In Florida, there are New Mandatory Reserve Requirements for Condominiums. State Laws Vary but it may be Good Practice to Establish a Liquid Reserve System.
Growing up in New England, it became axiomatic that organizations should establish and maintain a stable reserve system in case of emergency or otherwise. That is, even though the Patriots had signed a then-record ten-year contract with their face-of-franchise quarterback, Drew Bledsoe in 2001, they maintained a quarterback reserve group consisting of three additional signal callers going into training camp that season: Damon Huard, Michael Bishop, and future seven-time Super Bowl Champion, Tom Brady.
It was known by every fan in New England that these reserves were set aside only if disaster hit. Lo and behold, in the second game of the 2001 season, Bledsoe suffered a nearly career-ending injury. The Patriots brought in Brady, and the reserve group proved its value as Brady went on to lead the team to a Super Bowl that season.
As with the Patriots and their reserve plan, it is important for every community association to establish and maintain a foundational reserve fund. Further, due to major community association developments in Florida – the location of a football rival that despises the Patriots – the sunshine state is now at the forefront of legislation as it relates to reserve fund requirements.
Namely, over the past couple years, Florida has been at the epicenter of the community association world due to increased challenges for insurers, renovations to buildings/common areas and enhanced structural inspection parameters especially in light of the tragic Surfside building collapse, as well as the ever-possible natural disaster such as Hurricane Ian that affected many counties in Florida in late-2022.
Before we analyze deeper, a “reserve account” is the specific amount of cash in a separate account to fund necessary repairs or replacements projects, generally to defray the repair or replacement of major components which the association obligated to maintain, stable and equitable funding plan to offset anticipated future major common area expenditures. In other words, a backup plan, savings account, or nest egg.
In 2022, Florida Senate Bill 4D was officially signed into law in the sunshine state in 2022 as the Bill addresses new condominium requirements pertaining to structural inspection and reserves to cover necessary repairs. The Bill contains structural inspection requirements which makes sense because a primary reason to maintain adequate reserves is to address major infrastructure failure or construction need. As of January 2023, Florida is one of only four states that requires i) reserve studies for condominium associations, ii) reserve studies for developers, iii) reserve fundings for condominium associations, and iv) reserve funding for developers.
Contrarily, Massachusetts and Connecticut are the only New England states that require reserve funding for condominium associations, but none of the other New England states require any of the aforementioned conditions. Even though the majority of states do not require certain reserve funding right now, the Florida legislative model could have nationwide consequences. And even if your state does not include reserve requirements, an action plan related to reserve accounts created by association boards, owners, and property managers would be wise.
The initial reaction from Floridians to the new statutory mandate (deadline for reserve compliance is not until 2024) is rightfully pessimistic as community associations now anticipate heightened monthly fees, on top of the ongoing insurance crisis. It must be noted that the long-term benefits could be lifesaving.
Florida Senate Bill 4D amends portions of Florida Statute 718 (Condominium Act) and 720 (Cooperative Act) and will specifically require 1) associations complete a structural integrity reserve study every 10 years for each building in an association that is three stories or higher in height; 2) “structural integrity reserve study” as a study of the reserve funds required for future major repairs and replacement of the common elements; 3) visual inspection by a person licensed as an engineer or an architect; 4) a developer have a structural integrity reserve study completed for each building in the association that is three stories or more in height before turning over control of an association to the non-developer unit owners; 5) that it is a breach of a board member or officer’s fiduciary duty if an association fails to complete a structural integrity reserve study.
The specific statutory language under Florida law starkly contrasts the language of reserve statutes in which Allcock & Marcus presently operates, all of which provide for elective or vague reserve measures:
Massachusetts (Section 183): All condominiums required to maintain an adequate replacement reserve fund. Managing agents must render certain written reports.
Maine (Section 1604-103): Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves, as well as collect assessments. The public offering statement must contain a statement on the amount, or no amount, of the budget. There is no statutory requirement to fund reserves.
New Hampshire (Section 356-B:58): Public offering statement must include the status and amount of any reserve but there is no statutory requirement to fund reserves.
Rhode Island (Section 34-36.1-302 and 1-4.03): Unit owners associations may adopt and amend budgets for revenues, expenditures, and reserves and collect assessments. Public offering statements for condominiums must disclose a budget detailing the amount of reserves.
In addition, none of the above states’ statutes contain a requirement to conduct a reserve study.
First and foremost, it is crucial that the specific statutory reserve requirements are complied with, which evidently vary from stringent standards (Florida) to relatively lenient ones (Maine, NH, RI).
That being said, every association should implement best practices and some type of reserve system. While it is not a one-size-fits-all solution, Florida Senate Bill 4D provides some guidance, could be a harbinger for legislative reserve amendments in other states, and illustrates best practices that associations could begin following today.
Best Practices Recommendations that Associations Can Follow in their Development:
Ensure Compliance with Statutory Requirements
Conduct a Reserve Study: A Reserve Study minimizes the need for special assessment and enhances resale home values in communities, as well as decreases legal, fiduciary, and professional risk. There are different types of reserve studies based on funding goals, thresholds, and overall plan/specifics related to the association. It is good practice to sub-divide a board to address certain categories, and that is no different with a possible Reserve Study and Funding sub-committee.
Implement Reserve Account with Proper Funding: While this all sounds nice, the retort from most associations is going to indubitably be “but what’s the cost?”, especially because a reserve fund does not address immediate and visible outcomes. Unfortunately, a reserve account is a necessary balance that recommends additional contributions from unit owners – especially because the flipside could be an unexpected and costly special assessment. It may be worth consulting a reserve study professional or specialist to help navigate the best course of action with expected costs, maintenance, timelines, updates to residents, and overall budget.
Consultation with Engineer, Architect, and/or Other Suitable Experts: This is especially worthwhile in circumstances that are related to life, health, and safety.
Periodic Site Visit Review to Assess Reserve Study and Reality: This could include reviewing visual observations of the association and common areas and anticipated remaining useful life, but also includes reviewing the funding status and plan.
Preventative Measures where Necessary: As discussed above, reserve assessments may be met with hesitation. However, if there is a clear plan and funding related to a preventative maintenance schedule, repairs, renovations, and replacement based on aging, then the unit owners may be more open with preventative measures to address areas not covered by a reserve account.
Over 20 years ago, Tom Brady was the backup up in New England. As it stands today, he is in Florida and has been Mr. Reliable as his franchise has luckily not had to tap into their reserve quarterbacks at all. However, like associations, it looks like his organization may need to delve deeper into, or ensure they’ve established, a suitable reserve system for the near future to replace their dilapidated 45-year old quarterback.
Written by
Jake Marcus
jake@amcondolaw.com
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