Reserve fund redux

Started by VC • 27 replies • 399 views

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VC (Florida(FS 720))
Posts: 118

Posted:

Our board, of which I am a member, just paid $3,200 for the clubhouse tile floor cleanup out of the Common Reserve.

At our next meeting on Tue, I am going to propose a motion to pay this amount back by transferring money fromthe operating fund to the Reserve fund because the payment of this sort contradicts the Florida law on reserve fund money usage.

What possible objections can they offer to such a motion ?

Thanks.

ElleN (Idaho)
Posts: 4,420

Posted:

VC, do you know that searching this site for past posts by you is, for all intents and purposes, impossible?

Is this a condo?

What do you mean by "tile floor cleanup"? Exactly what was done?

What does the most recent reserve study say about (1) the clubhouse and (2) the floors?

Exactly which statute section do you think is being violated?

VC (Florida(FS 720))
Posts: 118

Posted:

1. No, I am not aware if that. What exactly is the problem and how can I fix it ?

2. It's a clubhouse in a mixed SFH/TH HOA. A crew came in and did the tile floor steam cleaning. No tile was replaced.

3. The clubhouse floor is not mentioned at all in the recent study. It's a tile floor which is supposed to last "forever".

4. The common reserve fund is supposed to be used for capital item *replacements*, such as roof, furniture, gym equipment, etc. Nothing was replaced in this case. therefore, tile cleaning should be paid from the operating fund.

If we use the logic that tile floor cleaning is "capital replacement", then weekly janitorial service should also be paid from the reserve fund.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By VC on 07/30/2023 9:24 AM
1. No, I am not aware if that. What exactly is the problem and how can I fix it ?

The problem is that one is left guessing which of several Florida statutes apply. You can fix this by stating which of the several HOA/COA/COOP/Rec Vehicle park statutes apply. Is it FS 718? FS 720? One of the other statutes? Look in the first few pages of the HOA's Declaration to determine which statute section applies. If you cannot answer this, then you should not bother trying to argue with the board.

Quote:

Posted By VC on 07/30/2023 9:24 AM

2. It's a clubhouse in a mixed SFH/TH HOA. A crew came in and did the tile floor steam cleaning. No tile was replaced.

3. The clubhouse floor is not mentioned at all in the recent study. It's a tile floor which is supposed to last "forever".

4. The common reserve fund is supposed to be used for capital item *replacements*, such as roof, furniture, gym equipment, etc. Nothing was replaced in this case. therefore, tile cleaning should be paid from the operating fund.

I tend to agree with your view of this. However when challenging a board majority, iron-clad arguments are what one should seek.

You posted, "the payment of this sort contradicts the Florida law on reserve fund money usage." If you are going to make this argument, then you had better be able to state the section of Florida law that you claim is being contradicted.

So again, what section is being contradicted?

VC (Florida(FS 720))
Posts: 118

Posted:

Ok, I'll add FS 720 to my location, thanks.

I'd say this is the paragraph that we clash with [ FS 720.303(6)(h) ]:

(h) Reserve funds and any interest accruing thereon shall remain in the reserve account or accounts and shall be used only for authorized reserve expenditures unless their use for other purposes is approved in advance by a majority vote at a meeting at which a quorum is present. Prior to turnover of control of an association by a developer to parcel owners, the developer-controlled association shall not vote to use reserves for purposes other than those for which they were intended without the approval of a majority of all nondeveloper voting interests voting in person or by limited proxy at a duly called meeting of the association.

The just checked the latest reserve study. The floor is there, sorry, I missed it the first time. Here's what it says:

Quantity: Approximately 350 square yards at the kitchen and rest room
History: Original
Condition: Good overall
Useful Life: Up to 30 years. The Association should fund regrouting of the tiles. (we are in the year 16 out of 30).
through the operating budget if necessary.

Tile cleaning is not there, therefore, us paying for that from the reserve contradicts 720.303(6)(h).

KerryL1 (California)
Posts: 14,550

Posted:

How did your HOA spend $3,200 on cleaning the tile floor? Did your Board approve the contract? Were there bids? How old is the floor?

Are you certain reserves must only be paid to "replace" items in the Study? Not "repair?" Not "maintain?" What's the wording in your reserve study for your clubhouse?

Our HOA steam-cleaned our large sf locker rooms' area floors & walls a few years back and paid out of our operating budget.

