After providing studies for more than 1,500 associations in Florida over the last 25 years, we’ve been asked innumerable questions about reserves and reserve studies. Here are some of the most common questions and their answers. The answers are provided for informational purposes and should not be construed as legal advice.
How much should we set aside in reserves?
There is no “one-size-fits-all” amount that should go into reserves. Each association is unique with different property components. Some associations have very limited common elements, such as entry signage and sidewalks only, while others maintain swimming pools, a clubhouse, docks, tennis courts, and other amenities. The latter will certainly have much higher reserve assessments to pay for the wear and tear on all of those common elements. Even with two identical properties built by the same developer, the homeowner boards might have very different philosophies about how to maintain them. One board might have an aggressive maintenance policy for regular sealcoating, gutter cleaning, roof inspections, etc., while the identical property has no maintenance programs whatsoever. While the latter property might save money in the short term, they’ll end up spending a lot more money over the long term because many of their common elements will require replacement much sooner than if they had maintenance programs in place all along. The reserve funding is dependent upon the size and complexity of the common elements of the association and how well they are maintained by the board or management.
What items should be included in our reserve schedule?
For Florida condominiums and cooperatives, the reserve schedule must include funds for:
Pavement resurfacing, and;
Any other capital expense greater than $10,000.
HOAs are only required to fund reserve components that were established in one of three ways:
They are required in the governing documents;
They were established by the declarant prior to turnover, or;
They were established by a majority vote of the owners at a duly called meeting.
Every reserve study begins with a review of the governing documents. These documents will identify the property components the association is responsible for maintaining. We see many schedules that omit major common elements with replacement costs greater than $10,000, such as concrete restoration, plumbing, electrical systems, fire alarm/life safety systems, and storm water drainage and collection systems, to name a few. A qualified professional engineer can help an association identify these specific items to help the board avoid surprises.
How long does a reserve study generally take?
They can take anywhere from one to six months, depending on the provider, level of service, and time of year. Our studies generally take about five weeks to complete following the inspection due to a stringent internal review by a team of engineers from various disciplines and backgrounds to ensure accuracy and the most cost effective advice. Best practices suggest starting the process early in the year (January or February) to allow the board plenty of time to review the study, ask questions of the provider, and prepare for any upcoming projects later in the year. Many times, our engineers identify items that may be discretionary like carpet replacement or party room renovations. Many boards like to explore alternate replacement or funding scenarios after reviewing a draft study. They can even break items into smaller or phased replacements less than $10,000, which would allow them to be excluded from the study. We encourage getting a head start to review and explore these scenarios in an effort to tailor the study prior to budget season, usually in late summer for most associations.
Is there a law requiring reserve studies?
No. Condominium statutes require several disclosures at the time of turnover including a professional engineering study that addresses many reserve components, but a professional reserve study is not a statutory requirement. Many people recall Florida Statute 718.113(6) that required an engineering study on the common elements every five years for buildings taller than three stories, but that section of the Condominium Act was repealed in 2010. Reserve studies are simply a best practice to ensure boards are fulfilling their fiduciary responsibility, minimizing their liability, and providing the correct information to the owners with respect to the required reserve contributions.
How Often Should a Reserve Study be Carried Out?
A full reserve study, including a site inspection and condition assessment, should be conducted as soon as possible after, or even during, construction. It should be updated with a site inspection every three to five years. Another good time to have an update is after major changes to the property, such as a large capital project. However, it is very important for the board and management to review the reserve schedule every year prior to approving the budget.
Won’t funding our reserves make our association fees too high and decrease our property values?
Funding reserves improves the financial health and stability of a community. Waiving reserves does not mean that expensive projects will go away. Capital projects are necessary to ensure safety and usefulness of your common property. In our experience, associations that don’t fund reserves end up spending more in repairs and maintenance as replacement/capital funds are not available when needed. They also don’t have the same “curb appeal” when compared to associations with strong financial health. By demonstrating to prospective buyers and their lenders that the association has adequate reserves and good financial health, boards can actually enhance property values by funding their reserves.
We have reserves for specific items but need to replace something that is not on our schedule. Can we borrow from another item to pay for the unanticipated expense?
Condominiums, cooperatives, and HOAs with restricted reserves can only spend the reserve funds on their intended purpose unless approved in advance by a vote of the owners. Statutes 718 (Condominiums), 719 (Co-ops), and 720 (HOAs) contain identical language:
“Reserve funds and any interest accruing thereon shall remain in the reserve account or accounts and shall be used only for authorized reserve expenditures unless their use for other purposes is approved in advance…”
Many associations are looking into “pooled” reserves, which is a grouping of the assets into one larger reserve fund. While this does allow for some flexibility when funds are needed, the same restrictions apply. Pooled reserve funds should only be spent on items in the defined group of assets.
How much should a study cost?
It depends on what you’re looking for. A study should cost as much as the value in which the association board sees that firm providing. Some providers will deliver reserve studies that simply determine standardized replacement costs and lifing analyses. We believe that boards should look for a more custom, comprehensive reserve study provider that considers their strategic plan, provides advice, and makes recommendations that will save the homeowners money over the long run. At the end of the day, the reserve study should help the board maintain a community where the members look forward to coming home every night.
With more than 45 years experience in the Central Florida area, Hara Community 1st Advisors has the expertise needed to efficiently manage your Condominium or Homeowner’s Association while providing the highest level of service to Boards and Owners. Contact HMI’s Regional Director Rick Michaud, or visit HMI online to learn more about their variety of client-customized services today.