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Reserving Funding Requirements and the Procedures for Waiving Reserves in Florida Condominium Associations

Posted on March 4, 2014 | 108 Comments

Florida law is very clear: every association must fully fund reserves unless a vote to waive reserves is obtained. This post will review the reserve funding requirements detailed in the Florida Statutes/ Florida Administrative Code and the process for waiving reserves.

Reserve Funding Basics

NOTE: There are specific requirements for developer-controlled condominiums and multicondominiums that are not discussed here.

Section 718.112(2)(f) of the Florida Statutes and Rule 61B-22.005 of the Florida Administrative Code require ALL Florida condominium associations to fund reserve accounts for deferred property maintenance and replacement projects. Specifically, a reserve account must be established for roofing replacement, property painting, asphalt paving, and any other project that has an anticipated cost of greater than $10,000.

For each identified project, the association must identify the anticipated date and cost of the project. For example, a community’s roof may have an estimated remaining useful life of 10 years and replacement cost of $50,000. Therefore, in 10 years, the association will need to have $50,000 in the roof reserve account to pay for the replacement.

The association must calculate annually the amount it needs to contribute to its reserve accounts and include this amount in the budget. Generally, associations will collect one maintenance fee payment from each unit owner monthly or quarterly and deposit it into an operating account. From there, the percentage of maintenance fees allocated to reserves per the budget is transferred into a separate reserve account. Reserve and operating funds may not be commingled for more than 30 days from the date of receipt of a maintenance fee payment. As such, if an association receives maintenance fees monthly (quarterly), they must contribute the appropriate amount to their reserve funds monthly (quarterly).

NOTE: There are two ways to look at monthly or quarterly reserve funding. Let’s look at an example. An association has a $100,000 annual budget with $20,000 (20%) allocated to reserve funding. The association requires maintenance fee payments monthly. In a given month, the association should received $8,333 in maintenance fees ($100,000/12) of which $1,667 is allocated to reserves ($8,333*20%). Let’s say in January the association actually received $7,000 in maintenance fees (several units failed to pay). The association could choose to fully fund the reserve account that month by transferring $1,667 dollars of the maintenance fees received to a reserve account. Or, the association could choose to only transfer $1,400 ($7,000*20%) to a reserve account, as they have not yet received the maintenance fees that would have contributed the remaining $267 ($1,667-$1,400) in reserve funds. The majority of associations (and management companies) choose the first option, ensuring that reserves stay fully funded. Both are acceptable per the law in my opinion. While the first option is preferable, if there is a situation where a large percentage of unit owners fail to pay maintenance fees and contributing the full budgeted monthly amount to the reserve account would hinder the association’s operations, then the second option may be best.

Florida law specifies two acceptable methods for calculating the necessary annual reserve contribution: pooling or straight line (component). We have discussed these two methods as well as the pros and cons of each here.

Recap: So, we know that condominiums must budget for sufficient reserve funds to pay for all long-term maintenance and replacement projects greater than $10,000. Further, we know that the annual reserve contribution necessary is based on the expected timing and cost of each project using one of two calculation methods (pooling or straight line). Great. But how does a board know exactly what projects greater than $10,000 will need to be done, when they will need to be done, or how much they will cost?

This is where a reserve study comes in. A reserve study is a professional engineering survey of your property. The reserve study firm will examine the property and determine what major capital maintenance and replacement projects will need to be done in the next 30 years. The study will provide expected costs of each project and expected timeframe for completion. While there is no specific requirement in Florida law that associations obtain a professional reserve study, I don’t see any way for a board to properly determine annual reserve contributions without one. I recommend a reserve study be completed every 2-3 years. Prices generally range from $3,000 – $6,000 for an initial study with a reduction in price for study updates completed by the same firm. To ensure the association always has the funds to complete routine reserve studies, I recommend including a reserve account for the study itself.

NOTE: If you need a good reserve study firm, I have had great success with Reserve Advisors.

