July 5, 2022

Volume XII, Number 186

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July 05, 2022

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Reserve Funding for Condo Associations: Options and Best Practices

Millions of Florida residents live in condominium units, be they stand-alone villas or penthouse units in a 30-story building. Irrespective, Florida Statutes section 718.112(2)(f) provides a default rule that condominiums must reserve fund balances to repaint, resurface the roads, replace the roof, and perform any deferred maintenance or replacement that costs more than $10,000. This means condominium associations must set aside enough money each year to replace certain components at the end of their useful life without the need for special assessment or borrowing.

As a result of the recent tragedy at Champlain Towers in Surfside, this topic has appropriately been in the spotlight. In that awful collapse, the Board of Directors may have been aware of needed repairs impacting the building’s structural integrity and nevertheless routinely sought approval from the owners to waive reserve funding. While no Board wants to be known for increasing assessments, it is also inevitable that condominium buildings in marine environments will require constant and expensive attention. 

The Florida legislature recently arrived in Tallahassee with a mandate to adopt safety and inspection requirements for condominiums three stories or higher. In addition to routine engineering requirements, some of the proposed legislation called for expanded and routine reserve study requirements and sought to make it harder to waive reserves. Unfortunately, the legislative session ended in a stalemate without approving any needed legislation. One factor preventing legislative approval was that the new reserve requirements would inevitably increase annual reserve assessments. For better or worse, the concern was that owners, faced with a sudden increase in reserve assessments, would be unable to pay and become delinquent. As you can imagine, a high delinquency rate likewise has a significant impact on financial ability to make necessary repairs. 

As of the date of this advisory, the Florida legislature has not reconvened to address this issue. Florida Governor Ron DeSantis recently signaled that he would welcome a special legislative session to address condominium safety, so it is possible some reserve legislation will be enacted in the near future. Until sweeping legislative is enacted, I routinely recommend condominium associations follow these best practices.

  • Engage a Professional Reserve Study. Although Chapter 718 provides that a Board can annually consider changes in useful life and replacement cost, the Board may not understand the full scope of required reserve items or the marketplace. Aside from the three express requirements (repaint, resurface and reroof), the $10,000 threshold has been static since I have practiced law. As a result, it is entirely possible you need to add critical components to your reserve schedule – either because of historical inflation or because you never contemplated having to replace concrete. In other words, you need to know what you don’t know. 

  • Consider Inflation. Especially in today’s environment of supply chain disruptions and cost increases, you can and should consider the impact of inflation on future replacement costs.

  • Prioritize Critical Items. Although it is politically popular to renovate common areas and replace pool furniture, these items should not take priority over waterproofing, expansion joints, plumbing, and concrete restoration. All of these items have a useful life and will cost more than $10,000 to replace. If you believe it is necessary to waive certain reserves, prioritize infrastructure over aesthetics.

  • Have a Backup PlanFlorida law is clear that you cannot include a balloon payment in your reserve schedule or budget for future borrowing to satisfy reserve funding. That being said, condominium associations are great borrowers and maintaining a line of credit to address emergency repairs does provide a source of instant liquidity.

© 2022 Varnum LLPNational Law Review, Volume XII, Number 87
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About this Author

Steven J. Adamczyk Partner Varnum LLP
Partner

Steve focuses his practice on residential and commercial real estate transactions and community association representation. He provides counsel to condominium and homeowners associations throughout Florida. Steve has extensive experience in corporate governance, compliance, insurance, risk management and contract negotiation matters and also provides estate and trust planning services.

239-241-7384
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