Large expenses arrive in every community sooner or later, and they are paid by the owners one way or another. A roof wears out, pavement fails, a pool needs resurfacing. A reserve account is the savings set aside by an association so that those costs can be paid when they come due.
This article is general information and is not legal or accounting advice.
What Reserves Are For
Two kinds of costs are covered by an association's annual budget. Operating costs, such as landscaping, utilities, insurance, and management, are paid month to month. Reserve contributions are set aside for major repairs and replacements that happen only every so often. When reserves are funded steadily, each owner pays a fair share of a roof or a repaving project over the years it is being used up.
What Happens When Reserves Are Missing
Special assessments are levied. Without savings, a large bill has to be collected from owners in a short time. Assessments of thousands of dollars per home are hard for many households to absorb.
Regular assessments are raised sharply. When the shortfall is finally addressed, the increase tends to be steep because years of contributions are being made up at once.
Loans are taken out. Borrowing can cover an emergency, but interest is added to the cost, and the debt is repaid by the owners.
Repairs are put off. Deferred maintenance leads to more damage, higher costs, and safety concerns.
Sales and financing are affected. Association budgets and reserve levels are reviewed by lenders and buyers. Weak reserves can make a unit harder to finance, harder to insure, and harder to sell.
Current owners are treated unfairly. People who own at the time of the failure pay for wear that built up under earlier owners.
What Florida Law Requires of Condominiums
Reserve rules for condominiums are found in section 718.112(2)(f) and (g) of the Florida Statutes. In summary:
- Reserve accounts must be included in the annual budget for roof replacement, building painting, pavement resurfacing, and any other item with a deferred maintenance or replacement cost above $25,000, an amount that is adjusted for inflation.
- For buildings that are three habitable stories or higher, a structural integrity reserve study (SIRS) must be completed at least every 10 years. Structural items such as the roof, load-bearing walls, fireproofing, plumbing, electrical systems, waterproofing, and windows and exterior doors are covered by the study.
- For budgets adopted on or after December 31, 2024, reserves for SIRS items may not be waived or reduced by an association that is required to have a study, and those funds may not be used for any other purpose.
- For other reserve items, funding may be waived or reduced only by a majority vote of the total voting interests.
- Reserve funds and the interest earned on them must stay in the reserve accounts and may be used only for their intended purpose, unless another use is approved in advance by a majority of the total voting interests.
Limited options were added by recent legislation, including funding by regular assessments, special assessments, lines of credit, or loans when approved by the owners, and a temporary pause in contributions after a milestone inspection in certain cases. Guidance should be obtained from the association's attorney and reserve professional before any of these are used.
What Florida Law Requires of Homeowners Associations
Reserve rules for homeowners associations are found in section 720.303(6). Reserve accounts are not required in every HOA. Once they have been established by the developer or approved by a vote of the members, they must be funded and used as the statute describes. Many HOA governing documents also call for reserves. Even where the law does not require them, private roads, gates, walls, stormwater systems, clubhouses, and pools still wear out on a schedule that can be predicted.
How the Right Amount Is Determined
The amount is set through a reserve study. Each major component is listed, its remaining useful life and replacement cost are estimated, and a yearly contribution is calculated. For condominium buildings covered by the SIRS requirement, the study must be performed or verified by a licensed engineer, a licensed architect, or a certified reserve specialist or professional reserve analyst.
A study should be updated on a regular schedule, because construction and insurance costs change quickly.
How Reserves Are Kept Healthy
- Reserves should be funded in every budget, even when an increase is unpopular
- Reserve money should not be used to cover operating shortfalls
- Reserve and operating funds should be held in separate accounts
- Balances and planned projects should be reported to owners every year
A promise never to raise assessments cannot be kept alongside a duty to maintain the property. More on this subject can be found in our post on
the importance of reserves for your condo or HOA.
Help With Budgets and Reserves
Budgets, reserve schedules, and reserve study coordination are handled for the communities managed by Condominium Associates. To talk about your association's financial planning,
contact us.