Waiving Reserve Contributions

For those communities where, for whatever reason, fully funding reserves is infeasible, Florida law provides the option to reduce or eliminate reserve funding. Here’s how it works.

Every year, the board must present a proposed budget to the community assuming full reserve funding. The association cannot hold a vote to waive or reduce reserve funding until after a proposed budget with full reserve funding has been provided to the membership. If the board would like to put a vote on the table to reduce or waive reserves funding, then they should provide (along with the proposed budget which must be distributed 14 days prior to the budget meeting): (1) a second budget with waived or reduced reserves and (2) a limited proxy to be filled out by unit owners specifically requesting the membership to vote on the second budget. The proxy must include the following wording per Florida Statutes:

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.

To successfully reduce or waive reserve funding, a majority of the membership (i.e., 51% of unit owners) must vote in favor of the reduction/ waiver.

If by the time of the budget meeting arrives the association has received insufficient votes, the board may delay approving the budget to attempt to collect more votes. Of course, realistically, the board may only postpone so much as the budget should be approved in time for coupon book deliveries prior to year-end. Further, the limited proxies are only valid 90 days from the date of the first scheduled budget meeting. So, if your association would like to vote to waive reserves but getting sufficient unit owner participation will be a struggle, it may be worthwhile to set the budget meeting earlier in the year than you would otherwise.

If a majority vote is not obtained, the board must approve the budget with full reserve funding. If a majority vote is obtained, the board must proceed with the waived or reduced reserve funding. It is important to note that any vote to waive or reduce reserves is only effective for one annual budget. Therefore, the vote must be obtained for every year the board would prefer not to fully fund reserves.

Why Fund Reserves?

Arguably one of the biggest problems facing condominium associations today is the failure to fully fund reserves. Many associations put little to no money aside, creating project delays and large special assessments. With the primary focus being low maintenance fees, boards can easily loose sight of the big picture reasons to fund reserves.

Let’s look at our roof example. The community’s roof has an estimated remaining useful life of 10 years and an anticipated replacement cost of $50,000. If an association does not put aside money routinely in a roof reserve account, then the unit owners would likely have to pay a $50,000 special assessment in 10 years. This is a negative outcome in several ways:

  1. Hesitancy to issue a special assessment or difficultly collecting the special assessment may lead to delays in project completion and further deterioration of the roof (i.e., more roof leaks which cost money to repair.
  2. The special assessment will be a burden on the unit owners.
  3. A special assessment is unfair in that prior unit owners did not have to contribute any money to the roof (though they benefited from it) while current unit owners have to pay for the entire thing. This creates an inequitable distribution of expenses.
  4. Limited reserve funds and a history of special assessments will drive away buyers, keeping home prices lower than they otherwise would have been.

I strongly recommend that every board fully fund reserves. If a board does not feel that full funding is feasible right away, they should still contract for a professional reserve study and establish a long-term plan for achieving full funding by gradually increasing reserve funds each year.

I hope this overview of condominium reserve funding was helpful.

Please let me know if you have any questions,

Emily

 Emily Shaw is a condominium homeowner in Tampa, Florida and a Director of VERA Property Management, a firm providing full-service community association management in the Tampa Bay Area as well as consulting, financial and legal services to all Florida community associations. 

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Florida Condominium Association Board Election Procedures: Florida Statute 718.112(2)(d) and Florida Administrative Code (F.A.C.) Rule 61B-23

Posted on January 31, 2014 | 300 Comments

The Florida Statutes, in combination with the Florida Administrative Code (F.A.C), provide specific processes and procedures relating to condominium association Board member elections. These rules have been established to ensure fair elections and to provide all unit owners interested in running for a seat on the Board the opportunity to do so. Failure to follow these procedures not only creates unit owner distrust of the Board but may also result in fines pursuant to FAC Rule 61B-21. Further, the association may be required to repeat the entire election process. This post will outline the Board election process and provide guidance on issues including search committees and campaigning.

