Does My Association Require a Reserve Study?
How much is an association required to put into reserves and are they required to get a reserve study? What are condominiums are statutorily required to do regarding reserves?
Defining and Explaining Reserve Accounts
Condominium associations must have reserve accounts for painting, paving, the roof, and any other item that has a deferred maintenance expense or replacement cost that exceeds $10,000. See Fla. Stat. § 718.112(2)f.2.a. This section further states, “[t]he amount to be reserved must be computed using a formula based upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item.”
Associations can reserve using either of two methods: the straight-line (a/k/a component) method, or the pooled (a/k/a cash flow) method. The difference in the methods is that in the straight-line method, funds may only be used for the specific purpose intended and for which they have been reserved. In the pooled method, however, the funds may be used in any amount for any of the intended purposes.
In other words, for the component method, each item has its own dedicated funds. So, an Association might have $50,000 saved for the roof, $100,000 saved for painting, etc. If the roof needs to be replaced at a cost of $100,000, it could use the $50,000 in reserves for the roof, but it could not use any of the $100,000 marked for painting without approval from the owners.
Conversely, if the Association were using the pooled method, it would have $150,000 in reserves for painting and/or roof, etc. So, in the same scenario as above, it could pay the entire amount from that account and leave $50,000 for any other identified reserve item.
Reducing or Waiving Reserves
The association may waive or reduce the funding of reserves. If an association is not going to fund reserves or intends to reduce the funding of reserves, it must obtain an affirmative vote from the ownership to waive this provision.
The downside for waiving or reducing reserves is obvious. If the association is not budgeting for and fully funding reserves, where will it get the funds for those types of capital expenditures when they become necessary? The answer is through the special assessment process, which can be significant, even when shared by the members.
Obtaining a Reserve Study
Condominiums are not statutorily required to obtain formal reserve studies. It is the responsibility of the board of directors, however, to ensure that reserves are computed “using a formula based upon estimating the remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item.” In short, the board needs 1) accurate estimates of the remaining useful life of each element, and 2) the estimated cost of replacement for each element.
Board members are not required to have any level of basic knowledge or proficiency in condo law to get elected to serve on their association boards. Thus, directors do not need to know how to estimate the useful life of a roof to be elected and serve. Directors are, however, expected to know what they don’t know, and hire the right people to give the proper advice.
In some communities, directors might be able to make those determinations on their own. In communities with just about any level of complexity, however, it is prudent to hire an expert to give a qualified opinion on these elements (i.e., obtain a reserve study).
A reserve study typically includes a complete site inspection to identify all common elements, assess the condition of the common elements (including photographs) and a calculation of the remaining life of the common elements.
The difference in a reserve study and an engineering study is that the engineering study is not limited to visual inspection of the common elements but involves destructive testing to determine the structural integrity of the common elements.
If your association is concerned about the amount of its reserves, here is an example to use in considering what to do:
Example: A huge condo has not funded reserves. What should it do? Ideally, it should determine what its governing documents say about reserves, confirm whether reserves have been funded at all and use the numbers to determine how much is needed, engage the services of a company to perform a reserve study or engineering study (depending on the age of the common elements or any concerns regarding structural integrity), and review the calculation of remaining life expectancy versus repair/replacement costs.
If the roof has 10 years of life left and is going to cost $100,000 to replace, then the proper calculation is the cost divided by number of years (life expectancy), divided by the number of members (10 units) to be assessed. Therefore, the Association needs to put $10,000/yr into reserves. Divide that number equally among the units, and each unit owner is assessed $1,000/yr.
If an association obtains a reserve study and the directors don’t like the results, are they bound by it? Since there is no requirement to obtain a reserve study, there is no requirement to utilize it. On the other hand, if a board elects to ignore the study, the directors better have reasonable basis for taking action contrary to the results of the study. Further, the Association’s inability to fully fund reserves at the amounts stated in the reserve study cannot form the basis for disregarding the study. Rather, the Association should keep the same proposed schedules, but ask the owners to vote to waive fully funding reserves.
In summary, although condos are not required to obtain a reserve study, getting a formal reserve study and then periodic updates to it is money well spent and helps directors fulfill their fiduciary duty to the owners.