New Reserve Study Changes with Current Pooled Reserve Account Overfunded in Some Categories - Complexities with Reallocation

Hi All,

Same 650 single family home HOA in and Florida - gated, amenities, pool, lodge, security, private roads. I’m on the Finance Committee in this community.

We have a generally well funded “pooled" reserve account based on 2014 reserve study with an annual contribution amount defined as a specific dollar amount (not percentage). There are 10 line elements in the reserve account that are tracked separately (but still funded as a pooled single account). The 2014 study did not include many elements of the complex community.

2020 reserve study recently completed by nationally known reserve analysis company with onsite reviews of amenities, etc. Results indicated lower than needed reserves, but not a crisis - total account could be corrected to that recommended by the reserve analysis by small transfer increases over the next four years. This reserve study is comprehensive, follows industry guidelines, and shows 35 separate lines in three very broad categories - site, buildings and pool.

Our first really large outlays include detention pond refurbishment continuing in 2021 (an underfunded component because the community ignored the maintenance of these 17 ponds for 10 years), and roads refurbishment (less % underfunded than ponds, but still a couple hundred $K) around 2027-2028 - most of the increases recommended from 2021-2027 are to increase funds to allow this to be accomplished and stabilize the process for the future. However, the reserve study does not address how to rebalance the funds already in the account.

We have already decided to increase reserve contributions (transfers) from assessments for 2021, and this process will continue , but, at the same time need to rebalance what is in the current pooled account. The process for doing this is something I have not had to address before.

The core question is how to rebalance per FS 720?

FS 720 (http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0700-0799/0720/0720.html) is a bit long winded, but seems to state that any change in the allocation inside a current reserve account requires a majority vote of the membership. This seems onerous, but possibly reasonable given how this could be manipulated by uninformed boards.

Is the easy answer to seek assistance from the reserve study company to assist in rebalancing, then package this proposal for membership vote? Is there a way for the Board to do this without membership involvement?

Given our timeline for billing for 2021 assessments we should have addressed this about six months ago, but the comprehensive 2020 study only completed in Oct, and Hurricane Sally cleanup has consumed a lot of time.

Anyone see other options?

Thanks in advance!

Oops; I think I conflated (f) and (g) above a bit. If one looks at the statute, I think one can figure out where I meant (f) and where I meant (g).

OK - I'm following.

Our HOA does have an attorney, but they are not an HOA attorney.

I will summarize the gist of the responses, herein, as, "The Board would be realigning funding inside a “pooled” HOA reserve account, but not reducing funding for the “pooled” HOA reserve account."

Is this accurate?

Augustin,

The reserve study is every well done and lays out, in 35 separate line items, all the components normally covered per national standards for reserve studies.

It has year by year funding outlays for each of the 35 components and recommends levels of total funding to be transferred into reserves, based on our total starting point balance. So, pretty darn comprehensive - BUT, it does not integrate the various lines in the original pooled account with the new list of 35 lines.

There are a couple of lines overfunded, and could of lines underfunded - as it stands now - but these are tracking lines, not separate accounts.

We would be adding about 20% more funds to the reserve account each of the next 5-6 years to bring it to levels of fully funded. It is pretty clear to the membership this is needed - no real pushback, yet.

My initial read of FS 720 was that we could reallocate inside the reserve account since it was and had always been a "pooled" fund per 720. Then the long-time, but non-HOA attorney said otherwise - then I started doubting my read of the statute - hence my post.

Avoiding a massive effort on something so straightforward was one of my goals ...

JohnC,

Right - we have a full allocation of how to spend based on 35 new categories.

The kerfuffle is about how to integrate those line items previously tracked from the last study - difference number of categories - and far larger number of specifics with this, professionally conducted study.

It would easy to simply not track the various components - as had been done since the last study in 2014 - but, the board has been accustomed to doing this, potentially because some of the the various components were underfunded - and, they got somewhat disjointed advice from the attorney when requiring a vote last time this was addressed.

Geno,

I agree, as well.

The issue, I think, is that the Board, and community, have become accustomed to seeing the various line items on a spreadsheet with specific numbers associated with each one - still in a single account, btw, and transfers made from assessments to that account - ie no sub accounts.