NOTE: These rules generally do not apply to timeshare condominiums. Condominiums with less than 10 units are not obligated to follow these procedures. In order to adopt different voting and election procedures , an association must obtain a 51% affirmative vote of the membership.

Regular Board elections to fill vacancies created by the expiration of a Board term must be held at the annual meeting of the membership regardless of whether a quorum is present. Any Board vacancies not filled by an election (e.g., not enough people ran for the Board, a Board member resigns) may be filled by a vote of the remaining Board members at a duly called Board meeting.

 

The Election Process

First Notice of Election

The first notice of election must be mailed, emailed (so long as an electronic consent form has been received) or hand-delivered at least 60 days prior to the annual meeting/ election day. This notice may be part of another unit owner communication such as a routine newsletter. There is no specific format in which this notice must be given but the notice should include, at a minimum:

  • The date, time and location of the annual meeting/ election
  • Details surrounding how a unit owner may become a candidate for the Board (discussed below)
  • Details surrounding the information sheet a Board candidate may submit (discussed below)

If the association fails to properly issue the first notice, the association must restart the notification process.

Receipt of Intents to Run for the Board

At least 40 days prior to the annual meeting/ election, all unit owners desiring to be candidates for the Board must inform the association in writing of their intent to run. Unit owners may send a letter (certified mail or regular mail), an email, a fax, or hand-deliver a written statement. I recommend that the association provide an “intent to run” form for unit owners to fill out. The association must issue a written notice of receipt of the unit owner’s intent to run and may deliver this receipt via mail, email, fax or hand-delivery.

At least 35 days prior to the annual meeting/ election, candidates for the Board may submit to the association an information sheet discussing their qualifications/ reasons for running for the Board. The information sheet must be a one-sided, 8.5”x11” sheet of paper. Associations may use two-sided printing when distributing the information sheets (discussed below) to reduce paper usage.

NOTE: At 40 days prior to the annual meeting/ election, if there are fewer candidates for the Board than spaces on the Board to fill, no election is necessary.

NOTE: At 40 days prior to the annual meeting/ election, unit owners that are more than 90 days delinquent in paying a monetary obligation to the association are not eligible to run for the Board. Further, felons that have not had their civil rights restored for at least 5 years are not eligible.

Second Notice of Election

The second notice of election must be mailed or hand-delivered (electronic transmission is not is NOT an option) between 14 and 34 days prior to the annual meeting/ election day. There is no specific format required for this notice but I recommend that it include:

  • Details surrounding how to cast a vote in the Board member election (discussed below)
  • Details surrounding how to fill out and submit the annual meeting limited proxy
  • Explanations of any specific items (e.g., surplus carryover, year-end financial reporting waive down) on which the association is requesting the membership vote

Along with the second notice, the association should include:

  • The agenda for the annual meeting
  • A limited proxy for quorum purposes (if interested, consider adding the vote to waive down the year-end financial reporting requirement to the annual meeting agenda and add the vote to the proxy)
  • A ballot including only the names of all candidates for the Board, listed alphabetically by surname (ensure all ballots are consistent in appearance)
  • An outer envelope labeled with the address of the property manager OR association (wherever you would prefer the votes go) and spaces for the owner’s unit number, name and signature
  • An inner envelope with nothing on the outside (unit owners that own more than one unit should have an inner envelope for each unit they own)

If the association fails to properly issue the second notice, the association must restart the notification process.

Voting in the Election

To cast a vote in the election, a unit owner must write their name, unit number and signature on the outside of the outer envelope. They must select their chosen candidates using the ballot (nothing else is to be written on the ballot, no write-in candidates are allowed) and place the ballot in the inner envelope. The inner envelope(s) must be placed into the outer envelope and should be mailed or hand-delivered to the association/ property manager. Unit owners may cast their votes using the same process at the annual meeting up to the point that outer envelopes begin to be opened. Once a ballot is submitted, it cannot be rescinded or changed.

NOTE: F.A.C has specific rules for voting machines.

