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Condominium
Budgets and
 Reserves

                  1
What is a budget?

   The budget is a map that will guide the board in making
    decisions during the course of the year. It is the board’s
    formal written plan of the association’s estimated future
    expenses




                                                                 2
Budget Meeting
                 718.112(2)(e), F.S.

Notice
Must be mailed, delivered or electronically transmitted
  not less than 14 days prior to the meeting.
   •   Proposed budget - Must be included with the
       notice.
   •   Reserves - Must be shown as fully funded in the
       proposed budget.




                                                          3
Adoption
              718.112(2)(f)2., F.S.

Unless documents call for unit owners to adopt the
  budget, the board must adopt a budget with fully funded
  reserves, (unless reserves have been properly waived
  or reduced by unit owners after mailing of the proposed
  budget, but before budget meeting).




                                                            4
Official Records
                 61B-22.003(3), F.A.C.
Both the proposed and adopted budgets must be
  maintained in the official records, along with an affidavit
  that the budget meeting notice and proposed budget
  have been mailed to the unit owners.




                                                                5
Operating Budget Requirements
        718.112(2)(f)1., and 718.504(21), F.S.

Budget must include estimated revenues and expenses.
Revenues must include, if applicable:
   •   Assessments;
   •   Interest;
   •   Insurance proceeds;
   •   Any other form of income.




                                                       6
Operating Budget Requirements,
                 continued…
Expenses must include:
   •   Annual condominium fees paid to the state;
   •   Insurance/Fidelity bonding.




                                                    7
Operating Budget Requirements,
                    continued…
Expenses must include, if applicable:
   • Administration expense;
   • Management fees;
   • Maintenance;
   • Rent for recreational and other commonly used
     facilities;
   • Taxes upon association property;
   • Taxes upon leased areas;
   • Security provisions.



                                                     8
Operating Budget Requirements,
                    continued…
Expenses must include, if applicable:
   • Other expenses;
   • Expenses for a unit owner:
      - Rent for the unit, if subject to a lease;
      - Rent payable by the unit owner directly to the
        lessor or agent under any recreational lease or
        lease for the use of commonly used facilities,
        when payment is mandatory and when not
        otherwise included in common expenses.



                                                          9
Other Required Information
                   61B-22.003(1), F.A.C.
   Beginning and ending dates for the period covered by
    the budget, for example (Jan. 1 thru Dec. 31, 2012);
   Total expenses, including reserves on a least an annual
    basis;
   Assessments per unit according to proportion of
    ownership - periodic (no less frequently than quarterly).




                                                                10
The 115% Rule
                 718.112(2)(e)2., F.S.
   If assessments are greater than 115% of the previous
    year’s assessments, unit owners May be entitled to
    consider an alternative budget.
   The calculation:
     •  From the total budget assessment, subtract those
        portions that result from:
         - Reserves;
         - Expenses not anticipated to be incurred on a
           regular or annual basis;
         - Betterments to the condominium property.


                                                           11
The 115% Rule, continued…
   If the net assessments are still more than 115% of the
    corresponding net assessments from the previous year,
    then the process is as follows:
     •  10% of the unit owners may apply to the board for a
        unit owners’ meeting to consider an alternative
        budget within 21 days after adoption of the annual
        budget.
     •  The meeting must be held within 60 days after the
        adoption of the budget.
     •  As least 14 days prior to the meeting, the board shall
        hand deliver or mail to each unit owner a notice of
        the meeting.
                                                                 12
The 115% Rule, continued…
•   A majority of the voting interests may vote to
    approve an alternative budget proposed by either
    the board or the membership of the association.
    Failure to achieve the needed vote results in
    implementation of the board’s adopted budget.




                                                       13
Condominium

 Reserves


              14
Definitions
               61B-22.001(5), F.A.C.

Reserves - Any funds, other than operating funds,
  which are restricted for deferred maintenance and
  capital expenditures, including the items required by
  the Condominium Act, and any other funds restricted
  as to use by the condominium documents or the
  condominium association.