VC (Florida(FS 720))
Posts: 118

Posted:

Quote:

Posted By KerryL1 on 07/30/2023 10:12 AM
How did your HOA spend $3,200 on cleaning the tile floor? Did your Board approve the contract? Were there bids? How old is the floor?

Are you certain reserves must only be paid to "replace" items in the Study? Not "repair?" Not "maintain?" What's the wording in your reserve study for your clubhouse?

Our HOA steam-cleaned our large sf locker rooms' area floors & walls a few years back and paid out of our operating budget.

They steam cleaned the tile floors (16 year old). Yes, there were bids and we approved the contract. I implicitly assumed that it would be paid out of the operating budget, as in your case, but was surprised to find out that it was paid with the reserve fund money.

If you conflate "capital replacement" with "maintain"/"repair", then the very meaning of the reserve fund is lost because *everything* can be paid out of reserve: lawn mowing, janitorial services, office supplies, pressure washing, termite treatment, etc. So, we would not need a reserve fund at all and just use the operating budget !

VC (Florida(FS 720))
Posts: 118

Posted:

I have a follow-up question.

What is the definitive document for "authorized reserve expenditures" ? Is it the latest reserve study (my understanding) ? I never saw that expression clarified.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By VC on 07/30/2023 10:02 AM
Ok, I'll add FS 720 to my location, thanks.

I'd say this is the paragraph that we clash with [ FS 720.303(6)(h) ]:

(h) Reserve funds and any interest accruing thereon shall remain in the reserve account or accounts and shall be used only for authorized reserve expenditures unless their use for other purposes is approved in advance by a majority vote at a meeting at which a quorum is present. Prior to turnover of control of an association by a developer to parcel owners, the developer-controlled association shall not vote to use reserves for purposes other than those for which they were intended without the approval of a majority of all nondeveloper voting interests voting in person or by limited proxy at a duly called meeting of the association.

The just checked the latest reserve study. The floor is there, sorry, I missed it the first time. Here's what it says:

Quantity: Approximately 350 square yards at the kitchen and rest room
History: Original
Condition: Good overall
Useful Life: Up to 30 years. The Association should fund regrouting of the tiles. (we are in the year 16 out of 30).
through the operating budget if necessary.

Tile cleaning is not there, therefore, us paying for that from the reserve contradicts 720.303(6)(h).

Thank you for this rather thorough post. When you start a thread, if you can note that your HOA is subject to FS 720, IMO this will help those readers willing to get into the legal weeds here. And I guarantee you, I can count on one hand the people who maybe are willing to get into the legal weeds here.

Did you see this section of 720.303 (6)

(d) An association is deemed to have provided for reserve accounts upon the affirmative approval of a majority of the total voting interests of the association. Such approval may be obtained by vote of the members at a duly called meeting of the membership or by the written consent of a majority of the total voting interests of the association. The approval action of the membership must state that reserve accounts shall be provided for in the budget and must designate the components for which the reserve accounts are to be established. Upon approval by the membership, the board of directors shall include the required reserve accounts in the budget in the next fiscal year following the approval and each year thereafter. Once established as provided in this subsection, the reserve accounts must be funded or maintained or have their funding waived in the manner provided in paragraph (f).?

Has this owners' vote taken place?

If not, then so far by my reading, the section you cited (720.303 (6) (h) ) does not apply.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By ElleN on 07/30/2023 1:45 PM

Did you see this section of 720.303 (6)

(d) An association is deemed to have provided for reserve accounts upon the affirmative approval of a majority of the total voting interests of the association. Such approval may be obtained by vote of the members at a duly called meeting of the membership or by the written consent of a majority of the total voting interests of the association. The approval action of the membership must state that reserve accounts shall be provided for in the budget and must designate the components for which the reserve accounts are to be established. Upon approval by the membership, the board of directors shall include the required reserve accounts in the budget in the next fiscal year following the approval and each year thereafter. Once established as provided in this subsection, the reserve accounts must be funded or maintained or have their funding waived in the manner provided in paragraph (f).?

Has this owners' vote taken place?

If not, then so far by my reading, the section you cited (720.303 (6) (h) ) does not apply.

It appears that at least the first sentence of this section is relatively new. Before 2021, the first sentence read:"An association is deemed to have provided for reserve accounts if reserve accounts have been initially established by the developer or if the membership of the association affirmatively elects to provide for reserves." More verbiage followed about the developer.

Perhaps many Florida HOAs now need to have this owners' vote approving (forcing, really) reserve accounts in the budget and so on.