Counting Votes

The vote count must be conducted at the annual meeting in a location that is visible to all attendees. Once all ballots have been collected, the names and unit numbers listed on the outer envelopes will be checked against a list of eligible voting by an impartial committee (i.e., no Board members, candidates, or family members of Board members/ candidates). Any outer envelopes without signature shall be marked with the word DISREGARDED and not included in the vote count. Once completed, all inner envelopes should be removed from outer envelopes and placed in a separate receptacle by the impartial committee. The inner envelopes will then be opened. Any inner envelopes with more than one ballot inside should be marked as DISREGARDED and not included in the vote count. The results should be announced at the annual meeting.

NOTE: In order for an election to be valid, at least 20% of the membership must have voted. If not achieved, the association must begin the election process again.

Runoff Elections

If there is a tie vote that creates the need for a runoff election, the association must send a Notice of Runoff Election during the 7 days after the annual meeting/ election. This notice must include a new ballot listing the tied candidates’ names, the candidates’ information sheets, as well as inner and outer envelopes. All previous voting and vote counting procedures must be followed. The runoff election must be held 21-30 days after the annual meeting/ election.

Fair Election Concerns

If unit owners are concerned that the association is not going to run a fair election, an election monitor may be petitioned using DBPR Form CO 6000-9. The F.A.C requires that the greater of 15% of the membership and 6 members sign the petition.

If a unit owner wishes to challenge an election, they must do so using the Department of Business and Professional Regulation’s complaint form within 60 days of the election results.

Election Official Records

The first notice, second notice, intents to run, information sheets, envelopes, and ballots (including those marked as DISREGARDED) are considered official records of the association and must be maintained for at least one year from the date of the election.

Search Committees and Campaigning

The F.AC is very clear that committees designed to officially nominate potential candidates for the Board (“ nominating committees”) are strictly prohibited. That being said, there is no reason why a Board can not put together a search committee responsible for identifying unit owners that may be good Board members and discussing with them the possibility of running for the Board. Further, there is nothing prohibiting current Board members or the association manger from encouraging certain unit owners to run for the Board.

Campaigning for Board elections is allowed per the FAC and the Florida Statutes; however, it is in the best interest of the Board so set up some guidelines regarding campaigning. For example, the Board may identify certain areas (e.g., an information board in a common area) that candidates can post campaign ads so as to avoid a candidate papering the property with “Vote for Me” posters.

NOTE: The community’s manager should remain impartial as it relates to Board elections. If your manager is telling unit owners how to vote in an election, consider submitting a complaint to the DBPR regarding their behavior.

If you have any questions about the above process, do not hesitate to comment or send me an email. Templates for any of the notices or forms discussed above are available upon request.

Emily

Emily Shaw is a condominium homeowner in Tampa, Florida and a Director of VERA Property Management, a firm providing full-service community association management in the Tampa Bay Area as well as consulting, financial and legal services to all Florida community associations. 

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Posted in Board Meetings, Elections, Florida Administrative Code, Florida Statutes

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Florida Condominium Association Board Members Voting By Proxy

Posted on January 29, 2014 | 14 Comments

I recently received a question asking if Board members have the right to vote by proxy. The Board member that posed this question was going to be out of town for an important Board meeting and wanted to know if he could give another Board member a general proxy to vote on his behalf.

According to Florida Statute 718.111(1)(b), Board members may not vote by proxy. Further, Board members not present at a meeting may not provide a vote in writing. The only real option for a Board member that is not physically at the meeting location is to vote via phone or webcam. Florida Statute 718.111(2)(b)(5) requires that Board members joining a meeting via phone must be put on speaker such that all meeting attendees can hear the Board member.

If an absentee Board member is only interested in one particular agenda item, there is nothing prohibiting the Board member from calling into the meeting for that vote only so long as a quorum of the Board is otherwise met.

Emily

Emily Shaw is a condominium homeowner in Tampa, Florida and a Director of VERA Property Management, a firm providing full-service community association management in the Tampa Bay Area as well as consulting, financial and legal services to all Florida community associations. 

