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Reserves and Reserve Studies Flipbook PDF
Reserves and Reserve Studies
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Community Association Education Series
RESERVES AND RESERVE STUDIES
1500 W. Cypress Creek Road, Suite 408, Fort Lauderdale, FL 33309 954-486-7774 • 800-987-6518 • [email protected] www.KatzmanChandler.com
DEFINITION “RESERVES” “Reserves” are monies set aside for specific expenditures that will be incurred in the future. “Reserves” means any funds, other than operating funds that are restricted for deferred maintenance and capital expenditures.
Categories “Deferred maintenance” means any maintenance or repair that: (a) Will be performed less frequently than yearly; and (b) Will result in maintaining the useful life of an asset. “Capital expenditure” means any expenditure of funds for: (a) The purchase of an asset whose useful life is greater than one year in length; (b) The replacement of an asset whose useful life is greater than one year in length; or (c) The addition to an asset that extends the useful life of the previously existing asset for a period greater than one year in length
Mandatory / Statutory Reserves
Reserve Schedule - Two (2) Methods of Reserve Accounting (a) Segregated or Straight line Method (b) Pooled Useful Life - Total The estimated total useful life of a reserve asset is the total life of a newly purchased asset before deferred maintenance or a replacement of the item is needed. Remaining Useful Life The estimated remaining useful life of a reserve asset is the length of time a particular asset has left before deferred maintenance or a capital expenditure is needed. Segregated / Straight line / Component Method Once you have listed the estimated total useful life for each reserve item, the next step is to determine each item’s estimated remaining useful life and to write the amounts on the schedule. The estimate for each reserve item’s remaining useful life will be placed in the second column of the schedule. Pooled – Cash Flow Method Allows associations to spend funds from a single reserve fund that includes all items on the reserve schedule with respect to Capital Expenses and Differed Maintenance. Each reserve item does not have to have its own fund balance, but there is a pool of money. Must still disclose estimated remaining useful life and estimated replacement cost.
Condominiums
Segregated vs Pooled Reserves
FS 718.112 (2) (f) In addition to annual operating expenses, the budget must include reserve accounts for capital expenditures and deferred maintenance. These accounts must include, but are not limited to, roof replacement, building painting, and pavement resurfacing.
Here is an example that shows how the Segregated and Pooling methods work for one reserve item.
Cooperatives FS 719.106 (1) (j) Same as FS 718 Homeowners’ Associations FS 720.303 (6) (d) An association is deemed to have provided for reserve accounts if reserve accounts have been initially established by the developer or if the membership of the association affirmatively elects to provide for reserves.
Contingency Reserves Many associations want to have a reserve called “Contingency Reserve.” The purpose of this account would be to fund items for which reserves have not been established or to cover unanticipated operating expenses. However, it is inappropriate to create a “reserve” account for this purpose, as there is no apparent restriction on the use of the funds. Consequently, the account does not meet the definition of a reserve, and associations that desire to have a contingency account should budget for a surplus in the operating fund. As stated above, the association may create a reserve for general deferred maintenance and capital expenditures. Funds in this account may be used for any deferred maintenance or capital expenditure project, but not for ordinary operating expenses. It is recommended that the association, at a duly noticed board meeting, state the items to be covered in the “general deferred maintenance and capital expense” reserve and include this in the minutes of the meeting.
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Segregated Method It has become apparent that the roadways in the community are in dire need of repairing and repaving at a projected cost of $100,000. The total amount of reserve funds collected for all projects is $600,000. The actual cost of the project will be $150,000, ($50,000, above the total collected under the component method). What options does the board have? • • • •
The Board can issue a special assessment on the unit owners to make up the $50,000 deficit. The Board can postpone the job until there is $150,000 in the Paving reserve account. The Board can increase maintenance fees the following year substantially to make up the $50,000 deficit. The Board can have a vote of the owners to borrow $50,000 from a different reserve fund to complete the project sooner than later.
Pooling Method The Board would be able to take the $150,000 out of the $600,000 total pooled reserve funds to complete the project. The Board would then have to calculate how to earn back the extra $50,000 that was used for the paving project in future years by: • Making up the difference if another reserve project cost less than estimated. • Increase reserve funding in future years In this case, it would appear that the Pooling method gives more flexibility. However, it takes into consideration that future boards will be enlightened, and not prone to underestimating costs or overspending on upgrades and additions.