VC (Florida(FS 720))
Posts: 118

Posted:

Quote:

Posted By ElleN on 07/30/2023 1:59 PM

Ah, that's exactly our case:

An association is deemed to have provided for reserve accounts if reserve accounts have been initially established by the developer.

The developer did establish the reserve accounts(Common and TH), so 720.303 (6) (h) should apply.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By VC on 07/30/2023 2:06 PM
Ah, that's exactly our case:
[ElleN edit: Quoting an outdated statute sentence]
An association is deemed to have provided for reserve accounts if reserve accounts have been initially established by the developer.

The developer did establish the reserve accounts(Common and TH), so 720.303 (6) (h) should apply.

Au contraire. In 2020, FS 720.303 (6) (d) had this phrase about the developer. Starting in 2021 or so, this phrase went away.

At present I believe that the Board now has a lot of wiggle room to get away with what you described in the first post. It is slovenly, but I think the statute is clear it's allowed.

I advise that you start your re-read at 720.303 (6) (b). Read through 720.303 (6) (i).

In my opinion "authorized reserve expenditures" means, in part, 'authorized by 720.303 (6) (d).'

At present if I were on your board, then I would be inclined to drop this.

Consider going after the board to have the owners' vote described in 720.303 (6) (d).

SheliaH (Indiana)
Posts: 6,964

Posted:

Did you raise any objection when the board was discussing this before a vote was taken? If not, why not?

Reserves are supposed to be used to pay for major repairs or replacements to the common area, so that's where you start. If they did this because there wasn't enough money in the operating budget, it's time to have a serious conversation about its funding, starting with asking if your assessments aren't keeping up with inflation.

They can say whatever they want and you can't predict what that will be, so you'll just have to make your case as best you can and keep tge bote come down. If you're outbited, you could ask if you can add a one page statement expressing your concerns to the minutes

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

ElleN (Idaho)
Posts: 4,420

Posted:

VC, a number of law firm sites addressed this 2021 change to FS 720. I found this quite helpful: https://www.floridacondohoalawblog.com/2021/11/24/are-reserves-still-mandatory-for-homeowners-associations/

Also google on:

"reserve" "vote" "720.303"

VC (Florida(FS 720))
Posts: 118

Posted:

Quote:

Posted By SheliaH on 07/30/2023 2:21 PM
Did you raise any objection when the board was discussing this before a vote was taken? If not, why not?

Reserves are supposed to be used to pay for major repairs or replacements to the common area, so that's where you start. If they did this because there wasn't enough money in the operating budget, it's time to have a serious conversation about its funding, starting with asking if your assessments aren't keeping up with inflation.

They can say whatever they want and you can't predict what that will be, so you'll just have to make your case as best you can and keep tge bote come down. If you're outbited, you could ask if you can add a one page statement expressing your concerns to the minutes

I did not raise objections at the time the tile cleaning was discussed because I just assumed it'll be paid out of the operating budged (Misc Maintenance). I was obviously wrong and should have asked where this work would be paid from.

There was enough money in the op budget. I am going to try and convince them to reclassify the expense based on the same reasoning you've suggested.

VC (Florida(FS 720))
Posts: 118

Posted:

Quote:

Posted By ElleN on 07/30/2023 2:23 PM
VC, a number of law firm sites addressed this 2021 change to FS 720. I found this quite helpful: https://www.floridacondohoalawblog.com/2021/11/24/are-reserves-still-mandatory-for-homeowners-associations/

Also google on:

"reserve" "vote" "720.303"

Ellen, thanks !

Just looked at the bylaws: we have this situation:

Reserve accounts are no longer considered “mandatory” if reserve accounts “have been established by the developer.” However, reserve accounts are considered “mandatory” if the declaration, articles, or bylaws (the “Governing Documents”) obligated the developer to create reserve accounts.

From our bylaws:
The Board shall prepare and periodically review separate reserve budgets for the Common Maintenance Area, and for each Service Area.
The reserve funds held in each account may be expended only for major maintenance, repair, or replacement of those assets covered by the reserve budget pursuant to which they were collected.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By VC on 07/30/2023 2:43 PM

From our bylaws:
The Board shall prepare and periodically review separate reserve budgets for the Common Maintenance Area, and for each Service Area.
The reserve funds held in each account may be expended only for major maintenance, repair, or replacement of those assets covered by the reserve budget pursuant to which they were collected.

