Contingency Included in Florida HOA Reserve Study

SaraA (Florida)
Posts: 3

Posted:

Recently my Florida HOA hired a company to prepare a new reserve study at a cost of $10,000. Some of community members disagree with one line item in the reserve study and the payment calculations as presented by this company.

In addition to the normal maintenance and replacement items the company that prepared the study added a 5%/year contingency line item to the reserve components.

Florida State Statutes 720.303 section e
(e) The amount to be reserved in any account established shall be computed by means of a formula that is based upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item. The association may adjust replacement reserve assessments annually to take into account any changes in estimates of cost or useful life of a reserve item.

Our HOA documents are in agreement with the statutes as to what can be included in a reserve study. The BOD has been informed that the 5% contingency line item is in violation of the Florida State Statutes but has still approved this reserve study.

Some of the HOA members disagree with the payment schedule calculations and want to change the inflation rate from 4% to 3% and add 1% interest earned to the calculations. We are dealing with a $23M reserve study so the effect of these two changes is considerable over the 20 life of the study and amounts to a $3.5M difference in the cost to members.

Question:
1. What recourse does the general membership regarding this violation of Florida Statutes regarding the inclusion of the contingency line item in the reserve study?

2. Can the calculations presented by the reserve study company be legally changed (by the BOD) to reflected a lower inflation rate and interest calculation in the payment schedule?

MaryA1 (Arizona)
Posts: 7,043

Posted:

Sara,

I would suggest thoroughly reading the FL reserve statute requirements,to determine if you are legally bound to abide by what the reserve study says. I believe you can use the reserve study as a guide, but do not have to do everything that is recommended in the study. Whereas a contingency line item may not be allowed to be a part of a reserve fund, it's not a bad idea to have such a fund set aside for insurance deductibles and any unforeseen expenses that may arise. However, with a 23M reserve fund recommendation, I'm thinking your operating fund is probably substantial enough to cover any unforeseen expenses.

SaraA (Florida)
Posts: 3

Posted:

Thanks so much for your reply.
The statutes have all been reviewed...a contingency is not a valid reserve item according to the Florida Statues 720 governing HOA's..

We have a legal opinion stating the illegality of the inclusion of the contingency item in the reserve study in Florida.

My question is: now that we have gone through all the steps and notified the BOD they still insist on keeping the contingency item in the reserves-what recourse do the homeowners have?

Yes-it is a good idea to have contingency funds which we do have, i.e. $840,000 of $200,000 is designated for our insurance deductible if req1uired. The contingency portion of the reserves would add another $200,000 to the reserves balance in 5 years.

The BOD is trying to collect more funds than needed for normal replacement and maintenance so that there are excess funds in the reserve account. Since the reserve account is reviewed and voted upon every year, there is an opportunity to increase the amount spent for replacement and maintenance items or add new items.

In addition we have a new $1.3M expense in 2014 that the BOD is funding separately through a special asessment or loan via the membership.

In 2006 the reserve fund was totally depleted by the BOD for one project which was also illegal so in 2009 we have a reserve of $80,000 on $9.5M of assets.

Sorry to be so lengthly but most of our residents are retired and will be hit hard by the financial expectations of the BOD. Furthermore our property values in Florida have declined 30% so most of us want to hold off moving prior to finding a more equitable community. In other words we're kinda stuck here!

PeterB1 (Florida)
Posts: 257

Posted:

Sara,

You have asked some tough questions. I can make some 'educated' guesses - but I can also tell you how our reserve study went. I'm guessing that you have a larger facility as our costs were much lower.

We picked a firm which had offices in FL and were familiar with FL laws. Many of the items were open to discussion when the 'appraiser/adjuster' walked through our association. She asked questions related to age and condition and I guided her through the area. There were no surprises when I received the end product.

I would immediately want to know (if I were in your HOA): (1)is the firm licensed in FL and (2) are they both licensed and experienced in reserve studies. The responses may be a clue.

When our reserve study came back, I (as Treasurer) was asked if we had to accept all the recommendations as presented. Our accounting firm advised us NOT to mess with the study contents. Changing the assumptions on interest or inflation rates begs the question of the expertise of the BOD who makes changes to a professionally done reserve study.

