HOA Reserve Fund Laws in Florida Explained

What Are HOA Reserve Funds?

HOA reserve funds are funds created for future common element and common area maintenance, repair, replacement, and/or upgrades. In Florida, reserve funds must be listed in a budget and maintained in a separate bank account (unless your HOA is very small and not required to have an official budget). If properly budgeted and accounted for, reserves can become a key financial cushion of your association and, if properly managed and utilized, can keep your association out of debt when commonly owned assets need repair, replacement, or maintenance.
The Florida legislature first required homeowners associations to comply with reserve fund requirements in 1998 in Section 718.112(2)(f), Florida Statutes, which governs budget requirements for condominiums. It was not until 2010 that Section 720.303(6), Florida Statutes, governed The Florida Homeowners Association Act (the "Act"), required that HOAs provide for reserve fund requirements in their budget. 2010 was also the year the legislature clarified that reserve funds could be used for repair, replacement, and maintenance of common elements or common areas as opposed to being limited to just replacements.
The Florida Administrative Code also provides guidance as to the maintenance, repair, and replacement of common areas. See Fla. Admin. Code Rule 61B-80.001 . It establishes a minimum threshold for reserve fund budgets each year of $10,000, and provides, among other things, that if your association has the minimum threshold, it needs to budget between 5% and 100% of the estimated annual expenses for the type of work to be done for the section in question. Also, depending on when your association was created (after October 1, 2005), the failure to appropriately maintain the following HOA reserve funds is a violation of Florida’s Condominium and Homeowners’ Association Laws: These reserve funds are also subject to limitations. For example, F.S. 720.303(6)(b) provides that reserve funds for capital expenditures and deferred maintenance may not be used (even by an affirmative vote of the majority of the members present at a duly called meeting) for any other purposes unless this prohibition is lifted by a 75% vote at a duly called meeting. A similar requirement (in Section 718.112(2)(d)3., Florida Statutes) is required of condominium associations.
Reserve funds should be kept in a separate interest-bearing bank account, and no funds allocated to reserve accounts may be used for any purpose other than for that purpose. Therefore, they should always be accounted for separately from general operating funds. Since the cost of maintenance, repair, replacement, and/or upgrades to commonly owned property tends to increase over time, HOAs should consider continuing RESERVE funds (or identifying new RESERVE funds), and maintaining the RESERVE funds at a level which allows the funds to increase in value over time.

Florida Statutory Requirements for Reserve Funds

The legal requirements regarding reserve funds and reserves imposed on Florida homeowner associations are found in Section 720.303(6),(d) of the Florida Homeowners’ Association Act:
"Reserve Accounts. The association shall include reserve accounts for capital expenditures and deferred maintenance, that must be maintained in accordance with s. 553.841. A reserve account shall be created and funded by a no vote of the members of an association. If the governing documents for the association expressly grant the right to use reserve funds for a specific purpose, a more restrictive budget requirement shall not apply. The provision authorizing the use of reserve funds after the reporting~ requirements of this paragraph do not apply to any community governed by a declaration that was recorded before July 1, 2002, unless the declaration was amended to specifically incorporate this section. The total annual reserve contributions may not be less than the amount necessary to prevent a special assessment or the imposition of a uniform assessment for the same purpose. An association is not precluded from taking a vote of the members to defer, reduce, or eliminate the funding of a reserve account, except for any reserve account earmarked for a specific purpose by a recorded covenant or agreement entered into prior to July 1, 2002. The provision authorizing the use of reserve funds after the reporting requirements of this paragraph do not apply to condominiums governed by s. 718.112(2)(f)1., cooperative associations subject to s. 719.106(1), or mobile home parks governed by s. 719.1055."
A reserve account is defined as a portion of cash or a Trust set aside by an association to finance the repair, replacement or addition of a major component of the property, with the purpose of avoiding the need for special assessments or an increase in regular assessments. Generally, if not specifically designated for a special purpose in the community association’s bylaws or Articles of Incorporation, reserve funds must be utilized only for the specific purpose for which they were collected. Because reserve funds are to be used for a future unexpected maintenance expense or capital improvement, it is important that funds derived from members assessments to fund reserves not be diverted from that purpose. Although a difference exists between the law applicable to homeowner associations and condominium associations, the general principle is that reserve funds cannot be diverted or spent on purposes other than that which is specified in the governing documents.

How the Reserve Funds Are Collected and Held

Generally speaking, reserves are collected from assessments made to the homeowners in an association. When a budget is created it should contain a line item that states the amount allocated to reserve funding. Assuming the association has taken into account its capital needs, and has established adequate reserves, the funds can be deposited into a reserve fund. The money is typically handled by the association’s Board of Directors and members.
Reserve funds may either be kept in a separate account or an account that is used for any other purpose. Florida Statutes Section 718.112(2)(g)1.b.(I) requires that the Board designate reserve funds for capital expenditures and deferred maintenance of the assets of the association which must be maintained separately from other funds of the association. However, it is not entirely clear whether the statute requires that these funds be segregated or placed in a completely different account. Typically however, this money should be kept in a separate account altogether.
Reserve funds may be pooled into a single account to provide liquidity. Pooling let’s the Board make more effective use of its cash balances and may also produce a higher yield where the association is large enough for more financial institutions to be interested in it as an investment. While the Board may have greater flexibility in the spending of reserve funds when funds are placed in large pools, there is a risk in spending the money pooled if such expenditure reduces the association’s ability to fund capital replacements when they are needed. In other words, the reserve fund’s investment objectives must be modified to the goals of the association being faster or more conservative.

