2007 LEGISLATIVE UPDATE - PART 1
2007 LEGISLATIVE UPDATE
PART 1 - RESERVES

    The 2007 Session of the Florida Legislature addressed many issues which affect community associations in Florida. This is the first in a series of eLawyers which will summarize the major changes affecting both condominium and homeowner associations.

    Because the new legislation is only summarized, prior to taking any action, the actual text of the new laws should be reviewed. This Issue will summarize changes to Florida Statute 720.303(6) dealing with homeowner associationís budgets, and specifically association reserves.

    Senate Bill 902 enacted new law 2007-173, effective July 1, 2007 which amends Florida Statute 720.303(6), along with other amendments which will be reviewed in future eLawyers. Prior to the enactment of this Bill, there were no statutory provisions relating to the creation or use of reserve accounts for homeowners associations.  Any requirements for funding reserve accounts were contained within the associationís governing documents. Many associations, however, established reserve accounts simply as a policy decision and good accounting practice. The new law makes slight changes to the old 720.303(6) 'Budgets', and designates the former section as 720.303(6)(a). The significant changes are incorporated by adding entirely new sections 720.303(6)(b) through (h). These new sections deal exclusively with the establishing and operation of reserve accounts. The main provisions of the new sections are as follows:

I. Statutory Reserves

    1) The budget may include reserve accounts for capital expenditures and deferred maintenance to the extent that the documents do not limit increases, including reserves. This means that if your Associationís documents prohibit increasing the budget over a certain percentage, such as 10%, 15%, etc., including reserves, then your Association will not be able to establish reserve accounts pursuant to this statute. This is because the cap will prevent the Association from establishing the amount of reserves required pursuant to the mathematical formulas in this section.

    2) If reserve accounts are established, the reserve accounts must thereafter be determined, maintained and waived pursuant to this section of the Florida Statutes.

    3) If the Associationís budget does not include reserves and the Association is responsible for repair and maintenance of capital improvements that may result in special assessments if reserves are not provided, the financial report for the preceding fiscal year must state in conspicuous type:

    THE BUDGET OF THE ASSOCIATION DOES NOT PROVIDE FOR RESERVE ACCOUNTS FOR CAPITAL EXPENDITURES AND DEFERRED MAINTENANCE THAT MAY RESULT IN SPECIAL ASSESSMENTS. OWNERS MAY ELECT TO PROVIDE FOR RESERVE ACCOUNTS PURSUANT TO THE PROVISIONS OF SECTION 720.303(6), FLORIDA STATUTES, UPON THE APPROVAL OF NOT LESS THAN A MAJORITY OF THE TOTAL VOTING INTERESTS OF THE ASSOCIATION.

    4) Reserve accounts may be established by the developer or when the membership elects to do so, by not less than a majority of the total voting interests of the association at a meeting of the membership or by written consent.

        a) Approval of the reserves by the membership shall state that the reserves shall be in the budget and designate components for which reserves are established.

        b) After approval, the Board must put reserves in the proposed budget for the next fiscal year and every year thereafter.

        c) Once established, reserves must be funded and can only be waived by member vote.

        d) Section 720.306(e) sets forth the formula to calculate reserves. It is similar to condominiums, and based on estimated replacement cost, or deferred maintenance expense, and the remaining useful life of a component.

        e) Once reserve accounts are established, membership must vote by a majority vote at which a quorum is present in order to waive or reduce reserves. If there is no quorum at the meeting or the vote is not obtained, then the budget with fully-funded reserves goes into effect. This vote is only good for one budget year, and the process must be repeated for each budget year thereafter.

    5) The reserve accounts can be separate or pooled. Section 720.306(g)(1) sets forth the funding formula for separate accounts and Section 720.306(g)(2) sets forth the funding formula for pooled accounts.

    6) Reserves must be used only for authorized reserve expenditures unless the membership votes to use them for another purpose, in advance, by a majority vote at a meeting where a quorum is present. Developer cannot vote to use reserves for any purpose other than that intended prior to turnover, without approval of a majority of all non-developer voting interests.

II. Non-Statutory Reserves

    Many associations have either provided for reserves because of requirements in their governing documents, or because they considered it a good accounting practice. While the language of the amendments is less than ideal, it is our opinion that the Legislature intended to permit such 'non-statutory reserves' as an option for associations. The new amendments define reserves regulated by the statutes as accounts:

    1) initially established by the developer; or

    2) affirmatively elected by a majority of all voting interests of the associationís membership.

    The new statutory requirements would apply only to reserves created by these two (2) methods, and would not apply to 'non-statutory reserves'. Thus an association which wished to continue its practice of either funding voluntary reserves, or reserves mandated by its documents, could do so provided they were not initially established by the developer or the result of a majority vote of all voting interests of the association.

The firm of Taylor & Carls, P.A., with offices located in Maitland, Melbourne, Tampa and Palm Coast, Florida, was founded in 1981 and has practiced in the area of community association law since that date. This edition was prepared by Harry W. Carls and Elizabeth Patrie of Taylor & Carls, P.A. The information contained in The Association e-Lawyer should not be acted upon without professional legal advice. The opinions expressed herein are as of the date hereof, and this law firm undertakes no obligation to advise the Association of subsequent changes in the law.


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