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Florida Statute 718.111(13): Everything You Need to Know About the Florida Condominium Association Year-End Financial Reporting Requirement

Posted on January 27, 2014 | 54 Comments

As it is January once again, it is time for condominium associations to produce their year-end financial reports.  As discussed in our post on accounting records, every condo association must produce a year-end financial report of some kind. The type of financial report required depends on the annual revenues and/ or the size (i.e., number of units) of the association. This blog post will review the specific requirements outlined in the Florida Statutes and the Florida Administrative Code (FAC) relating to the preparation and distribution of the year-end financial report, provide guidance on contracting for or completing the reporting requirements, and discuss voting to waive the year-end reporting requirement.

The Year-End (“YE”) Financial Report

 Per Florida Statute 718.111(13):

  • An association that operates fewer than 50 units, regardless of the association’s annual revenues, shall prepare a report of Cash Receipts and Expenditures.
  • An association with total annual revenues of less than $150,000 shall prepare a report of Cash Receipts and Expenditures.
  • An association with total annual revenues of $150,000 or more, but less than $300,000, shall prepare Compiled Financial Statements (“Compilation”).
  • An association with total annual revenues of at least $300,000, but less than $500,000, shall prepare Reviewed Financial Statements (“Review”).
  • An association with total annual revenues of $500,000 or more shall prepare Audited Financial Statements (“Audit”).

Report of Cash Receipts and Expenditures

  • Must report cash receipts and disbursements from each of the Association’s operating and reserve accounts.
  • Must report cash receipts by classifications at the association’s discretion (e.g., Maintenance Fees, Special Assessments, Late Fee & Interest, Fines, Rental Income).
  • Must report cash expenditures by the following classifications: Security, Profession and Management Fees, Taxes, Recreational Facilities, Refuse Collection and Utilities, Law Care, Building Maintenance, Insurance, Administration/ Salary and Reserve Contributions by Reserve Account. While these classifications are specifically listed in the statute, they are not all inclusive and the association may add any additional classifications they feel are relevant.

Per Rule 61B-22.006 of the Florida Administrative Code:

Compilations, Reviews and Audits must be completed on an accrual basis according to Generally Accepted Accounting Principles (GAAP). Further, Reviews and Audits must be completed by a Certified Public Accountant (interestingly, a CPA is not specifically required for Compilations).

This report must include the following financial statements:

  • Accountant’s or Auditor’s Report
  • Balance Sheet
  • Statement of Revenues and Expenses
  • Statement of Changes in Fund Balances
  • Statement of Cash Flows

Notes to the financial statements must include the following reserve funding disclosures:

  • The beginning balance in each reserve account.
  • Total additions to each reserve account.
  • Total amounts expended or removed from each reserve account.
  • The ending balance in each reserve account.
  • Amount required to fully fund each reserve account, or pool of accounts (if using the pooling method), over the remaining useful life of each asset.
  • How reserve items were estimated (typically by a reserve study).
  • The date the reserve estimates were last made.
  • The association’s policies for allocating reserve fund interest (i.e., interest held in a separate reserve account, applied pro-rata to each reserve account, or included in the reserve pool as is the case when using the pooling method).
  • Whether reserves have been waived during the period covered by the financial statements.
  • Any developer converter reserve accounts.

Notes to the financial statements must also include the following other disclosures:

  • How incomes/ expenses are allocated to unit owners (typically by a unit owner’s percentage ownership in the common elements).
  • The purpose and amount of each special assessment (if any) and how the funds were used.
  • The expenses related to limited common elements that are charged to specific unit owners.
  • Disclosures relating to guarantees pursuant to Section 718.116(9), F.S (see the FAC for more details on these disclosures).

Report of Cash Receipts and Expenditures must be completed using a cash basis and must include the reserve funding disclosures, special assessment disclosures and limited common element disclosures listed above.

NOTE: For all YE financial reports, the FAC has specific guidelines for multicondominium associations.

