A Guide to Florida Condo Reserve Requirements

What are Condo Reserve Requirements?

Condo reserve requirements are funds that must be set aside by condominium associations in Florida for the purpose of future maintenance, repair, replacement, and improvement of the "common elements" of a condominium. (Note: The common elements typically consist of everything in a condominium development except the space inside of the walls of each unit.) It is required under Florida Statutes §718.112(2)(f) that all condominium associations have reserves for maintaining certain elements of a condominium development. Further, §718.112(2)(e) provides that the budget for every condominium association must provide for funding of these reserves. Florida Statutes §718.112(2)(f) lists those elements of a condominium that are required to be fully funded in the association’s budget as follows:
a. Roof.
b. Structure.
c. Exterior.
d. Painting.
e. Pavement.
f. Pool.
g. Tennis Court.
h. Other recreation facilities or related furnishings and equipment.
i. Other item of capital (that is, requiring $10,000 or more in expenditures).1
In short, the above elements are considered to be the components of a condominium that are required by Florida law to be fully reserved in the budget of every condominium association. Payments for the above items by the association are commonly articulated in the budget as the association’s "contribution to reserves," "funds for future projects," or something similar.
Reserves do not cover all future expenditures of a condominium association. Typically , the association would also be required to pay insurance and other regular operating expenses associated with the operation of the condominium. Reserving for these expenses is not required by law, but it is necessary lest the association fail to reserve for complete future costs.
As an example, assume that the roof and exterior wall of a condominium building will need to be replaced at a total cost of $100,000. Due to the large number of condominiums of this nature, this is not an extraordinary expense. If a condominium was developed in the 1980s and consists of 10 units, it is likely that each condo owner is responsible to pay $10,000 for this expense. Either annually or in some other regular interval, the association would need to assess each unit-owner between $500 and $1,000 per year over the lifetime of the roof and wall in order to make certain that adequate funds are available to pay for the new roof and wall when it needs to be replaced. This is potholes for homeowners’ associations. The replacement cost is so large that reserve funding is necessary to properly maintain the property. Conversely, generally speaking, the need to fund reserves for extraordinary replacement costs of this nature are not needed for condominiums that consist of many units. Further, in accordance with the Florida statutes, whether or not reserves are fully funded is up to the unit owners. A majority of the board of directors or the eligible membership may vote to waive reserves and to not reserve fully for replacement and repairs. However, if that is the case, the unit-owners are not able to complain about the lack of adequate funding because they made that choice at the ballot box.

Legal Framework Governing Reserves in Florida

Reserves are provided for in Section 718.112(2)(f), Florida Statutes, and within the Florida Condominium Act. This section, commonly known as the "living within your means" provision of the Condominium Act, sets forth management’s duty to consider funding reserves. Specifically, the law states that "[t]he board may, but is not obligated to, include in the proposed annual budget, a reserve for repair or replacement of any or all of the following: (1) roof; (2) structure of the building; (3)/*/ exterior painting or waterproofing and restoration of all or a portion of the condominium property; (/4/) pavement and striping of paving; (5) security systems; (6) pool and pool deck surfaces and appurtenances; (7) fireproofing and fire protection systems and equipment; (8) elevator cars, equipment and related electrical systems, and (9) plumbing.
A board is required, however, to consider funding reserves under section 718.112(2)(f) by means of an amendment to the annual budget if the developer has not yet turned over control of the condominium association to unit owners other than the developer, or if the board of directors is controlled by unit owners other than the developer.

Calculating Adequate Reserve Funds

Most Florida condominium associations are required to establish and maintain reserve funds. The statute requires boards to determine the amount necessary to fund the replacement of the association’s personal property. Specifically, Florida Statute Section 718.112(2)(f)(4) states that:
[T]he amount to be included in the annual budget of an association for reserves for capital expenditures and deferred maintenance shall be computed based upon the estimated remaining life and estimated replacement cost of the common elements and long-lived assets of the association, and shall be funded in accordance with a separate account for each item. A reserve schedule that is based on a formula is in compliance with this subsection. (Emphasis added.).
Once a reserve schedule is prepared, an association’s board of directors must determine whether or not it is necessary to fund reserves. If the board elects to fund reserves, they must specify on a per-unit basis the amount to be included in the budget for reserves, or provide alternate plans to fund reserves. The Reserve Schedule is essentially a list of the major items the association’s board believes need to be replaced or repaired and shows the expected remaining life and estimated replacement cost of each item. The list must then be entered into a spreadsheet so that the figures are easily manipulated. At a minimum, the items the association should consider including in the Reserve Schedule include: Kitchen Appliances, Pools, Fountains, Gazebos, Landscaping, Outside Lighting, Firewood, Watering of Landscaping, Street Sweeping, Irrigation, Air conditioning, Awnings, Cabinetry, Carpeting, Curtains, Decorator Items, Electrical Outlets, Elevator Service, Furnishings, Railing, Cleaning Service, Pool Tables, Spas, Games, Home Theatre, Office Equipment, Referees, TVs, Water Coolers, Exercise Equipment, Internet Service, Cable TV and Golf Carts. Often, associations invest in reserve studies and hire professionals to prepare them. Although this can be costly, normally a well-written reserve study is worth the money spent.

