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How Many Florida Condo Associations Are Financially Sound?

By Christopher Carter - Real Estate Broker Associate

October 26, 2023

Another trick question, because the definition of "financially sound" varies depending on who you are asking. In terms of whether or not a Florida Condominium Owners Association has enough money to responsibly operate, maintain, and protect the building and property, the answer to our headline question is "Not as many as there should be..."

For this article, we are defining financially sound as an Association's ability to pay current operating costs and be ready for future expected repair and replacement costs without unreasonably burdening the owners or going into debt.

Today we are discussing Florida Condominium Associations, though the basics of good financial management also apply to cooperatives and HOA communities.

According to the Division of Florida Condominiums, Timeshares, and Mobile Homes, in October 2023 there were almost 25,000 separate residential Condominium Owners Associations registered with the State.

All those COAs contain more than 1.4 million individual condominium units.

This means that over 1.4 million owners are paying assessments (dues, fees) to their Associations for managing, operating, and maintaining all the common elements (areas) and physical components of the building or community.

Owners' payments contribute to shared costs such as:

• Building maintenance & repair
• Landscaping & exterior lighting
• Swimming pool and deck
• Elevators
• Parking areas and driveways
• Onsite amenities (clubhouse, fitness room, etc)
• Property hazard and liability insurance
• Management fees
• COA property taxes

After the catastrophic and deadly Surfside building collapse in June 2021 and various attempts at "condo reform" legislation since then, another budget line item has gained long-overdue awareness and importance:

• Reserve funding

In this overview, I will not be going into detailed analysis of deferred maintenance, physical deterioration, Reserve funding calculations, legislative inconsistencies, or Florida Statutes references. This article is intended to be a general overview and introduction for individual unit owners, especially new ones still unfamiliar with how Florida residential Owners Associations function.

(Note - In direct response to the Surfside collapse, the Florida legislature passed SB-4D (2022) and its follow up SB-154 (2023), two "condo reform" bills that attempt to deal with building safety and include limited Reserve funding requirements. In my opinion, the practical application of this legislation is awkward and unenforceable. See my other articles for further commentary.)

Owners' scheduled assessments (usually quarterly) pay for current, ongoing, and expected future repairs and maintenance of Association-owned property.

Example - your Association pays a pool service to skim leaves and check chemical levels daily in the building or community swimming pool (current ongoing maintenance). Though at some point the pool will need to be drained and resurfaced, which is larger-scale expected future maintenance.

All Association-owned physical components (common elements) that will need future service, repair, or replacement have an Expected Useful Life (EUL) expressed in years, as well as an Estimated Replacement Cost (ERC) for the work required at the end of its EUL. These are the components that should have Reserve funding entries in the Deferred Maintenance Schedule and carried into the Association's annual budget.

In very basic terms: Replacement Cost ÷ Useful Life = Annual Reserve Contribution

Reserve funding for common elements in its most basic definition is putting away a little money each quarter so enough will be there when a large common element/area item has to be serviced, repaired, or replaced.

The following common physical components should have Reserve funding accounts for anticipated future service, repair, and replacement:

• Building exterior paint and waterproofing
• Roofs
• Driveway and parking area paving
• Elevators
• Swimming pool and deck
• Balcony / lanai railings and concrete deterioration
• Lobby, meeting room, office equipment and furnishings
• Front gate mechanisms and security systems
• Any Association-owned common component that will require major (costly) repair or replacement at the end of its Expected Useful Life

Florida COAs are notorious for repeatedly waiving or underfunding their Reserve contributions. When you collect less than is really needed to fully fund Reserves, quarterly assessments due from each owner magically become lower. Many Boards and owners take this dangerously short-term financial view.

When owners continue to vote for waiving or underfunding Reserves, many of them are playing the popular game of Florida Condo Roulette, betting that they will have already sold and no longer own a unit when the inevitable Special Assessment comes through for a large maintenance expense like a new roof, elevators, or balcony/lanai concrete repairs.