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WHAT METHOD IS RIGHT FOR YOUR COMMUNITY? • Do you believe your board is responsible and knowledgeable to manage a Pooled Reserve? • Do you have a competent accountant to help you schedule the funding? • Have you had a Reserve Study done recently? • Do you do them at regular intervals? • How many reserve items are you currently funding? Be aware: • Associations can have both Segregated and Pooled reserves • To change from Segregated to Pooled reserves the association must get a vote of the owners • A vote is not needed to start a Pooled reserve
Waiving or Reducing Reserves A fully funded reserve schedule must be included in the proposed budget. By a vote of the owners, associations may waive the requirement that reserves be funded or reduce the amount of the proposed funding. (partial funding) It is the board’s responsibility to include reserves on the proposed budget and to fully fund those reserves that are not waived or reduced by a vote of the unit owners. Proxy questions relating to waiving or reducing Reserve funding or using existing reserve funds for purposes other than for the purposes for which the reserves were intended, must contain the following statement in capitalized, bold letters in a font size larger than any other used on the face of the proxy ballot: 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 Voting to waive or partially fund reserves: “A majority of those present in person, or by proxy”
RESERVE STUDY
What Is a Reserve Study?
A reserve study is an in-depth evaluation of a property's physical components and an analysis of its reserve funds. Based on a thorough on-site inspection, a custom reserve study details anticipated replacements or repairs to common-area elements and recommends annual reserve funding to cover capital expenditures for the next 30 years.
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Types of Reserve Studies Full Reserve Study The most comprehensive type of reserve study. The reserve analyst will complete a site inspection to get measurements and information of all common elements, including assessing the condition of common elements and taking a photo inventory of most components. The results are then compiled in the reserve study. The following five (5) Reserve Study tasks are performed: • • • • •
Component Inventory Condition Assessment (based upon on-site visual observations) Useful life and Valuation Estimates Fund Status Funding Plan
Update of Reserve Study with Site Inspection This type of reserve study is less comprehensive than a Full Reserve Study. The following five (5) Reserve Study tasks are performed: • • • • •
Component Inventory (verification only, not quantification) Condition Assessment (based on on-site visual observations) Useful Life and Valuation Estimates Fund Status Funding Plan
The reserve analyst will make limited evaluations of conditions and will update the photo inventory only when necessary. The results are then compiled and reserve study report is issued. Update of Reserve Study - Without Site Inspection A Reserve Study update with no on-site visual observations. The following three (3) Reserve Study tasks are performed: • Useful Life and Valuation Estimates • Fund Status • Funding Plan Do It Yourself (DIY) Reserve Study Some companies offer this type of Reserve Study designed for cost-conscious clients who are capable of compiling and/or updating their own Component List, detailing the scope and timing of each component’s future repair or replacement. Based on an association-submitted Component List, Reserve Fund Status is calculated. Finally, a custom Funding Plan that allows for timely repairs and replacements, with an emphasis on avoiding special assessments is produced.
Reserve Study Report The reserve study report is issued from a reserve study. This report will include: 1. A listing of the major assets of the association funded through reserves, their expected useful life, remaining useful life, and current replacement cost. 2. An evaluation Reserve Fund's current financial strength (usually expressed as percent funded). 3. A recommended multi-year Reserve Funding Plan.
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Our innovative "No Cost / No Fee Guarantee" Delinquent Account Collection Option provides “FREE” collections to your Community Association. Yes….. We said “FREE.” We are so confident in our ability to successfully collect upon your delinquent accounts, we are willing to shift the ultimate financial responsibility for the Costs and Legal Fees incurred in the collection process from your Community to our Law Firm. This one of a kind program is the answer to thousands of client requests over the years, and the result of decades of experience in, and analysis of, delinquent account collection in Community Associations.
This truly unique program guarantees, in writing, that your Association will NEVER receive an invoice for Costs or Legal Fees incurred by our Law Firm in providing delinquent account collection services.
Our unique “Fast Track” Violation Process assists our clients in pursuing their most common types of violations, without the risk of having to incur unnecessary legal fees in the early “pre-litigation” stages of the violation process.
