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Florida Condo & HOA Legal Blog News & Updates on Condo & HOA Laws & Legislation in the State of Florida

Board Talking About Switching Over to “Pooled” Reserves

Posted in Assessment Collection, Budgets, Reserves & Financial, Reader Q&A

Question: Our board of directors has been talking about switching over to “pooled” reserves. Can you explain what this means? L.A. (via e-mail) Answer: The concept of funding condominium reserves through the “pooling” method, sometimes also known as the “cash flow” method, came into vogue about seven years ago. The Florida Condominium Act requires an association to include as part of the annual budget, a reserve schedule. Reserves must be set aside for roof replacement, pavement resurfacing, building painting, and any other item of association responsibility with a replacement cost or deferred maintenance expense of $10,000.00 or more. Traditionally, the reserve schedule accompanying the proposed budget has used the “straight line” method of calculating required reserves. For example, assume that the roof on a condominium building has a twenty year useful life, is ten years old, and will cost $100,000.00 to replace. Further assume that the current amount of money in the roof reserve is $50,000.00. The association will need to collect $5,000.00 per year, over the next ten years, to accumulate another $50,000.00 so as to “fully fund” the roof reserve. This is traditional, “straight line” funding of reserves. Similar calculations are then made for all other required reserve items (building repainting, pavement resurfacing, and other items with a replacement cost or deferred maintenance expense in excess of $10,000.00), and the annual contribution required to “fully fund” the reserve account is thus arrived at. If no vote of the unit owners is taken, the board of directors is obligated to collect “fully funded” reserves as part of the monthly or quarterly assessment.  The law does permit unit owners to vote to reduce the funding of required reserves, or waive funding of reserves altogether. The law was also amended in 2008 to require that any reserve reduction or waiver vote include bold-faced disclaimer language on the proxy and ballot. It is important to understand that when reserves are funded on the straight line method, whether fully funded or partially funded, the law provides that reserve funds can only be used for their intended purposes. For example, money could not be taken out of the roof reserve account to pay for painting the building. However, the association can use reserve funds for non-scheduled purposes if approved in advance by a majority vote of the unit owners. The vote required to waive or reduce reserve funding and the vote to use reserves for non-scheduled purposes (which are technically, two separate votes), each require approval of a majority of the voting interests present, in person or by proxy, and voting at a duly noticed meeting of the association. As with the reserve reduction/waiver vote, a vote to use reserves for non-scheduled purposes must also be accompanied by bold-faced disclaimer language on the meeting proxy and ballot. The concept of “cash flow” or “pooled” reserve funding is a bit different. Under pooled reserves, it is still necessary for the reserve schedule which accompanies the annual budget to set forth required reserve items (roofs, painting, paving, and other items with the replacement cost/deferred maintenance expense of more than $10,000.00). Further, the “cash flow” reserve schedule must still disclose estimated remaining useful life and replacement costs for each reserve component. The main difference in the cash flow presentation of reserves is that instead of each reserve line item having its own fund balance, there is a “pool” of money in the reserve fund, which is available for costs affiliated with any item in the reserve pool. For example, the painting and roof reserve monies are “pooled” into one fund, so a vote of unit owners is not required for expenditures from the fund, as would be the case in a straight-line reserve scenario where monies from one reserve account would be used for another reserve purpose. It is important to note that even with pooled reserves, a vote of the unit owners is still required to use reserve funds for operating purposes, or for any expenditure involving items that are not part of the “pool”. The pooling method of reserve funding attempts to predict when a particular item will require replacement or deferred maintenance, and reserves are scheduled and funded so as to insure that a necessary amount of funds are on hand when the work needs to be done. Theoretically, monthly or quarterly reserve contributions can be lowered, while still avoiding special assessments. Of course, what works in theory does not always work when placed in human hands. In addition to needing a crystal ball to predict exactly when a reserve expenditure will need to be made, reserve contributions may be substantially higher in certain years, such as when the fund is depleted for the replacement of a required item, and there is a short useful life for the next asset that needs to be replaced. Personally, I neither encourage or discourage association clients from switching from straight line funding of reserves to cash flow. There are pros and cons, and it ultimately boils down to a matter of choice. Clearly, straight line funding is the more conservative funding mechanism. The law is not entirely clear as to how the switch from straight line funding to cash flow funding is supposed to occur. I believe it is the position of the Division of Florida Condominiums, Timeshares, and Mobile Homes that the board of directors has the authority to present pooled reserves, even when straight line reserve funding has typically been used in past years. However, I also believe that it is the Division’s position (and I believe consistent with the law) that if funds that were previously deposited in straight line accounts are going to be put into the “pool”, then majority approval of the unit owners is required. Accordingly, as a practical matter, every association which switches from straight line funding of reserves to cash flow funding will need to take a vote, so that the existing money in the straight line accounts can be put into the “pool.”  

