How does an association calculate reserves?
By SYLVIA HELDRETH
Q: My husband and I live in a condominium. It seems to us that the amount our association collects for reserves increases every year. A friend of mine mentioned that her association has found a way to reduce the increases by pooling reserves. This has nothing to do with maintaining the swimming pool but with how the reserves are calculated, I believe. What’s it all about?
A: Before 2002, an association had only one way, the “straight line” method, to calculate how to fund reserve accounts. The amount collected for each reserve item was based upon the replacement cost, the amount in the reserves at the beginning of the year and the remaining useful life of each reserve item. The total amount calculated for each of the reserve categories was added and the total was the amount collected. The total was sometimes daunting to owners resulting in a vote to waive the reserves as permitted by the Act. The end result was frequently the need for large and unexpected special assessments to fund necessary maintenance and repairs.
Since late 2002 condominium associations have been permitted to calculate reserves using the “cash-flow” or “pooling” method. This method allows an association to look at a group of assets instead of looking at each asset individually. Using the pooling method usually results in a substantial reduction in the annual contribution of the owners to the reserves, while still resulting in adequate funds for replacement and upkeep of association assets.
The rules allow a calculation based on a formula that provides funds equal to the total estimated deferred maintenance expense or total replacement cost for an asset or group of assets over the remaining useful life of the asset or group of assets. The balance on hand at the beginning of the budget period plus the projected annual cash inflows over the remaining estimated useful lives of all the assets in the reserve pool must be equal to or greater than the projected annual cash outflows over the remaining estimated useful lives of all of the assets that make up the reserve pool. The difference is the amount that must be collected based on the current reserve analysis. The projected annual cash inflows may include estimated earnings from investment of principal but the reserve funding formula shall not include any type of balloon payments.
The straight line method requires a contribution regardless of whether reserve components are being replaced in any particular year. This results in collections that are greater than those necessary using the pool method.
The collection of reserves in a condominium is required by Section 718.112(3)(f), Florida Statutes. This mandatory provision is further regulated by the provisions of Rule 61B-22.005, Florida Administrative Code, which contains the rules regulating reserves. Complying with these rules is not as simple as it sounds. You may want to seek the advice of an attorney or accountant who is well versed in the nuances of pooling reserve accounts.
Attorney Sylvia Heldreth is a Certified Specialist in Real Estate Law. Her office is located at 1215 Miramar Street in Cape Coral.
This article is not intended as specific legal advice to anyone as is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter involving the law.