Great. Then my argument to the board would be as follows:

"The reserve study determines the reserve budget. For the clubhouse floor, the reserve study considers solely the cost of replacement of the tile. It's on page ____, line item ____. See? The cost of replacement is put at $___. This line item in the reserve study funds solely replacement and nothing else. Hence as far as the clubhouse floor is concerned, reserve funds are solely for replacement of the tile.

If for some reason the operating funds are low, I suggest you come up with another way to pay for the floor cleaning. It's one thing to criticize. It's another to have to come up with solutions. I say: Play fair.

One more thing: You are almost assuredly the only one on the board who is going to understand the statute section and bylaw. Expect pushback in the form of the directors being volunteers who do not have either the time or skill set to study these things the way you do. I can almost guarantee that they have no understanding of how reserve funding and reserve studies work. Be ready to lose this battle. In my opinion it is not a battle worth making enemies over.

I am not sure the statute section is all that relevant at this point. The bylaw is powerful enough by itself, IMO.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By ElleN on 07/30/2023 2:59 PM
Great. Then my argument to the board would be as follows:

In your argument to the board, start by referencing the bylaw you cited above.

VC (Florida(FS 720))
Posts: 118

Posted:

Quote:

Posted By ElleN on 07/30/2023 2:59 PM
Posted By VC on 07/30/2023 2:43 PM

From our bylaws:
The Board shall prepare and periodically review separate reserve budgets for the Common Maintenance Area, and for each Service Area.
The reserve funds held in each account may be expended only for major maintenance, repair, or replacement of those assets covered by the reserve budget pursuant to which they were collected.

Great. Then my argument to the board would be as follows:

"The reserve study determines the reserve budget. For the clubhouse floor, the reserve study considers solely the cost of replacement of the tile. It's on page ____, line item ____. See? The cost of replacement is put at $___. This line item in the reserve study funds solely replacement and nothing else. Hence as far as the clubhouse floor is concerned, reserve funds are solely for replacement of the tile.

If for some reason the operating funds are low, I suggest you come up with another way to pay for the floor cleaning. It's one thing to criticize. It's another to have to come up with solutions. I say: Play fair.

One more thing: You are almost assuredly the only one on the board who is going to understand the statute section and bylaw. Expect pushback in the form of the directors being volunteers who do not have either the time or skill set to study these things the way you do. I can almost guarantee that they have no understanding of how reserve funding and reserve studies work. Be ready to lose this battle. In my opinion it is not a battle worth making enemies over.

I am not sure the statute section is all that relevant at this point. The bylaw is powerful enough by itself, IMO.

Thanks, Ellen !

Yeah, I am ready to lose but I'll try anyway.

I am not going to be too emotional about it.

ElleN (Idaho)
Posts: 4,420

Posted:

VC, I did find some of your other recent posts, several involving what I judge to be inappropriate withdrawals from the reserve funds. I get that these are adding up and your fellow directors seem to not care. I wonder if they have any clue about why this money is there. A lot of "newbies" to HOA budgeting do not understand why cash just sits in a bank account when the HOA has immediate needs.

KerryL1 (California)
Posts: 14,550

Posted:

It sounds I as if your Board is pretty ignorant about your reserves funds. This isn't unusual. It would be really good for your board and assn. if your Board invite your reserves specailts to visits and explain Reserves to them and to your membership. Ours visits every 2-3 years, at no cost, and is always well received and appreciated.

It's always best to search your own documents before wading through statutes. Based on your own HOA's docs, it's clear that the common area tile floor's maintenance and repair are not reserve components. Your study does call for regrouting the tiles (major repair), but suggests you do that with the operating budget. (To me this qualifies as "major maintenance," and could be a reserve item. but leave it alone for now.)

As a board member, and maybe you're kind of new, VC, write in the margin of every agenda item at every meeting that's going to require an expenditure: "Where's the $ coming from?" if you don't see it in your materials for the meeting. The director or manager who wrote the agenda item for steam-cleaning the floors should have included the source of funds in their material for the board to review. So they were mistaken to leave it out.

Yes, of course, the steam cleaning should have been paid for out of your operating budget's, "Misc. Maintenance" line item. And that's what the motion-maker should have included IN the motion. You've written there are enough O.B. funds.