Uses for Condo Reserve Funds

The necessary expense in a condominium that the reserve fund is typically accumulated for is capital expenditures. These capital expenditures generally are repairs, replacements, or upgrades to the condominium common elements. In other words, capital expenditures typically are payments that are made to improve the vital parts of a community. Regular operating expenses typically pay for maintenance and repairs, while a reserve fund can be used for major repairs and improvements that will add more value to a community or association, as well as prolong the life of the physical property.
Some examples of capital expenditures would be roof replacement, elevator maintenance, electrical work, HVAC replacement, stucco repair, window and door replacement, concrete remediation, landscaping upgrades, seawall installation, seawall repairs, pest control, and others.

Penalties for Inadequate Reserves

The implications of inadequate reserves extend beyond merely falling short of the full reserve requirement and are not to be taken lightly. A recent appellate decision involved attorney’s fees being assessed against a condominium association for failing to properly reserve for a badly leaking roof. The association argued in part that its failure to include a roof reserve in its budget did not prevent the unit owner from recovering his attorney’s fees because the unit owner was successful in pursuing a claim against the association. However, the appellate court found that, although the unit owner was successful, the trial court could still impose attorney’s fees against the association in favor of the unit owner because the Association had acted in willful disregard of its reserve obligations.
When an association fails to properly budget for reserves or levies a special assessment within the time limits provided by statute, a losing party may recover attorney’s fees, as well as expert witness fees, from the prevailing party. Essentially, when there is an obvious need for reserves, the association’s failure to fund for reserves may result in the association being responsible for the litigation expenses incurred to force the association to comply with its reserve requirement.
Further, a special assessment to fund a legal challenge may not be levied without specific member approval. Because special assessments are levied equally against all units , if an Owner is required to levy a special assessment in order to collect money from a previous Board for its failure to fulfill the property’s statutory reserve requirement, such special assessment will be levied against all units of the Association, thus raising the monthly maintenance fees for all unit owners. This scenario may cause some members to sell their units at a loss, while other members may struggle to pay the increased monthly maintenance obligation.
Inadequate reserves also have a negative impact on the property’s values, because potential buyers will be aware of the property’s funding lapses when offers are made on the property. A buyer will consider the costs of any potential special assessments in her offer on the property because, to the buyer, purchasing a unit in a community with insufficient reserves equates to an invitation to "double dip": paying for the property out of pocket when the seller sells the property, and then potentially paying for the property a second time if the buyer decides to remain in the unit long enough to be subject to a special assessment. In this type of scenario, properties are typically listed far below the market equivalent purchase price because buyers know they will encounter litigation upon closing the sale, thus forcing sellers to sell at a considerable loss.

Preparing for Reserve Fund Studies

Certifications by board members, as described above, are based, among other things, on the result of a reserve analysis, which shall be conducted at least annually by a board of administration and presented to all members at a regular or special meeting. Since the members of the board of administration or a committee may not have the expertise to value these assets, most condominium associations will hire a professional reserve analyst to prepare the study. While having a reserve study professionally prepared is not required, it is advisable considering the survey nature of the asset evaluation process. A professional, independent reserve analyst will try to be as objective as possible in this process. The professional reserve analyst will generally inspect the common facilities, including, roofs, pools, elevators, asphalt roads, recreational facilities, and other major components located within a condominium complex. In addition to a physical examination of each component, the reserve analyst will typically inspect the extent of deterioration in the components from the date of inspection. Unlike a board member, who may more closely know the deterioration of the property, a reserve analyst can be objective in recommending a method of determining whether the deterioration warrants reserving for replacement of the component. The reserve analyst will make recommendations on replacement and repair based upon an examination of the age of the building, type of construction and quality of the materials used in the construction of the building. In addition, the reserve analyst will recommend that an analysis of the mechanical, electrical and plumbing systems be performed.

Recent Developments and Trends in Florida Condo Reserves

In recent years, legislative changes and a series of high-profile incidents have led to greater scrutiny of Florida’s reserve requirements. Perhaps the most significant change occurred with the passing of the Reserve Bill — House Bill 403 (the "Reserve Bill") — Chapter No. 2018-112. Under the Reserve Bill, beginning July 1, 2018, Florida condominium associations must conduct annual reserve studies regardless of whether they are subject to the 2018 amendments. Florida condominium associations are governed under Section 718 of the Florida Statutes and, until recently, may opt to waive reserves, thereby setting their own agendas as it pertains to reserve funding. In 2018, the Florida Legislature passed the Reserve Bill which amended Section 718 of the Florida Statutes to require each condominium association’s board of directors to conduct a reserve study to determine the current replacement cost for the association’s common elements, the components of the common elements required to be funded pursuant to §718.112(2)(b), and the estimated remaining useful life of the common elements. Section 718.112(2)(f)3.c. , Florida Statutes. These requirements are now codified in Florida Statute 718.112(2)(g) and provide that each condominium association’s board of directors must:
The Reserve Bill represents a significant shift in how revenue retains its value. Historically the concept of reserve funds was generally taking money from owners assessment to be held for future replacement of common elements. Now, associations are required to conduct reserve studies, prepare reports and seek additional funds if needed. Accordingly, reserve studies must be calculated long before a project is required or the reserve funds may become a phantom account. Interior structural items such as electrical systems and major plumbing items, which have frequently been neglected, need to be funded early in the reserve plan. Similar to car maintenance, the longer a critical common element is neglected the longer the "no touching" price, to make it right, will increase. The pressure on condominium associations to fund and maintain reserve accounts will only increase in the coming years. More reserve funds are required in addition to the reserves already in place.