Bottom line - IMHO: Changing the values or assumptions might expose the HOA (BOD) to legal action. After all, you hired out the study and now you want a non-professional to make changes. If you have a valid legal opinion concerning the contingency fund, I would ask the BOD to consider it. If they do not accept the opinion, they should seek their own legal opinion.

MaryA1 (Arizona)
Posts: 7,043

Posted:

Sara,

I have reviewed FL statute 720.303(6) (budgets) which includes info on reserve accouts. I agree a contingency fund is not a part of the reserve funding. Since the board is adamant about keeping this line item in the reserve funding, all the member have to do is not vote for it. Perhaps you can gather other like-minded members to put together a listing of all the objectional items in the reserve funding. Educate the members and ask that they vote no to these items. That's about all you can do!

With a reserve account of approx $23M I cannot understand why the board would be proposing a special assessment or a loan. I certainly would question that action!

GlenL (Ohio)
Posts: 5,491

Posted:

Quote:

Posted By MaryA1 on 10/23/2009 4:15 PM

With a reserve account of approx $23M I cannot understand why the board would be proposing a special assessment or a loan. I certainly would question that action!

Mary the 23M is when the reserves are fully funded in presumably 15-20 years they currently only have $80,000.00 in reserves.

Studies show that 5 out of 4 people have problems with fractions

MaryA1 (Arizona)
Posts: 7,043

Posted:

Thx Glen! Somehow I missed that. Looks like their funding might be a little slim! I wonder how much they need to be fully funded at this point because that's what they should be looking at. That 20-30 year figure will change as our economy changes.

SaraA (Florida)
Posts: 3

Posted:

Dear Mary A1 (Arizona)
My main concern is that the BOD is collecting more funds than needed.
The budget was approved as the community Voting respresentatives were unaware that contingency funds are illegal in reserve funds according to Flroida State Statutes. The voting respresentative were not informed and passed the budget with a one year reserve plan which did include an allotmment for the contingency contribution.

My question is what recourse do the members have now that the budget has been passed?

I'd also be interested to know what inflation rate and interest rates other HOA's are using in their payment plan schedule calculations. Our was calculated at 2% for 2010 and 4%/year thereafter for 20 years with no interest earned over 20 years.

MaryA1 (Arizona)
Posts: 7,043

Posted:

Sara,

I must be missing something, but I cannot understand how you can say the board is collecting more funds than needed when you also stated the reserve fund was depleted just 3 yrs ago and now only has $80,000 in it. At what % is the reserve fund right now? Surely not 100% or more!

If the members have already voted on the reserve funding then I don't know that anything can be changed. Frankly, I don't believe a contingency fund is illegal, it just should not be a part of the reserve funding. All the board has to do is separate those funds from the reserve funds and no harm is done. Because it's not a state law requirement; and if it's not required in the gov docs, the members would not have to vote on the contingency fund either.

EricD4 (Florida)
Posts: 1

Posted:

We've seen similar discussions from Tampa associations dealing with deferred maintenance and SIRS requirements under HB 1021.

DeanJ
Posts: 1,786

Posted:

Quote:

Posted By SaraA on 10/23/2009 6:53 AM
Recently my Florida HOA hired a company to prepare a new reserve study at a cost of $10,000. Some of community members disagree with one line item in the reserve study and the payment calculations as presented by this company.

In addition to the normal maintenance and replacement items the company that prepared the study added a 5%/year contingency line item to the reserve components.

Florida State Statutes 720.303 section e
(e) The amount to be reserved in any account established shall be computed by means of a formula that is based upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item. The association may adjust replacement reserve assessments annually to take into account any changes in estimates of cost or useful life of a reserve item.

Our HOA documents are in agreement with the statutes as to what can be included in a reserve study. The BOD has been informed that the 5% contingency line item is in violation of the Florida State Statutes but has still approved this reserve study.

Some of the HOA members disagree with the payment schedule calculations and want to change the inflation rate from 4% to 3% and add 1% interest earned to the calculations. We are dealing with a $23M reserve study so the effect of these two changes is considerable over the 20 life of the study and amounts to a $3.5M difference in the cost to members.

Question:
1. What recourse does the general membership regarding this violation of Florida Statutes regarding the inclusion of the contingency line item in the reserve study?

