Question: The board of directors of my homeowners’ association has decided to “roll over” the surplus funds from our 2013 budget into a non-statutory pooled reserve account. Last year they overstated the amount necessary for the budget in order to have a surplus and I believe they are doing the same thing this year. It appears they are doing this to create a reserve account without the owners’ approving it. The board says they can do this because it is a non-statutory pooled reserve and no owner vote is required. Is this proper? M.Y. (via e-mail) Answer: Unlike the Florida statute applicable to condominiums, which specifically mandates certain reserve accounts, the Florida Homeowners’ Association Act does not expressly require reserves. Rather, the statute identifies what are often referred to as “HOA statutory reserves”, in Section 720.303(6)(d). HOA statutory reserve accounts are those reserve accounts established either initially by the developer, or mandatory reserve accounts implemented by an affirmative vote of the membership. HOA statutory reserves may be used only for the specific reserve purpose, unless there is a vote of the membership authorizing the funds use for a non-scheduled purpose. Further, the statute also provides that the amount necessary to fund statutory reserves must be based on a formula that uses the estimated useful life of the reserve item and the estimated replacement cost or deferred maintenance, similar to condominium associations. However, if the HOA maintains a “non-statutory reserve account”, meaning the reserve account was not originally created by the developer or implemented as a mandatory reserve account by an affirmative vote of the membership, then the requirements of the statute do not apply. In such a case, and always subject to any guidance in the governing documents, the board can decide how much is necessary to include in the reserve account, as part of the budgeting process. Further use of non-statutory reserve funds is not limited to the reserve purpose. Rather, such “non-statutory reserves” accounts are really no different than a “contingency” line item in the operating budget. Intentionally overstating anticipated expenses in the budget, in order to roll the surplus into a dedicated account, is not consistent with good accounting practices, nor consistent with the statute. Section 720.303(6)(a), provides that the proposed budget “must reflect the estimated revenues and expenses for that year and the estimated surplus or deficit as of the end of the current year.” Accordingly, the budget should be based on the association’s best efforts to determine its expected expenses and revenues over the coming year. Finally, the association should consult with its accounting professional and legal counsel in structuring any rollover vote, as the failure to do so can occasionally present potential adverse income tax consequences.
Condo cannot collect safe harbor from mortgagee after foreclosure
Community Update, Volume 4, 2014