances are very significant, this discussion will focus on some of the financial reporting requirements set forth in the Florida Homeowners’ Association Act.

Significance of HOA Reserve Funding

Maintaining adequate reserve funds is one of the most important financial responsibilities an association faces. Reserve funds help ensure that associations have the money available to repair and replace common elements when needed, and can help them avoid special assessments and large increases in regular assessments.
Associations that fail to adequately fund their reserves do so at their own peril. For example, recently a condominium association was ordered to pay over $900,000 for failing to properly fund its reserves, despite its budget preparing a fund for reserves. Although the association had maintained a fund, it acknowledged that it had used the funds for operating expenses. In addition, the association board was aware there was not enough money in the reserves to complete the substantial repairs to the common property. The association’s reserve funds were raided to keep assessments down, at the expense of their building. Consequently, the association failed to avoid special assessments and increased regular assessment fees, and instead ended up with special assessments.
Associations that were properly fund their reserves avoid the need for special assessments or increased fees.

HOA Reserve Requirements Calculation: Key Considerations

A number of factors go into how much reserve contributions an association will need to meet its current and future obligations. First, the cost to repair or replace the assets must be considered as this is the basis of the required reserve contribution amount. The following factors are important in determining the costs to be involved: In addition, consideration must also be given to inflation and the rate of growth for the association. The cost of goods and services is ever increasing due to inflation. Historically, association reserves tend to fall short because inflations rates exceed the annual adjustments made to reserve funds. Inflation therefore must be taken into consideration. Lastly, although less common for smaller community associations, potential for higher and greater growth subdivisions should consider adding the projections of anticipated slowing of growth for the community into the reserve study. Some communities grow at a rate that require more reserves for future customization of common areas, clubhouse, improvements such as parking facilities and pools. Maintaining a careful watch over the rate of association growth is critical in mitigating and planning for future reserve needs. The reserve study process considers these factors and will project out the near and long term needs for the homeowners association along with the funding necessary to cover those costs. A reserve study is however only an estimate and must be periodically revised, as it can change based on actual conditions and the use of the common areas and amenities by the owners.

HOA Best Practices: Managing Reserve Funds

Regardless of the funding structure adopted, every Florida homeowners’ association should implement the following best practices with respect to reserves:

Reserve Studies. Every Florida homeowners’ association, regardless of their method of funding or not funding reserves, needs a current reserve study. Reserve studies need to be updated every two (2) to three (3) years so that the reserve study values properly reflect the current financial state of the association.
Full Study Every 7 years. While a reserve study needs to be updated at a minimum every 3 years, the study must be a full study every 7 years. A full study includes a physical analysis and a financial analysis. A financial analysis includes budget analyses that are very specific to each line item covered in the reserve study. Humans are fallible, thus if you do not have a full study every 7 years, then you run the risk of underestimating or overestimating the reserve schedules values, which could have very serious ramifications for your association.
Funding the Schedule. Regardless of the method of funding or not funding reserves that your association decides to adopt, the associated schedule will not be able to fund the ledger if it is not adopted properly . Therefore, when the Board adopts the budget, the budget must adopt the correct schedule and the right values for the reserves to be properly funded on an annual basis. Otherwise, you’ll find yourself looking at a deficit in your resvs.
Reserve Disclosures. Regardless of the method of funding or not funding reserves that your association decides to adopt, owners and prospective buyers must be informed of the status of the reserve studies and the funding of those studies. This means that your Annual Disclosure of Association Finances should include a full copy of the most recent material (either full material or updated material) and that any time there is a Special Assessment to address reserves, the members and prospective owners are notified in writing that the Special Assessment is for reserves.
Keeping Funds Separate. Money for reserves should only be used for the specific purposes set forth in the budget and for emergencies. While it is important to have enough funds in the reserves, it is also important that the funds in the reserve accounts actually be tracked for the specific purpose that they are intended for. Otherwise, you’re just going to see the money disappear in the black hole that it is.

