Understanding the Florida HOA reserve fund laws that govern homeowners associations and condominiums is important. When board members understand these laws, they can ensure compliance and avoid potential liability.
The Purpose of Florida HOA Reserve Fund Laws
To any homeowners association, the reserve fund is a critical component of financial stability. Unfortunately, many HOAs and condominium associations in the country fail to maintain a reserve fund. As such, when major expenditures are needed, associations are left to raise regular fees or levy significant special assessments.
In Florida, there are strict reserve fund laws. Legislators in the Sunshine State passed more stringent requirements for association reserves, particularly for condominiums, in 2022. The Florida Legislature sprang into action following the collapse of the Champlain Towers South condominium in Surfside. The collapse resulted in the deaths of 98 people and injured others.
The collapse of the Champlain Towers could have been prevented. According to investigations, the long-term degradation of the building’s structural support was a significant contributor to the condominium collapse. The problems were noted in 2018 and again in 2021, only much worse. Although the condo association approved a $15 million remedial works program before the tragedy, work had not commenced, and the collapse took place.
The importance of HOA reserve funds is abundantly clear. Associations can quickly liquidate their reserves to pay for major repairs and replacements of their components. An HOA’s reserves can protect the association and its residents when managed and expended properly. Florida’s stricter laws also help steer associations on the right path.
What are Reserve Funds?
A reserve fund consists of funds allocated for future costs. For community associations, these funds are used to pay for major repairs, maintenance, and replacements of common elements in the future. It is essentially a bank account used to store the association’s savings. Given that an HOA should have quick access to the money, it is important to have a highly liquid reserve fund.
Operating Fund vs Reserve Fund
Although there is no difference between reserves and reserve funds, there is a distinction between operating and reserve funds. For an HOA, the reserve fund pays for the cost of major replacements and repairs of common elements in the future.
For example, if the clubhouse’s roof is set to reach the end of its useful life in 10 years and the cost to replace it is $10,000, an association must set aside $1,000 per year so that it has the money to pay for the replacement when the time comes.
In contrast, an operating fund consists of an association’s money for day-to-day operating expenses. Regular expenditures fall under this umbrella. Common operating expenses for an HOA include office supplies, management fees, insurance premiums, cleaning fees, etc.
An HOA should keep separate accounts for its operating fund and reserve fund. This way, board members can keep track of the money separately, and there is a reduced risk of commingling the funds.
Florida HOA Reserve Requirements
Here is a breakdown of the Florida HOA reserve fund laws that associations must know about.
Accounting Records
According to Section 718.501(1)(c), an association’s accounting records must include structural integrity reserve studies. A condo association must maintain these reserve studies for at least 14 years after completion of the study. Other accounting records include but are not limited to financial reports, accounting statements, reviews, and audits.
Condominium Financial Reporting Rules
According to Section 718.111(13), a condo association must have “standards for presenting a summary of association reserves.” These standards must be included in the association’s financial reporting rules. Additionally, an association should consist of a good faith estimate of the yearly amount of reserve funds that the association will need to fund each line item of the reserves fully. This estimate should use the straight-line accounting method.
According to Section 718.112(f)(2), an association’s annual budget must include reserve allocations for painting, pavement, roof replacement, and other items with a replacement cost of more than $10,000. The reserve amount should follow the association’s most recent reserve study. An association must complete this study by December 21, 2024.
If an item’s reserve amount does not appear in the association’s initial or most recent study, the association must compute the amount using a formula based on the estimated remaining useful life and the estimated cost of replacement or deferred maintenance expense.
The same applies if the association has yet to complete a reserve study. Every year, the association may adjust the assessments for replacement reserves to consider the changes in useful life or estimates brought on by deferred maintenance.
In the past, associations could waive reserve funding through a majority vote at a duly called meeting. However, beginning December 31, 2024, associations can no longer vote to provide any reserves or less than the requirement.
Frequency of Study
According to the new Florida law, condo associations must complete a structural integrity reserve study by December 31, 2024. Beginning in January 2025, they must use the findings to inform their annual budget.
Buildings must also complete a milestone inspection by the end of the 30th year after receiving the certificate of occupancy. Subsequent inspections must take place every ten years. For buildings within 3 miles of a coastline, the milestone inspection must happen when they reach 25 years old, with subsequent inspections also occurring every 10 years after that.
For Homeowners Associations
According to Section 720.303(6), a homeowners association can prepare a budget that includes reserve funding for capital expenditures and deferred maintenance for the items the HOA is responsible for. If the HOA does not establish reserve accounts, financing these reserves is confined to the extent that the bylaws and CC&Rs restrict dues increases. Associations can waive to fund the reserves, provided there is proper notification in their financial statements.
The Role of Governing Documents
While Florida state laws have strict reserve requirements, every association should also refer to its governing documents. The CC&Rs and bylaws, in particular, may have more stringent requirements and procedures regarding reserve funding.
An Advantage for All HOAs
An association’s reserves play an essential role in safeguarding its assets. Reserve funds allow associations to budget for future expenditures properly without burdening homeowners with substantial, one-time payments. While legislators passed stricter Florida HOA reserve fund laws to avoid another Champlain Towers tragedy, they benefit all associations in the long run.
Freedom Community Management provides HOA management services in Florida. Call us at 904-490-8191 or contact us online to learn more!
