RESERVES: SHOULD WE FUND THEM OR SHOULD WE WAIVE THEM?

It’s the time of year when Boards are concentrating on passing the association’s new budget.  In a Florida condominium, the budget must contain fully funded reserve accounts that shall go into effect, unless a majority of a quorum of unit owners vote to waive or reduce the funding of reserves.  Reserves must be kept for painting, pavement and roof replacement and for any other item that is expected to cost $10,000.00 or more.

In an HOA – The budget may include reserve accounts for capital expenditures and deferred maintenance for which the association is responsible.  There are 3 ways to establish reserve accounts in an HOA:

  1. If they were initially provided for by the developer;
  2. a majority vote of the membership;
  3. a decision by the Board of Directors to include reserves in the budget, however, this decision is subject to any limitation on the increase of assessments in the governing documents.

The question is…in an economy where every dollar is hard to come by, is it better to waive reserve funding and hope for the best, or bite the bullet and put away a few bucks each month just in case a major repair is needed?

Another year has gone by in Florida without a major hurricane.  As a result, we may have become less fearful of a storm actually striking and wreaking havoc on our communities and on our wallets.  At the same time however, if we are honest with ourselves, we know that it’s only a matter of time before an Andrew, Charley or Wilma strikes again, and when it does, the financial effects can be devastating.

Many senior citizens are opposed to funding reserve accounts because they don’t want to pay for the replacement of a roof in twenty years, when they may not be alive any longer to see the actual replacement.  While I understand the logic, it can also be akin to playing Russian roulette should “the big one” destroy the community in which they live while they are alive.

After Hurricane Wilma, many people that lived in Florida condominiums were shocked to learn that their association was forced to pass huge special assessments to pay for hurricane deductibles and related repairs, because the association had no reserve accounts.  Unit owners, including many senior citizens, learned quickly that failure to pay these special assessments can result in a lien and foreclosure lawsuit and the ultimate loss of their home.  Sure, they voted against the funding of reserves, but never dreamed that by doing so, they may be voting in favor of their own foreclosure.

As a result of the foregoing, The Florida Legislature passed a new law that requires the association to put the following language in capitalized, bold letters in a font size larger than any other, on any proxy form that owners must sign when they vote in favor of waiving their reserve accounts or using reserve funds for other purposes:

 

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.

Now, if you are going to vote in favor of waiving reserves, you must acknowledge that you may be sealing your fate and creating your own financial doom.

If any of you have experienced the horror of not having a reserve account when needed, please share your story so that others may learn what can happen to them.  Of course, if the reverse is true and your association was lucky enough to have that pot of gold available when needed, we certainly would like to hear from you as well and whether or not you would have been able to afford the hit of as large special assessment had the reserve account not existed.

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