Florida HOA Reserve Management Case Studies

Preserving the value of a community association requires understanding and successfully managing reserves. Following are some of my most successful Florida HOA reserve planning success stories.
As we all know, every community is different. Some associations have large expenses, possibly from amenities or common structures, while others have little more than a small office and no amenities. Regardless, reserve funding is a critical issue to many community associations and their members.
My first successful HOA reserve planning story is actually a client of my colleague, Omar Chahin. Omar’s client’s community had many amenities and common structures – everything you could imagine. However, they had not funded any reserves for many years. The community board was in desperate need of a reserve study and plan. Unlike many community associations which only have gardens and other grass areas, at this community, the board did several things to save money and add value to the community.
First, they did not hire a contractor to help with landscaping, but rather, they hired a consultant to help with making the community beautiful and to maintain the value of the common elements, costs and appearance. Not only that, this community’s board, with the help of Omar and me, was able to work together with the developer to increase their monthly assessments by 2% over 10 years. This means for every $90,000,000, an association would collect $1,800.00 per month or $21,600,000 over 10 years. That’s a serious amount of money to fund reserves.
In my second successful HOA reserve planning story, I had a client with no amenities other than a small gatehouse at the entrance of the community. My client, South Harbour Village East 2, quickly realized that they wanted to be proactive to avoid any deferred maintenance. In the January 2015 HOA board meeting, the president, (quite wisely), asked my opinion and my recommendation on how to effectively fund reserves for their community. I suggested a full reserve study. The following day, the board voted to have the full reserve study done. Now, as we know, a reserve study is merely an estimate of costs for repairs and replacement of the common elements and places an estimated useful life on each common item. The reserve study also analyzes all of the common expenses and recommends an amount necessary to set aside each month to be in compliance with F.S. 720.303(6). The following is an excerpt from the reserve plan: The board also opted for a "Modified Straight-Line" method of reserving. The Modified Straight-Line method assumes that the costs of the component is spread evenly over the estimated life of the component. Think of this method sort of like dividing your yearly car insurance premium over the 12 months in the year. I suggested this method simply because it is very difficult to set up this process by the calendar year. The Modified Straight-Line allows an association to say, "We need $1,000 monthly for reserves," instead of saying, "We need $12,000 this month." That’s a difference worth mentioning since most communities do not take in $12,000 in one month. With the Modified Straight-Line method, the expense is divided across the 12 months, rather than the calendar year. This will make SOHO Village East 2 much more likely to avoid or lessen any potential deferred maintenance issues in the future.
So, as you can see, with the right types of guidance, all HOA’s can successfully plan for reserves and reserve funding.

HOA Reserve Management Challenges in Florida

While the State of Florida clearly prefers that HOAs fund their reserves, it has provided no mechanism to enable HOAs to go back in time and assess each owner to bring reserves up to a level that ensures their viability. When associations try to do this, they are met with resistance by owners who rightfully can argue they paid "low assessments" their entire time in Florida.
While normally this issue is one of the more difficult issues to deal with, especially when you try to get everyone on board, approaching the problem with a little civility can pay off in the long run. The first step is to get people involved. If the association is self-managed, have a meeting or series of meetings to educate the owners on the importance of reserves. Ask for volunteers to adopt a system for preparing annual and long range budgets together and make sure owners understand the process. Sometimes a hoa has to budget for a shortfall that will take years to correct, but usually it doesn’t take long for people to recognize the need for reserves and thus the need to fund them.
Another challenge associations often face is dealing with a turnover in the HOA Board. In other words, the current Board, administering the association, may not be the same Board that made the original commitment to properly fund reserves. In cases of turnover, the new Board may want to address the issue of reserves directly. While the new Board is responsible for acting in the best interest of the Association, a careful and public review of the financial condition of the association may lead to a consensus about the importance of funding reserves that all owners will accept. Whether that’s true or not, every owner should be asking the question "how much money does we have in reserves and how is it being spent?" If you don’t already know the answer, find out. As always, knowledge is power.
Another issue that associations face revolves around all of the money they have in reserves. The law clearly provides for the Association to spend the money in reserves and as long as it is spent for a reason described in the statute or the governing documents and after certain procedures are followed , it is not considered a "special assessment." Because that is true, some Boards have been known to take large amounts of money out of reserves and spend it on things that don’t really comply with the statutes or the governing documents. This use of reserves should be closely monitored and if any issues are identified, corrective action should be taken. Budgeting for expenses that exceed reserve funds and then spending the money on items the association did not disclose to owners should also be avoided. Just because the law defines a "reserve" item, it does not mean that an association does not have a duty to disclose planned expenditures.
Allocating reserve funds to individual units also presents another challenge for many associations. Allocation of funds on the basis of % of the cost of replacement is easy but most owners and owners associations have differing opinions about allocation. The common objection is that any allocation on a % of replacement cost basis results in the owners with larger units paying more than their share while the owners of smaller units pay less than their share because the cost of replacement does not get divided proportionately to actual costs. For condominiums, the allocation of funds to individual units is further complicated by the requirement that any allocation made by a Board of Directors must be approved by the members of the association at the next meeting and by a vote of the members. This means that the board of directors can create a budget as proposed, but until the budget passes at the next meeting, it has not been adopted. So, unless the association adopts a contingency reserve fund to cover the risk of overruns, the association could run out of money before it has budgeted for a replacement of a major component and then, after the fact, tax the owner of the unit that failed with the double whammy of paying both a special assessment to the association and having a special assessment to the association’s master association.