  • Pat Kelly

    We are a HOA of 8000 parcels, and we do not have Statutory required membership or developer reserves. The Board has established Board reserves, but believes that because they are Board reserves, they are not required to identify the components of the reserves, i.e., roof replacement, repainting, etc. and they are able to move, remove or change these components including moving funds into operating funds. Are they correct? What responsibility do they have to inform the membership of what the reserves are for?

  • Leo Cruz

    Are condominium associations required to have a “balanced budget” for each fiscal year?

  • John Hamill

    I’m hung up on the requirement for a Reserve Schedule.
    If you have a common element reserve with a number of items do you need to show each item in your yearly reserve budget?
    Also if you setup additional reserve accounts (let’s say Grounds Reserve) are these additional reserves need to be handled the same as the required reserves?

  • Michael Burris

    We switched from the line-item basis to the cash flow basis a year ago but maintain our older straight line reserve accounts until depleted. A few of the older reserve accounts are in a deficit position. Since we also have the pooled account, is it acceptable to have deficit positions in the older accounts or do they have to be funded either through assessment or through transfer from the pooled account?

  • Stephen

    My name is Stephen and I live in a HOA under ss 720, Florida. I have a question regarding Reserves, I would like to ask you and I would appreciate your help.
    I live in a HOA with houses and I would like to know at what time do we start putting money in the budget for reserves. Our clubhouse is not completed yet and it may take another year or so. I was told that you don’t have to put money into reserves until it’s completed and a CO has been issued by the city.
    Money is tight RIGHT now so we are not in a hurry to put money in the budget for this right now. When the time comes we know we will have to and we are ok with that. We live in a development where the builder went bankrupt in 2007. We have 241 homes completed at build out we were to have 999 homes.
    They did start our clubhouse and it’s about 70 % completed and it’s been sitting there for over two years with no date for completion in sight.
    Do we have to put money into reserves for over 3 years when the clubhouse is not compeleted, a CO has never been issue.
    Are there Laws,Rules or guidelines that control this, if so would you please site them.
    Thanking You In Advance,
    Stephen Cluney

  • Stephen

    My name is Stephen and I live in a HOA under ss 720, Florida. I have two questions I would like to ask you and I would appreciate your help.
    What are your thoughts about awarding a Landscape contract valued about $500,000. In ss720 it says that any contract over $100,000 should go out for bids. Well, the question I have is a Landscape Contractor here was awarded with same Landscape contract in 2008 for about $340,000, a few bids were received on this one. Our HOA board just awarded the 2009 contract to them again for about $500,000 without going out for bids.
    The way they did it was to reference the first contract awarded in 2008 and just amended that contract and called it a Renewal Amendment. This Renewal Amendment was a increased in cost for the same services and they added a few more services with additional cost totaling for both of $160,000.
    Do you think this is correct, shouldn’t they have gone out for bids? Is the Renewal Amendment considered a contract the way they did it. Is this a violation of ss720.
    I think they did it this way because they didn’t want to go out for bids. They are very friendly with this contractor. I also found out that another contractor did submit a bid in 2008 for about 50% less then what they awarded this contractor for. I called the other contractor that submitted the other bid and he said his bid still stands at a savings of 50%, $250,000.
    What should we do to correct this matter, any advise.
    Thanking You In Advance,
    Stephen Cluney

