Use of Reserves Justification

What kind of procedures do most boards use to outline the justification of using reserves in terms of documentation and notification of homeowners? If someone were to question the use of reserves inappropriately, what would be the backup to show the judgement used in the decision?

Im asking on a case by case basis. What backup do you keep to protect yourself in case someone questions the use of reserves for something that doesn't appear necessary on the surface.

Your reserves study lists all components that may be repaired or replaced with reserves funds. If something is not in the reserves study, reserves should not be used.

Doesn't FL legislation tell you anything about this topic, Jason?

Notwithstanding a state law that says otherwise, I think a board has the authority to replace and repair as they see fit. If there is a reserve study, they should try to follow it as much as possible but a reserve study can only estimate replacement and repairs. I don't think it is appropriate to use reserves unnecessarily but what is necessary is a judgement call.

I don't think it's necessary to keep documentation proving the board used good judgement, other than stating the reason for replacement/repair in the minutes.

Right Sheila, its always a good idea to wait until something bad happens to devise a plan. Thoughtful people prepare for all likely scenarios. This is why so many condos are so dysfunctional. If a condo board can replace anything they want claiming "judgement", then the reserve is just a big slush fund to use for whatever they want to do.

Here are the criteria per Davis-stirling.com, a CA HOA law firm site: "Spending Restrictions. Boards may not spend reserve funds for any purpose other than the repair, restoration, replacement, or maintenance of, or litigation involving the repair, restoration, replacement, or maintenance of, major components that the association is obligated to repair, restore, replace, or maintain." (Civ. Code §5510(b).)

The word "obligated" means components listed in the study.

So, again, for CA. The reserve study itself estimates the useful life (EUL) and the estimated replacement cost. A good reserves analyst knows how to make these estimates suing a variety of tools. So...the Board decides to replace a component. They will discuss it at an open meeting and, in FL Owners who attend can ask questions about it. Directors might reply as backup, "this costs $xx more than estimated because there now are more technologically advanced versions on the market." This would be in the meeting minutes.

I have to say, though, that with 11 years on my board, no owner has ever questioned the replacement costs we discuss at open meetings. I don't think many owners read the study at all, which they get online or via US mail annually. We do, though, have over 80 components, so it's a lot to read.

Here, all of the residential hallway carpeting and wall covering was replaced when the two 25-story towers were only 6 years old. The EUL was 10 years and the est. cost on the study was much lower than the actual replacement cost. But the original study had been done by the developer, and developers are notorious for under & overestimating those two factors to keep dues lower in order to sell more product faster. The Board argued that we had to have better quality carpeting that would last longer. It's now 10 y.o. and is good for another year or two. BUT, because it was so premature, it put a big hole in our reserves that took several years to fill.

As Ben points out, some of those are judgement calls, but a majority on the Board would have to agree and, in FL, anyway, owners can argue with the Board about replacing the components.

If you're worried about protecting directors in their decisions about reserves expenses, if they follow their study and practice reasonable inquiry on replacement or repairs, they shouldn't have any trouble. If you're worried, Ben, about Boards spending reserves lavishly and carelessly, Onwers would want to fans together and vote to replace as many as possible at the next election.

Pooling reserves is called the cash flow method (vs. the component method).
Under the cash flow method, the Reserve is one large pot of money with the intent being that when maintenance or replacement are needed, there is enough money in the pot to cover.

Utilizing that method with the scenario you suggest, could occur. However, the funding of the reserves is designed to replace components as they are, not enlarge them. Yet, a poor board could certainly do as you describe PROVIDING the membership allows it.

The membership is the check and balance for the Board.
This is why it's important for the members to know what the board is doing and how they are doing it.
To better enable this to occur, many States enacted open meeting requirements along with better access to records. However, nobody can force the members to actually utilize those options.


No.
If that happened, the membership better be ready for special assessments to perform the maintenance or replacement of the next item, as the correct funding won't be available and they won't be available because the members allowed that to happen by not paying attention until it was too late.

Then they need someone like you to educate them.

There's a limit on alterations, but not on use of the reserves. Which is why they call everything a "replacement". I think this is more a civil fiduciary issue than a legal one, the more I look into this. There's a plan in place to upgrade the building into a super luxury building, and they're systematically replacing everything using the reserves. The classic using other people's money to enact an agenda.

I almost thought you lived in my 'development'.

ditto

Condo or HOA, Jason?

To use the reserves for anything other than the component(s) that the reserve funds are being set aside for is only possible with a vote of approval by the homeowners (or unit owners in a condo).

As long as the funds are being expended to repair, replace or prolong the useful life of a component, the expense is usually justified. This assumes you're in an HOA subject to the statutory reserve requirements of FS 720. Some HOAs, such as my own, pre-date the passage of FS 720 and therefore some of the reserves language does not apply unless the developer established reserves before turnover or the homeowners affirmatively elect to handle their reserves in accordance with FS 720.

Jennifer,

If the current reserve study used a cash flow method and the previous reserve study used a component method, this could explain why the reserves may be seen as over funded.

Personally, I believe that the component method is the most prudent.
The cash flow method, in my opinion, does work for those Associations where the membership doesn't want to raise assessments.

Jennifer wrote:
"The board decided to privately rescind the Reserve policy reportedly in a planning meeting (which clearly states the reserves are not to be used for enhancements or capital improvements)." Are you saying that the Board made this decisions behind closed doors? And that it opposes your governing docs and/or CO laws re: open meetings

In CA, for instance, we may not as a Board take any action in so-called planning or orientation meetings. Decisions such as your Board's would be required to be made in open meetings. I think CO has the same open meeting laws, yes?

What percent funded are your reserves per your study?? Some HOAs do have landscaping in their studies, but I take yours does not, right?

It sounds you & others will take this to court. Do you think it's possible that letters from owners to the Board, or you all speaking out at the next open meeting might persuade the Board to act differently? It'd be a lot cheaper. On the other, what if you called a special meeting of the members? We only need 5% to sign for one and then the Board must permit it. The topic could be discussed there. In fact you might be able to a have two topics the ransacking of reserves and the requirement to build giant greenhouses. OR you could call two special meetings of the members. Check your bylaws for more.

In other words, this Board seems to need to have its feet held to the fire, or be thrown out at the next election.