Through our "No Cost / No Fee Guarantee" Delinquent Account Collection Option, ALL of the potential Risk, Liability and Financial Exposure to your Association for Costs and Legal Fees incurred due to non-paying owners can now be avoided, and your Community can enjoy a truly “Risk Free” and “Worry Free” opportunity to timely and effectively pursue collection of delinquent accounts.
This innovative program provides your Association with a custom set of pre-litigation notices and communications, tailored specifically to your community, which may be
Our newest offering provides clients with an easy-to-use, quick-reference overview of responsibilities contained within their Association’s Governing Documents. Windows and Doors and Water Heaters…OH MY! For any Community Association that has ever struggled with or incurred legal expenses in determining whether a particular item is the maintenance, repair or replacement responsibility of the Owner or the Association, we have the answer for you!
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utilized to address most, if not all, of the common violations identified in the Association. By issuing these pre-litigation notices in house, violations are cured faster, and the Association only incurs legal fees in the event that owners fail to comply with the “Fast Track” demand and the Association turns the matter over for legal action – in which case, such fees are recoverable by the Association as the prevailing party in litigation.
The Matrix is a quick-reference guide tailored specifically for your Community Association that provides a chart listing all items identified by the Association, as well as a designation of whether those items are the maintenance, repair and/or replacement responsibility of the owner or the Association based upon the Association’s Governing Documents and applicable Florida Statutes.
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LITIGATION/ARBITRATION/MEDIATION DEPARTMENT Litigation Matters are those which are not purely Transactional and include actions such as the following (listed in order from typically most frequent to least frequent by Community Associations);
The Attorneys at Katzman Chandler have extensive experience in handling a wide variety of routine (and non-routine) Community Association litigation issues and topics.
• Breach of Contract and Foreclosure Lawsuits against delinquent owners;
Our litigators have resolved thousands of litigation matters to the satisfaction of our valued clients. At the outset and prior to our recommendation to enter into litigation, we fully advise our clients as to the benefits and detriments of the recommended course of action.
• Defense of Bank Foreclosure Lawsuits naming the Association as a Defendant; • Covenant Enforcement Litigation I Injunctive Relief Lawsuits; • Arbitration and Mediation as required by State Law; • Contract Dispute Litigation between Association and Vendor(s); • Administrative Actions or Litigation against Government Entities or Municipalities; • Property Damage / Insurance Claim Litigation; and
We further advise that we have explored other options to resolve the dispute, or that we believe litigation is the best and most effective method to end the dispute favorably. We are committed to handling and pursuing matters of litigation on behalf of our clients in the most costeffective and efficient manner possible, given the particular circumstances involved.
• Construction Defect Litigation
PROPERTY DAMAGE/INSURANCE CLAIMS If there is a single downside to living under the Florida sun, it is the risk of a significant storm impacting our homes and way of life. However, in times of need, members of the Katzman Chandler family of clients can rest assured that their interests are represented by some of the best attorneys in the industry.
networks. Our clients need not worry about this process or their complicated insurance policies, as our dedicated team of attorneys will work with you to ensure that your community is provided with the maximum available care, attention and financial support needed to put the pieces back together.
Katzman Chandler’s Casualty Department understands the inner workings of large insurance conglomerates and their often convoluted and intricate claims
That is why our Firm has and regularly works with some of the very best attorneys well versed in prosecuting insurance claims. Together, we can help
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you crack a system that routinely denies or underpays claims.
well as costs will not be due or collected from you. We only receive payment if we win.
Katzman Chandler invests substantial Firm resources, money and attorney time in order to ensure the best possible outcome against the corporate giants that seek to benefit, while your community suffers. For this reason, our Firm routinely handles insurance claims purely on a contingency basis, meaning there are no out-of-pocket fees or costs to your community during the process, and if we are not successful, legal fees as
Whether your Community’s claim is resolved in 2 weeks or 2 years, we are a committed partner to your Community, and will be there for you whatever way the wind, water, fire, smoke or vandals cause damage to your Community. Simply stated- THEY wrote the policy, and WE make them write the check!