So, a clear position might be expressed? "While many of you have become accustomed to seeing these numbers broken out by the ten line items adopted following our first reserve study in 2014, it is important to recognize these were simply internal tracking numbers and are not "sub accounts" of the reserve fund. Our reserve fund is
"pooled" per the provisions of FS 720 - a single account. We are re-baselining our contributions to follow the categories determined by our recent reserve study, completed two months ago. Also, as the Board is not decreasing or waiving any transfers into the reserve fund, no vote of membership is required."

Had sort of the same reactions here last year. Changing from straight-line reserves to pooled (cash flow) reserves was confusing to many. The board thought it was up to the homeowners whether or not to change the method. Finally, the HOA attorney opined that while the board had the authority to switch from "straight line" to "pooled" reserves without the approval or consent of the owners, it would be proper to have the homwowners approve the transfer of funds from the individual reserve accounts to a single "pooled" account because one could argue that reserves set aside for the roofs, let's say, were being re-purposed for something else; i.e. the pooled reserves account. Such a minor change and it caused a big commotion as some tried to make a mountain out of a molehill. All the sub-reserve accounts added up to X dollars and, once combined into the pool, the total was still X dollars.

I think you need to have serious conversion with someone who actually understand the reserve study and how it works for a community. The answers I see here leave much to interpretation. Pooled funding may work for smaller association with very few components, but never for larger communities with many assets and especially with private streets, sewer systems and gate components.

My take:

-- The Florida Condominium Act was enacted in 1963. Over the years the Florida legislature has added to and amended the Act many times. The Florida Condo Act speaks of each method (straight-line accounting and pooled) method for reserve funding once, in Section 718.111 (13). Section 718.112 (2) (f) 3. seems to me to be the basis for law firms opining that a membership vote must occur for a HOA to switch from straight-line to pooled in its reserve planning. Here is one such opinion: https://www.floridacondohoalawblog.com/2018/11/19/procedure-to-convert-to-pooled-reserves/. This vote is mandatory. That is, the Board must arrange for it.

-- I think the Florida HOA Act was enacted around 1992, with again, many additions and amendments over the years. Section 720.303 (6) (g) states in part: "Funding formulas for reserves authorized by this section must be based on a separate analysis of each of the required assets or a pooled analysis of two or more of the required assets." The only section of the Florida HOA Act addressing votes on reserve funding is 720.303 (6) (f). The membership has the option of initiating such a vote. Otherwise, the statute does not mandate this vote.

-- With the advent of personal computers and mass usage of spreadsheets, the pooled (cash flow) method became the recognized superior method of estimating reserve funding.

-- Reserve Study standards only came into existence in the late 1990s (possibly reflecting the availability of the personal computer).

-- Regardless of what the HOA/Condo is doing in any annual presentation of reserve funding, today companies that perform Reserve Studies are going to do two things:

(1)
Estimate replacement costs (with COLA/interest/yada factored in) and years to replacement for each reserve component it identifies (sometimes with input from the Board).

(2)
Use the pooled (cash flow) method to determine future annual reserve funding, based on the current point in time; the current assessment; and recommended increases in the assessment as needed.

-- Reserve funding is not an exact science. For one, actual annul reserve component expenditures can vary widely from a Reserve Study's estimates. A condominium using the straight-line method must get votes anytime its published annual estimates vary from the actual expenditures, requiring some re-arranging of the dollar figures for the reserve components. Estimate errors are piled on top of estimate errors, all ridiculously demanding not a little labor, and I think entirely in the way of Sisyphus (rolling a boulder up a hill only to have it roll back down upon him again and again).Was this a condominium?

I am a new board member and am facing a challenging situation with reserve accounts. We have reserve accounts for specific components (i.e., pool, gazebo, etc). Since they are set up as component reserve accounts, FS720.303 prevents us from diverting funds from one component to repair another if there is not enough money available. I want to create a pooled reserve fund by merging these component reserve accounts, providing the Association with the flexibility to use reserve funds as needed. FS720 requires a majority vote to create or terminate a reserve fund; however, it is unclear whether a conversion from one account to another, which remains a reserve account, also requires a majority vote. Since we already have component reserve accounts, there is no need for voting; however, I am unsure about combining them into a single account. Can someone help me with this? Your feedback is very much appreciated.

Jim, please, please, please start a new thread. Some here will not read 5 year-old ones so you won't get as many replies.

Thank you for your pointer. I don't know the rules for this forum, so I didn't want to create a new discussion with similar content. I will do that next time.