  • http://www.theroofstore.net Aanthony R Meurer

    A former state certified Life Health variable and fixed annuity agent,EMT, Firefighter now licensed for the past 15 years in specialty contracting, manufacturing, member of the Wall Street Journal business opportunities national, and current USCG Marine officer, in my travels, training and real life experiences with many variations of contracts, legal challenges, political wrangling, I have found that there is much home running going on when bidding in the condominium demographic within South Florida.
    The state of Florida has not made the law strict enough regarding estopel of a valid proposal, offer and acceptance never having a chance to engage or perform within the present structure for non profit Florida condominium associations.
    The acts of the participants on both sides of the equation are in many instances criminal, for example collusion for financial benefit is illegal.
    There are a record number of complaints over this kind of undertaking not to mention the recent disconcerting rash of complaints that assessment money collected after the annual collection goes completely unaccounted for and no one is going to jail.
    We can only hope that eventually the Florida legislature will have to recognize there is a serious problem and pass the kind of rules of law required to detour one from straying into the gray.
    When it comes to fair dealing bidding or negotiating contracts with not for profit condominium associations in our beautiful state of Florida make sure you document everything in anticipatory breach correspondence, with a little tact know one will know that you have covered your concerns by just sending a short email message verifying any devil in the details.
    You would be surprised how this extra effort described documenting statements during the period of preliminary discussions, or substantive negotiations curtails the kind of bad behavior we could all do better without.
    Regards
    Anthony R Meurer
    http://www.theroofstore.net/about-us.html
    principalmedia@bellsouth.net

  • Russ Reinke

    At a recent Board meeting it was announced by the President that they had approved a contract with a contractor to pave roads in several sections of the HOA. Cost would be about $69,000.00, and would be paid for from reserves.
    The approved budget for the year 2010 does contain a line item expense from that reserve for that approximate amount.
    President and Treasurer contend that since the Budget was approved, they do not need to Board appeoval to proceed and spend that money.
    Several Board members believe the Budget is a gudeline and that actual monies spent from Reserves must be approved by the Board.
    Is rhe Board President correct?
    Response: Generally all contracts require the approval (affirmative vote) of the Board of Directors and the President does not have the unilateral authority to sign a contract unless the board approves.

  • Jay

    At our upcoming 2010 annual meeting, the Board is asking homeowners to respond to a voting initiative authorizing the expenditure of thousands of dollars from pooled reserves for the years 2008-2009 in connection with litigation costs. The reserve study includes the component that is the subject of the litigation, its useful life, etc. I have contacted the Board President and Treasurer to state that the 2008-09 expenses are an unspecified use and required the affirmative approval of a majority of homeowners in advance. They say no.
    Can you clarify?

  • Bill Filip

    Our association has a pooled reserve.
    I’m the Finance Committee Chair and have a question.
    If we have a new capital purchase or new deferred maintenance item that needs to be added to the pool, and the expenditure requirement is immediate, can it be funded from the pooled reserve immediately as long as we increase the reserve funding next year sufficiently to assure no future year balance is negative?
    Clearly, in a fully fund, straight line structure, this would be taking fund from other reserves and require a member vote.

  • Jim

    In an HOA, we have had Reserve funds set up years in our budgets. We now have a Board that is transferring these funds around because they say that our HOA did not set up our Reserve funds at the time the developer transfered the association ownership to our HOA and we did not set up Reserve funds by getting a majority vote of the residents at a special meeting, therefor the Board has the jurisdiction to use these funds as they so desire.
    Doesn’t the fact that the HOA has been following accounting principles for years have any valid claim in this matter?
    Jim

  • Med Espinosa

    In our Condominium, the Bylaws provide for the owners to approve the Annual Budget and Reserves at our Annual Meeting.
    Question: If the owners approved the proposed Reserves using the traditional “Straight Line Method” does the Board have the authority to change the approved Reserves for that year to the “Pooled Method”.
    Thank you,
    RESPONSE: It is not appropriate for us to respond to specific legal inquiries in this forum. If the association does not have counsel the Division’s enforcement section may be of assistance.

  • http://www.facebook.com/salvatore.macaluso.140 Salvatore Macaluso

    smacalu@aol.com would like toknow:
    where can i get the pros and cons of pooling

  • http://www.facebook.com/salvatore.macaluso.140 Salvatore Macaluso

    WHERE CAN I GET THE PROS AND CONS OF POOLING

  • http://www.floridacondohoalawblog.com/ Lisa Magill

    You really need to go over the numbers.  Pooling gives you far greater flexibility and most of the time it seems to require less in up-front contributions.  The straight line method is still used by many associations.  Sometimes board members like the fact they have limits on use of the association’s funds.