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The Trouble with Fixed Reserves PDF Print E-mail
Written by Dan Bloomquist   
Friday, 18 July 2014 12:12

 

Assigning fixed reserve to the components of a Reserve Study is done as human intervention of the standard distribution of reserves. Usually reserve are distributed to components starting with the earliest replacements and working on down through the later. The amount of distribution is the fully funded value of the components; the component cost minus the straight line depredated value of the component. The formula in its simplest form is:

Fully Funded Reserves = Age divided by Useful Life the results multiplied by Current Replacement Cost

The state where fixed reserves is often use is Florida. That as a result of the way common property reserve laws are written. It seems to stem from these sections:


FL Condo Law; Chapter 718.112 Bylaws.—

(f)?Annual budget.—

3.?Reserve funds and any interest accruing thereon shall remain in the reserve account or accounts, and may be used only for authorized reserve expenditures unless their use for other purposes is approved in advance by a majority vote at a duly called meeting of the association.

2.?In addition to annual operating expenses, the budget must include reserve accounts for capital expenditures and deferred maintenance. These accounts must include, but are not limited to, roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost, and for any other item that has a deferred maintenance expense or replacement cost that exceeds $10,000. The amount to be reserved must be computed using a formula 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 or extension of the useful life of a reserve item caused by deferred maintenance.

 

What often gets done is funds are allocated arbitrarily as the association ages and from (f)3 corrections to the distribution of funds cannot be done, at least, without a member vote. If the provision in the latter part of (f)2 were followed, funds would get allocated in an suitable way and corrected without a vote. The simplest way to conform is to apply the straight line accounting method. And that is appropriate according to:

 

FL Condo Law; Chapter 718.111 The association.—

(13) FINANCIAL REPORTING

...The rules must include, but not be limited to, standards for presenting a summary of association reserves, including a good faith estimate disclosing the annual amount of reserve funds that would be necessary for the association to fully fund reserves for each reserve item based on the straight-line accounting method.

 

Fixed reserves would never have to be used to affect the study. It would eliminate skews in the distribution that lead to unrealistic budgeting. I've seen many times where one set of components were badly over funded leaving no money for earlier pending expenses because of fixed reserves.

 

Links to full text of the statutes:

Florida Statute 718.111

Florida Statute 718.112


Last Updated on Tuesday, 22 July 2014 13:04
 
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