TRANSACTIONAL DEPARTMENT Being a Full Service community association Law Firm requires us to be knowledgeable and proficient in several key practice areas including, but not limited to, Real Property Law, Corporate Law, Litigation, Contract Law, and Insurance in order to meet all of our community association clients’ needs. Om Transactional Department is one of those key departments which are called upon daily to assist with the corporate representation and governance of our valued clients. The team’s decades of combined legal experience provides our clients with cutting edge solutions for routine, novel and often complex legal issues confronted by industry professionals and the voluntary boards that govern Florida’s community associations. Our transactional attorneys are routinely relied upon by the media and legislators to sort out issues relating to the community association lifestyle. Each member of the Transactional Team brings a unique skill set and perspective to this diverse practice and understands
how best to assist boards in functioning in an age of ever greater state regulation. Whether we are reviewing your contracts, amending your documents, rendering a bank loan opinion or enforcing your covenants against violators, our goal remains the same: to deliver answers in an easy to understand format with personalized service and attention to detail that you can rely on every time. If your community has a question, our Transactional Department has your answer. Come and see for yourself why our Transactional Team is committed to providing your community with the advice and guidance it needs to operate safely within the confines of your governing documents and the applicable Florida Statutes.
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Don’t Delay!
“AMENDING YOUR GOVERNING DOCUMENTS” What May Need to be Changed? • • • • • • •
Add Kaufman Language Purchasing and Approval Provisions Maintenance and Repair Provisions Financial Reporting Requirements Rental Restrictions Foreclosure and Collections Provisions Covenant Enforcement Provisions
• Pre-litigation Attorneys’ Fee Provisions • Use Restrictions - Provisions Concerning Pets, Smoking, Parking and Towing • Guest and Occupancy Restrictions • Use Fee and Moving Fees • Provisions Concerning Cable TV and Satellite Dishes • “Correct and Bill” Provisions
WE SPEAK COMMUNITY
Toll Free Hotline: 855-827-5542 • Email: [email protected] Most of you reading this already know the names Bill and Susan Raphan and the mark they made on the Florida Condominium Ombudsman’s Office during their 7 year tenure. For those of you who don’t know about this dynamic couple here is their story. When Florida’s first Condominium Ombudsman, Virgil Rizzo, was appointed back in 2004, there was no money to staff the local South Florida Office. Bill and Susan were his first volunteers. They had been having problems in their own condominium and wanted to help others in similar situations. They worked for seven months as volunteers, often returning calls from over a hundred people a day asking for help with their association-related issues, before the money was found in the State budget to finally pay them. During their seven years with the Condominium Ombudsman’s Office they spoke with thousands of association members, directors, association managers, attorneys and legislators about the common and not-so-common issues that crop up when people live in close quarters and decisions are made by an elected body. While some of the problems they confronted were not within their authority to address, others were successfully resolved as a result of their interventions. A patient set of ears, knowledge regarding the Statutes, Administrative Code and practices of the DBPR, along with common sense and a dash of humor, often helped put both Board Members and Owners with complaints on the right path. Was every problem solved? Absolutely not. Were many problems that could have resulted in time consuming and costly litigation successfully defused? Absolutely yes. Bill and Susan had run a successful catering business for many years, and as a result, applied many of those same business principles to organizing the Ombudsman’s Office in an efficient manner especially given the shoestring budget under which they were forced to operate. They began an extensive education program at Broward and Palm Beach College as well as in Community Centers and Condominiums throughout the State. They facilitated the appointment of election monitors for approximately 90 condominium elections per year, and educated almost 6,000 people in just their last year at the Condominium Ombudsman’s Office! In 2011, they made the leap of faith and decided to join Leigh Katzman, and today they serve as Katzman Chandler’s Statewide Educational Facilitators. The Raphans have been widely recognized for their role in providing Board Members and Community Association Managers (CAM’S) across the State of Florida with the highest-quality educational seminars for certification and continuing education credits. Bill and Susan were also featured in a front page article in the Wall Street Journal, and have appeared on many TV and radio programs. We are thrilled to have Bill and Susan as part of our team at Katzman Chandler and would urge you to experience one of their enjoyable and interactive educational classes for yourself.
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THE LAW FIRM OF KATZMAN CHANDLER MAKING THE LIVES OF BOARD MEMBERS AND COMMUNITY ASSOCIATION MANAGERS EASIER THROUGH UNIQUE OFFERINGS AND UNPARALLELED CUSTOMER SERVICE. CALL US TODAY 1-800-987-6518
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