So you need to ask to place this on the agenda in a friendly way. Does the president determine what goes on the agenda? Or may any directors submit an item with the proper background material (as in my HOA)? I'd avoid being very formal, but make sure you include the copy of the clubhouse reserve verbiage from your reserves analyst, and your Bylaws verbiage. You might try something like:

"I recently learned from our documents that steam cleaning clubhouse tile should be expensed from our operating budget. But even though not in the motion, it was expensed from reserves. There is a balance of $xxx in the Misc. Maintenance, GL# xxx. Our reserves, meanwhile, "are not as well-funded as is wise: (if true) OR "to make our reserves even healthier," I move that the Board approve transferring $3,200 from our op budget, GL#xxx, to our reserves study."

Yes, I agree that "authorized reserve expenditures" are in your latest Board-acknowledged final reserves study (vs. a draft)

TimB4 (Tennessee)
Posts: 21,062

Posted:

Quote:

Posted By ElleN on 07/30/2023 8:14 AM
VC, do you know that searching this site for past posts by you is, for all intents and purposes, impossible?

I have noticed this with some user names.
From what I figured out, this is mainly due to the site removing spaces.

For info on how to search for past posts by anyone:

Click on my profile
Click on view posts by user
Replace your username with the user name of the individual you want to review posts of.
Click on Search

Typically, usernames on any forum site require 3 letters.
In VC's case, I added a space between the V and C and was able to pull up past posts.

ElleN (Idaho)
Posts: 4,420

Posted:

Quote:

Posted By TimB4 on 07/31/2023 12:01 AM

For info on how to search for past posts by anyone:

Click on my profile
Click on view posts by user
Replace your username with the user name of the individual you want to review posts of.
Click on Search

Typically, usernames on any forum site require 3 letters.
In VC's case, I added a space between the V and C and was able to pull up past posts.

TimB4, thank you for this valuable information. I will be using it.

SheliaH (Indiana)
Posts: 6,964

Posted:

Quote:

Posted By VC on 07/30/2023 2:33 PM
Posted By SheliaH on 07/30/2023 2:21 PM
Did you raise any objection when the board was discussing this before a vote was taken? If not, why not?

Reserves are supposed to be used to pay for major repairs or replacements to the common area, so that's where you start. If they did this because there wasn't enough money in the operating budget, it's time to have a serious conversation about its funding, starting with asking if your assessments aren't keeping up with inflation.

They can say whatever they want and you can't predict what that will be, so you'll just have to make your case as best you can and keep tge bote come down. If you're outbited, you could ask if you can add a one page statement expressing your concerns to the minutes

If the money did come out of reserves, reclassifying it isn't enough - the money spent should be transferred from the operating budget (perhaps via the miscellaneous expense line item) to reserves.

Of course, you see how important it is to pay attention to the details when these motions come up before a vote is taken.....

The other posters raised good points about understanding the difference between reserves and operating budgets, so you may want to add that to your arguments. Reserves isn't a pot of money boards can use for whatever reason they want - otherwise, they'll find the money isn't there when it's time for a repair or replacement that was supposed to be paid with reserves. That can lead to special assessments and/or a loan, which increases costs for everyone.

You didn't say when your community will have another reserve study - if it's coming up, that's one point (among many) I'd ask the specialist to drive home when presenting the findings.

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

VC (Florida(FS 720))
Posts: 118

Posted:

Kerry,

Thanks a lot !

VC (Florida(FS 720))
Posts: 118

Posted:

Quote:

Posted By SheliaH on 07/31/2023 6:16 AM
Posted By VC on 07/30/2023 2:33 PM

You didn't say when your community will have another reserve study - if it's coming up, that's one point (among many) I'd ask the specialist to drive home when presenting the findings.

It's coming up at the end of the next year. The latest was done at the end of 2021

SheliaH (Indiana)
Posts: 6,964

Posted:

Excellent!

I also hope the board considers scheduling a special homeowners meeting where they can also hear the findings and ask questions. I'm sure some of them also think of reserves as a garden variety savings account, which it really isn't, so they need to remember that when they howl about assessment increases. An IRA is probably similar - you save money now so you'll have more financial resources when you retire and hopefully won't have to resort to working as a greeter at Wal-Mart for extra money (oh, wait, they don't have those anymore...)

If it is not right do not do it; if it is not true do not say it. Marcus Aurelius

KerryL1 (California)
Posts: 14,550

Posted:

Pay attention to Shelia, VC. As with me, she has many years experience as an HOA board member. I also think she was treasurer.

As I suggest above, your reserve specialist probably will be very happy to speak to to your Board and owners.

Who keeps track now of your reserve changes throughout the year? Maybe components have been repaired so the specialist will "reset" their estimated remaining life, etc.

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