Required Timeframe for Completion and Distribution

Within 90 days of fiscal YE (not calendar YE though most are one and the same) the association must have completed or have contracted for the preparation of the required YE financial report. Within 21 days after the financial report is completed, but not later than 120 days after the end of the fiscal year, the association must mail or hand deliver a copy of the financial report (or a notice that the report is available upon written request) to each unit owner. This must be done without charge to the unit owner. Note that this particular Florida Statute does not allow for electronic distribution (e.g., email, via website) of the financial report. 

Completing The Year-End (“YE”) Financial Report

 A CPA must complete Audits and Reviews per the FAC.  Any qualified accountant may complete Compilations though I would still recommend a CPA. These services can be very expensive ($1,000 – $6,000) so be sure to obtain competitive bids for your YE financial report. Further, be sure that any CPA or accountant the association hires has experience with condominium associations.

If your association’s fiscal year corresponds with the calendar year (January – December), I strongly recommend contracting with a CPA in November or December to ensure the CPA will have time to complete your association’s financial report within 120 days of year-end (tax season typically keeps CPAs very busy). Contracting with a CPA early also helps to ensure the association obtains the best price (CPAs often increase prices for rush projects).

Boards of Directors or associations’ management companies often complete the Cash Receipts and Expenditures report. This report is relatively easy to complete if your bookkeeping has been well kept and you know the rules discussed in this blog. That being said, it is my experience that management companies do not accurately complete this report (particularly the disclosures). Be sure to review your Cash Receipts and Expenditures report in detail before disseminating to the community. We have templates for the Cash Receipts and Expenditures report. Please send me an email if interested. 

Waiving the YE Financial Reporting Requirement

Florida Statute Chapter 718.111(13)(d) allows condo associations to “waive down” their reporting requirement for three consecutive years. What this means is that the membership of an association that is required to have an Audit may vote to complete a Review, Compilation or report of Cash Receipts and Expenditures instead. Likewise, the membership of an association that is required to complete a Review may vote to complete a Compilation or a report of Cash Receipts and Expenditures instead. And so on. It is a common misconception that associations may vote to waive the YE financial reporting requirement all together. This is not allowed.

A majority vote of a properly called meeting of the association’s membership must be obtained in order to waive down the YE financial reporting requirement. This means that a quorum of unit owners must be present at the meeting (either in person or by proxy) and at least 50% of those owners present must vote to waive down the requirement. As a quorum is required to hold the association’s annual meeting, I recommend including the vote to waive down the financial reporting requirement at the annual meeting. This will save the Board the hassle of obtaining two quorums in one year and will save the Association money on printing, envelopes and postage. Specifically, the association may consider including language similar to the following on the limited proxies that are mailed to the membership for the annual meeting:

WAIVER OF YEAR-END FINANCIAL REPORTING REQUIREMENT

I cast my vote to waive the requirement for a <<Compiled, Reviewed or Audited>> financial statement as required by Chapter 718.111(13) of the Florida Statutes and provide in lieu thereof a <<Compiled financial statement, Reviewed financial statement, or Report of Cash Receipts and Expenditures>> in accordance with Chapter 718.111(13) of the Florida Statutes and 61B-22.006 of the Florida Administrative Code.

YES ________ NO ________

This vote is only effective for the current and subsequent fiscal years (e.g., the vote to waive the 2013 reporting requirement must take place in 2012 or 2013).

Per FAC Rule 61B-22.006, the minutes of the meeting during which the waive down vote took place must reflect the number of votes cast to waive the requirement as well as the type of YE financial report that the association will prepare.

I hope this overview has been helpful. If you have any questions, please feel free to comment or reach out via email.

We are pleased to offer year-end financial reporting services (Audits, Reviews, Compilations and reports of Cash Receipts and Expenditures) to all Florida condominium associations through our management and consulting firm, VERA Property Management. Feel free to contact us directly for a quote.

Emily

 Emily Shaw is a condominium homeowner in Tampa, Florida and a Director of VERA Property Management, a full-service community association management and consulting firm.

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