2. Can the calculations presented by the reserve study company be legally changed (by the BOD) to reflected a lower inflation rate and interest calculation in the payment schedule?

Consumer inflation in the US the last 25 years has been 2.5-3.5%. But construction inflation, the cost of material and labor to make repairs, has averaged 7-8% over the last several years. Construction inflation in 2021 and 2022 was 14%. The 25 year average for construction inflation (3.1-4.1%) exceeds the 3% your owners want to use and your reserve study has a more reasonable estimate. I think your owners are hoping for rainbows on this item.

The assertion this study will cost the owners $3.5 million over 20 years is bunk. Your HOA will adopt several more reserve studies over that period and adjustments will occur.

Your reserve funding was computed by means of a formula that was BASED upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item. Your reserve study used “a formula” (any formula the HOA decides to use) that included the required items has met the requirements of the law and a 5% variable in that formula is not a violation.

DeanJ
Posts: 1,786

Posted:

Quote:

Posted By n/a on 10/24/2009 8:11 PM
Sara,

I must be missing something, but I cannot understand how you can say the board is collecting more funds than needed when you also stated the reserve fund was depleted just 3 yrs ago and now only has $80,000 in it. At what % is the reserve fund right now? Surely not 100% or more!

If the members have already voted on the reserve funding then I don't know that anything can be changed. Frankly, I don't believe a contingency fund is illegal, it just should not be a part of the reserve funding. All the board has to do is separate those funds from the reserve funds and no harm is done. Because it's not a state law requirement; and if it's not required in the gov docs, the members would not have to vote on the contingency fund either.

In Florida 720.303, the section of law Sara references at BUDGETS.--The association shall prepare an annual budget. The budget must reflect the estimated revenues and expenses for that year and the estimated surplus or deficit as of the end of the current year. (b) In addition to annual operating expenses, the budget may include reserve accounts for capital expenditures and deferred maintenance for which the association is responsible.

Clearly the law does not require a balanced budget.

JackS20 (North Carolina)
Posts: 271

Posted:

Quote:

Posted By DeanJ on 01/24/2026 12:21 PM

Posted By SaraA on 10/23/2009 6:53 AM
Recently my Florida HOA hired a company to prepare a new reserve study at a cost of $10,000. Some of community members disagree with one line item in the reserve study and the payment calculations as presented by this company.

In addition to the normal maintenance and replacement items the company that prepared the study added a 5%/year contingency line item to the reserve components.

Florida State Statutes 720.303 section e
(e) The amount to be reserved in any account established shall be computed by means of a formula that is based upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item. The association may adjust replacement reserve assessments annually to take into account any changes in estimates of cost or useful life of a reserve item.

Our HOA documents are in agreement with the statutes as to what can be included in a reserve study. The BOD has been informed that the 5% contingency line item is in violation of the Florida State Statutes but has still approved this reserve study.

Some of the HOA members disagree with the payment schedule calculations and want to change the inflation rate from 4% to 3% and add 1% interest earned to the calculations. We are dealing with a $23M reserve study so the effect of these two changes is considerable over the 20 life of the study and amounts to a $3.5M difference in the cost to members.

Question:
1. What recourse does the general membership regarding this violation of Florida Statutes regarding the inclusion of the contingency line item in the reserve study?

2. Can the calculations presented by the reserve study company be legally changed (by the BOD) to reflected a lower inflation rate and interest calculation in the payment schedule?

Consumer inflation in the US the last 25 years has been 2.5-3.5%. But construction inflation, the cost of material and labor to make repairs, has averaged 7-8% over the last several years. Construction inflation in 2021 and 2022 was 14%. The 25 year average for construction inflation (3.1-4.1%) exceeds the 3% your owners want to use and your reserve study has a more reasonable estimate. I think your owners are hoping for rainbows on this item.

The assertion this study will cost the owners $3.5 million over 20 years is bunk. Your HOA will adopt several more reserve studies over that period and adjustments will occur.

Your reserve funding was computed by means of a formula that was BASED upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item. Your reserve study used “a formula” (any formula the HOA decides to use) that included the required items has met the requirements of the law and a 5% variable in that formula is not a violation.

thsi post is many years old and resurfaced due to a spammer posting his company's services to get money off reserve studies.