Like many other organizations, homeowner associations use reserve funds as a way to prepare for future expenses and hopefully to avoid having to levy a substantial special assessment to pay for capital projects. Unlike for condominiums, however, homeowner associations in Florida are not statutorily obligated, per se, to create, maintain or fund reserve accounts. Section 720.303(6)(b), Fla. Stat., provides in relevant part:
“In addition to annual operating expenses, the budget may include reserve accounts for capital expenditures and deferred maintenance for which the association is responsible…” (emphasis added).
However, the Homeowners’ Association Act (“HOA Act”) does impose certain requirements on the use of funds in reserve accounts and the funding of reserve accounts depending upon how those accounts were established. The HOA Act creates two categories of reserve accounts – one of which we will refer to as “statutory” or “mandatory” reserves and the other as “non-statutory” or “voluntary” reserves:
Reserve accounts are “mandatory” under the HOA Act if they meet the requirements outlined in s. 720.303(6)(d), Fla. Stat. which provides, in part, as follows:
(d) 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. . . .
The statute does not identify what a developer must do to “initially establish” reserve accounts. While arguments may be made otherwise, it seems likely that reserve accounts would be considered “initially established” by the developer under the HOA Act, and thus “mandatory” if either (1) the governing documents require reserve accounts; or (2) reserve accounts were created by a developer or successor developer-controlled board of directors. In the relatively recent case of MacKenzie v. Centex Homes, 208 So. 3d 790 (Fla. 5th DCA 2016), for example, the court held that where the declaration required a reserve fund but allowed the board discretion in establishing the amount of reserves; and where the developer had created a reserve fund and made an initial contribution to it, that the reserves were “mandatory” under s. 720.303(6)(d) Fla. Stat.
As an alternative to “initially established” developer-created reserves, the above statute authorizes a third mechanism to establish mandatory reserves – that being (3) the membership affirmatively elects to provide for reserve accounts by a majority vote of the membership.
If none of these three situations exist, then any reserve accounts that exist are not statutory reserves, would have been established by a post-turnover Board of Directors alone, and would be considered “voluntary” reserve accounts.
The distinction between statutory and non-statutory reserves is key, and it is critical for a Board to know whether their reserves are statutory or not, because if reserves are “mandatory” under the HOA Act, the law imposes certain requirements upon them, including the following:
- The association’s budget must designate the components for which the reserve accounts may be used. (s. 720.303(6)(d) Fla. Stat.)
- The reserve accounts must be fully funded each year, regardless of any provision in the governing documents that limits assessment increases, using the formula outlined in the statute (s. 720.303(6)(e) and (g), Fla. Stat.) unless the funding is waived or reduced by a member vote, in which a pre-turnover developer is not authorized to participate (s. 720.303(6)(f), Fla. Stat.)
- The reserve funds and any interest on them may only be used for their designated purposes unless an alternative use is approved by a member vote, in which a pre-turnover developer is not authorized to participate. (s. 720.303(6)(h), Fla. Stat.)
If reserve accounts are “non-statutory” then the above requirements do not apply – there is no obligation in the statute to fully fund the reserve accounts according to any particular formula, any provisions in the governing documents that limit the amount of assessment increases would apply to potentially limit reserve funding, and existing reserve funds could be used for non-reserve purposes without a member vote. However, despite the lack of statutory obligations, recall that directors nonetheless have a fiduciary duty to the corporation and its members and therefore must engage in appropriate budgeting for the community’s anticipated needs.
Lastly, if a homeowner association does not have statutory reserves, but nonetheless has maintenance or repair obligations, and even if it has voluntary reserves established by the board, the statute requires the placement of specific disclosure language about reserves on its annual report in conspicuous type, which either discloses a lack of reserve accounts, or discloses that existing reserve accounts are limited and voluntary. See s. 720.303(6)(c) for the exact required language.