Planning Reserves

For Your Association

By Andrew Rand, Director of Association Accounting at CSI Management Services

Andy-Rand-head-shot

Andy Rand

 

The Board of Directors of a condominium association is required by Florida statute to present a fully funded reserve budget to the membership. Unit owners, if given options by their Board, can choose to vote for less than, or even waive altogether, the fully funded amount.

Half way through the year is a great time to start planning for next year’s budgeted replacement fund and deferred maintenance expenditures. By planning now, the Association has ample time to get a full-blown reserve study or reserve study update. Your Board may also decide to prepare the estimated replacement costs and years remaining to replace each item, based on bids from licensed contractors or actual costs from recent replacements.  For the preparation of the proposed budget, whether the Association estimates are calculated from a formal reserve study or from Board prepared estimates, planning now permits the reserves to be calculated appropriately according to the guidelines set out in the statutes.

It goes without saying that funding reserves enables the Association to have money when needed to replace and maintain the major replacement items when the time comes. To sum it up, the membership either pays now as part of the operating budget or pays later through special assessments. Basically, if reserves are waived or funded less than the full amount, the Association will be less financially sound than those Associations who fund reserves.

According to John Stroemer, CPA, “In addition to having a financially sound association, there are other benefits that are widely ignored but should be considered regarding the funding of reserves.  When it comes time to sell a unit, a savvy prospective purchaser – and his financing institution, if applicable – will look at the association financials to see if reserves are adequately funded. If they are not, that buyer may go down the street and buy in a building that has funded reserves. If reserves are funded, the seller will also be able to command a higher price on the unit. Furthermore, there are tax benefits to consider. Every dollar the owner pays into the reserve fund increases the basis of the unit, thereby reducing the taxable gain of the same amount. The result is the unit owner pays less income tax.”

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Planning Reserves