Reacting to a need for more flexibility in the use of condominium reserve accounts, in December 2002, the Division of Florida Land Sales, Condominiums, and Mobile Homes amended the administrative rules governing the condominium budget process as it applies to condominium reserves. The Condominium Act requires all condominium associations to have reserve accounts for roof replacement, building painting, and pavement resurfacing and for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000. Prior to the amendment to the administrative rules, these reserve accounts had to be segregated and the funds in each of these designated accounts could only be used for the purposes for which they were collected. For instance the building painting reserve account could only be used for building painting unless a majority of members voting at a meeting of association members voted to use the funds for a different purpose. This amendment to the administrative rules allows association boards of directors to combine two or more reserve accounts into a 'pooled account'.
What impact will the Pooling Method have on your condominium? The primary impact will allow the board of directors greater flexibility in dealing with the non-routine management and maintenance of association property. For instance, consider the following scenario when the reserve funds are in segregated accounts.
A tropical storm or hurricane causes extensive roof damage and the cost of replacing the roof is greater than the amount of funds in the roof reserve account. The board would have only two options to deal with this crisis. Either go through the process of levying a special assessment to make up the shortfall or call a special meeting of the members to vote to divert funds (if available) from other reserve accounts for the cost of roof repair. Both of these options are time-consuming and expensive to the association to implement and would be required regardless of the amount of funds in other reserve accounts.
Consider the same scenario if the reserves are in a 'pooled account'. If the balance of funds in the pooled reserve account was sufficient to pay for the roof repairs, the board could simply write a check for the costs of the repairs, regardless of the purpose for which the funds were originally reserved. For example, the association has$10,000 for roof, $20,000 for painting, and $25,000 for re-paving in its pooled account and the cost of the roof repair from the storm damage is $40,000. Because the balance in the pooled account is sufficient to handle the crisis, the board has access to the necessary funds immediately. Of course the reserve funds used for this unforeseen project would have to be replenished in accordance with Florida law.
What is the method for converting segregated reserve accounts into a 'Pooled Account'? The board of directors by resolution can create the pooled account. However, this action by the board does not automatically transfer the funds from the existing segregated accounts into the new pooled account. In order to do this, the members would have to vote to approve the transfer of funds from the existing segregated accounts into the pooled account. This is necessary because these funds could be used for a purpose other than the purpose for which they were originally reserved. Although this conversion by the board could take place at any time during the budget year, it is most easily done when a new budget takes effect at the beginning of your fiscal year.
Will the Pooled Reserve method increase my assessments? The method for determining the amount of funds which are necessary for roof replacement reserves, as an example, would not change. That is you would still determine the estimated useful life of the roof, the estimated remaining life of the roof and the estimated cost of replacement of the roof and use these figures to calculate the funds necessary for roof replacement. However the method of funding for the roof and the other assets within the pooled account will change. If your reserve calculations have been accurate and the association has always fully funded the segregated reserve accounts, your monthly assessments should not increase.
The hurricanes of 2004 caught many associations off guard and many boards were scrambling to come up with the necessary funds for the repair or replacement of an asset for which there were reserve funds. If there were sufficient funds in the reserve account for this asset, the board could deal with it quickly and efficiently. If these reserve funds were insufficient, the board was faced with time-consuming alternatives to collect the funds necessary, even though there may have been funds available in other reserve accounts. If these assets were in a pooled reserve account, the board could have acted more quickly and efficiently for the benefit of all members.
We encourage you to examine your circumstances and determine if pooling the reserves would work for you. If so, please contact your community association counsel to assist in the specific process of conversion.
The firm of Taylor & Carls, P.A., with offices located in Maitland, Melbourne, Tampa and Daytona Beach, Florida, was founded in 1981 and has practiced in the area of community association law since that date. This edition was prepared by Gene S. Boger, Esq. of Taylor & Carls, P.A. The information contained in The Association e-Lawyer should not be acted upon without professional legal advice.