Reserve Studies and Budgets

Reserve studies are essential in the planning and budgeting process of establishing and maintaining an FHA reserve fund. They essentially provide the financial information that the Board will be utilizing to plan and budget for the reserve fund.
A reserve study will provide the following important information to the Board: Typically, a reserve study can be performed every two to three years. It’s important (and required by statute) that the reserve study be based on a visual inspection of the items for which the reserve fund is being established and maintained and a physical examination and measurement of those items with a reliable and documented appraisal of their useful lives and replacement costs.
As noted above, a reserve study is required every few years, and the State of Florida provides that pursuant to Section 720.303(6)(f), Florida Statutes, a reserve study may be obtained "at least every five years." However, your association’s governing documents may require the reserve study to occur more often, for example, annually. In instances where your governing documents require an annual reserve study , they will control instead of Florida’s five year requirement.
In some instances, the reserve study will include a detailed discussion of the assumptions and conditions relating to the condition of the items for which the reserve fund is being established and maintained. For example, the reserve study may indicate the life expectancy of paving, the date it was installed, whether the condition of same is suitable pursuant to current standards, and if not, what conditions must be met and/or what repairs must be made in order to adequately extend the life of same.
Maybe the most important requirement of a reserve study is that all legally required reserve items must be accounted for. This means that the items listed in subsection (g) above must be listed in the reserve study, or, if not listed, the reasons for not including them in the reserve study must be documented. If the items are omitted from the reserve study, you should note same in the Minutes and notarize the Minutes as per state law (Section 720.303(2), Florida Statutes).

Risks if You Don’t Comply

An HOA that fails to abide by Florida’s reserve fund laws does so at its own risk. Most actions that could be legally taken against an HOA and its board will cost the association money, whether it be in legal fees, additional assessments, or other fines. Legal cases typically play out in favor of the owners. For example, in the case of Coral Ridge v. Peterson, a non-profit group, Coral Ridge Properties LLC (no relation to the homebuilder) was a member of a homeowners’ association in Broward County. In 2008, the association sent out annual summary notices of assessment, and at the same time, it sent out a notice of special assessment. As required by law, the annual assessment amount for each parcel in the association was to be determined by a vote of the association members. The notice of special assessment proposed a supplemental assessment per parcel if the members approved the proposed annual assessment. This supplemental assessment was intended to pay for the upkeep of the common elements for the coming year.
The property owners of the association did not receive the second notice, but they did receive the annual assessment notices. They paid only the annual assessment portion and refused to pay the supplemental item. The HOA filed a lawsuit against all members who had not paid their dues, not yet realizing the fact that they had no legal right to collect those unpaid portions of the dues. The board discovered what had happened and rescinded the supplemental assessment. The members who had not paid the supplemental fee refused to pay the rescinded one, advocating that they had fulfilled their financial responsibilities to the association for the time being.
The court took the side of the property owner, siding with the Association of Poinciana City Homeowners, Inc., finding that even though the association rescinded the charge, the board and Coral Ridge failed to comply with Florida’s reserve fund law. The Association of Poinciana City Homeowners sued the Association of Poinciana City for breach of fiduciary duties. The jury found that the Association had breached its fiduciary duties as defined by Florida Statutes, specifically the failure to maintain reserves. In the verdict, the jury concluded that the Association of Poinciana City Homeowners bore damages of $40,000 in storage units that the Association of Poinciana City Homeowners claimed was an inaccurate amount for the property. The court imposed the charges on the Association of Poinciana City.
Non-compliance with the reserve fund laws can expose the HOA to other negative consequences as well. For instance, suppose a homeowner wants to acquire financing for any improvements on his property. Any lender or potential buyer would take a look at the financial records for that property. If an association has reserves that did not match the amount required by the reserve fund law, a buyer may have a difficult time obtaining a loan during this current market of tight fiscal requirements set forth by lenders. The lender may deny the loan outright, or the homeowner may be forced to take a loan at a much higher interest rate.
Depending on the extent of the problem, it often takes a period of years to build up a proper reserve fund to meet the requirements under the statute. During this time, the landowners have to be able to handle the high payments for services without the reserves to ease their financial burdens.

Recommendations to Boards

The following best practices can help Florida Homeowners’ Association (HOA) boards ensure compliance with reserve fund laws while also encouraging transparency and good governance.
Prioritizing Reserve Fund Discussion in Meetings
Florida HOA boards should dedicate time to discuss reserve funds at regular and special meetings. This not only demonstrates a commitment to financial transparency but allows all homeowners to understand the current and long-term funds available for community assets.
Encouraging Homeowner Involvement
Florida HOA boards should foster an open dialogue about financial issues. Board members should be willing to address questions and explain the implications of financial decisions on the community as a whole.
Comprehensive Reserve Fund Studies
Regularly updating the HOA’s reserve fund study is important for remaining in compliance with Florida’s reserve fund laws. —Osceola County HOA managers and board members must share with HOA members periodic estimates of all reserves.
Dedicated Bookkeeping
Florida HOA boards should consider hiring a bookkeeper experienced with HOA financials to ensure the organization’s finances are maintained appropriately. Board members should regularly review key financial statements , such as the balance sheet, revenue and expenses statements, current month budget, and accounts receivable to monitor financial health.
Transparency with Reserves
Florida HOA boards should strive to be transparent when it comes to reserve funds. Even though most homeowners do not want to deal with financial issues, the board’s willingness to communicate about reserves will build credibility, understanding, and trust – all essential attributes for a well-functioning HOA.
Staying Well Informed
The Florida statutes require reserve fund disclosures, and the penalties for non-compliance can be severe. For this reason, Florida HOA boards must stay informed about reserve fund laws and requirements. Boards can consult with HOA professionals for guidance on reserve fund study reviews, financing issues, and other legal matters to better understand how to effectively follow reserve fund laws.