An important concept in Reserve funding is the term Fully Funded, which means enough money is being collected each year in order for there to be enough in a certain item's Reserve account to fully pay for its repair or replacement when needed. It does NOT mean that all the money has already been collected and is sitting in the Reserve account. Rather, if an item's Reserve account balance is increasing through owner contributions at an annual rate that provides for all the money to be there at the end of the item's useful life, it is being Fully Funded along the way. Well-run COAs view being Fully Funded as a moving target, and usually end up around 75-85%, which keeps any Special Assessments manageable because most of the repair/replacement cost has already been collected.

Just because an Association's budget and financial statements say that it collects for Reserves and has a Maintenance Schedule, that doesn't automatically mean it is financially sound. Here are a few questions to ask when reviewing a Florida COA's financials regarding Reserves:

• Was a real Reserve Study performed by a third-party professional based on an onsite visit and inspection? Deferred Maintenance Schedules prepared in an office by a manager or management company are NOT the same as a professional Reserve Study.

• Who determined the initial Expected Useful Life numbers used? Using artificially long numbers falsely lowers the calculated Reserve contributions that are required. Common components deteriorate from physical exposure and insufficient maintenance, and the rate of deterioration cannot be changed through mathematical calculations.

• Have onsite physical inspections been performed recently to see if Remaining Life estimates are still accurate? The Florida environment significantly accelerates wear and deterioration on all Association physical elements. Remaining Life estimates must be adjusted regularly (every 2-3 years) to account for physical components' environmental exposure, level of maintenance, and use.

• Have Replacement Cost estimates been reviewed and updated recently to include current materials and labor costs? Estimated Replacement Cost entries more than 2-3 years old can be wildly inaccurate.

• Have Remaining Life estimates been correctly adjusted year-to-year in the Deferred Maintenance Schedule? I have seen schedules that have the same Remaining Life shown for 2 or 3 consecutive years. Without physical inspection, is this just a clerical error or an attempt to quietly extend required maintenance and defer its cost?

• Have there been any unexplained transfers into or out of Reserve accounts? In Florida, Reserve funds cannot be used for any other purpose without an owner vote.

When any of the answers reveal discrepancies in the numbers used to calculate Reserve funding levels, owners need to ask questions. Remember - Association money is owners' money.

The real problem is that most Boards and owners never ask these questions.

What are the downsides to underfunded Reserves? What happens when there is not enough in a Reserve fund to pay for needed maintenance, repair, or replacement? Here are the only choices available in that case:

• Needed work is delayed past scheduled service time, which always ends up costing more and can cause significant resident safety issues.

• Boards increase current scheduled owner assessments in order to collect more money, then pay for the needed work later. The problem with this approach is that it only addresses the financial side. The component's deterioration continues and must be addressed.

• The Board levies a Special Assessment to all owners. These are paid in addition to scheduled (quarterly) assessments.

• The Association gets a bank loan to pay for needed repairs. When loan money is used to maintain, repair, or replace any component that already has a Reserve account, it is clear proof that Reserves have been underfunded for an extended period. Inflation and increased costs are not a valid excuse. Remember - remaining life and replacement costs should be reviewed regularly.

• The item needing repair or replacement is ignored and remains unaddressed, which can endanger resident safety and noticeably reduce owners' enjoyment and use of their properties.

Largely due to the Surfside collapse and resulting increased awareness of proper Reserve funding, potential buyers of Florida condos are now much more aware of deferred maintenance, physical deterioration, and the costs involved. Florida condos governed by Associations with well-funded Reserves, timely maintenance practices, and closely monitored physical deterioration pose much less financial risk to buyers.

There we are, a quick intro and overview for owners about COA Reserve accounts and common component physical maintenance.

Editor's Note: Christopher Carter is NOT an attorney. He does not give legal advice. For interpretation and application to specific circumstances of anything you read in this article, you must speak with a Florida-Licensed attorney.

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