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RESERVES:
SHOULD WE FUND THEM OR SHOULD WE WAIVE THEM?
By
Eric Glazer, Esq.
Published
November 26, 2012
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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