                                                          15
Definitions
         61B-22.001(2) and 61B-22.001(3),
                      F.A.C.


   Capital expenditure – Purchase or replacement of
    an asset with life of more than one year, or addition to
    existing asset to extend its life more than one year.

   Deferred maintenance - Any maintenance or repair
    that will be performed less frequently than yearly and
    will result in maintaining the useful life of an asset.




                                                               16
Requirements Regarding Reserves
                718.112(2)(f)2., F.S.


Must include:
  • Roof replacement;
  • Building painting;
  • Pavement resurfacing, and;
  • Any other item of deferred maintenance or capital
    expenditure exceeding $10,000, which may
    include retrofitting of fire sprinklers.




                                                        17
Requirements Regarding Reserves
                     continued
                61B-22.003(1), F.A.C.

   Proposed budget must include fully funded reserves.
   Reserve schedule must be included with proposed
    budget.




                                                          18
Reserve Calculation
              61B-22.005(3), F.A.C.
Need to know
  • Total estimated life;
  • Remaining estimated life (# years);
  • Anticipated replacement/deferred maintenance
    cost;
  • Anticipated beginning balance in reserve fund.




                                                     19
Straight Line Method Formula

The formula for using the straight line method is:
   Anticipated replacement/deferred maintenance cost
    less Anticipated beginning balance in reserve fund
    = Remaining reserves needed

   Remaining reserves needed divided by Remaining life
    (# years)
    = Amount needed in current year to fully
    fund


                                                          20
SCHEDULE OF DEFERRED MAINTENANCE &
                          CAPITAL EXPENDITURE RESERVES
            (for the budgeting period of January 1, ____ through December 31, ____)

                    Estimated    Estimated      Estimated Cost    Estimated        Annual
                      Total      Remaining       for Deferred       Fund           Funding
  Reserve            Useful        Useful      Maintenance or a    Balance      (current year)
   Items               Life         Life            Capital         as of
                                                 Expenditure       12-31-__
                    (in years)   (in years)           ($)             ($)               ($)


     Roof
  Replacement           12          1               95,000          87,000            8,000

   Pavement
  Resurfacing          18           7               55,000          30,472            3,504

    Building
    Painting            5           4               92,000         19,968             18,008

Elevator Repair &       25          14              20,000           8,800              800
 Modernization

                             TOTALS                262,000        146,240             30,312
                                                                                                 21
Pooled Reserves
Defined - This means that an association may have a
  single source of funds to pay for multiple categories of
  reserve expenses.
   For example, if an association establishes a pooled
    reserve account for roof replacement, building painting
    and pavement resurfacing, funds may be drawn from
    this account to pay for any of the three items.
   Prior to the change in the rules associations were
    required to maintain separate accounts for each of
    these items and approval from the membership would
    be required in order to use funds from one category to
    pay for another.



                                                              22
Pooled Method Formula

The amount of the contribution to the pooled reserve
  account shall not be less than that required to ensure
  that the balance on hand at the beginning of the
  period for which the budget will go into effect,

  plus the projected annual cash inflows over the
  remaining estimated useful lives of all of the assets
  that make up the reserve pool is

  = or > the projected annual cash outflows over the
  remaining estimated useful lives of all of the assets
  that make up the reserve pool, based on the current
  reserve analysis.


                                                           23
Pooled Method Formula, continued…

   The ending reserve fund balance must never go below
    zero;
   The reserve funding formula shall not include any type
    of balloon payments;
   Reserve funding must be calculated out over the
    remaining useful life of the asset with the longest useful
    life.




                                                                 24
Pooled Reserve Schedule
                                                Pooled Reserve Schedule
                            For the Budget Period January 1, 20___ Through December 31, 20___

                                                                                 Projected Cash Outflows

                       Total        Remainin
                     Estimated       g Life
Replacement Item        Life          (Yrs)       Cost      Year 1    Year 2        Year 3       Year 4    Year 5   Year 6

Roof Replacement         30             8        $14,000          0         0                0        0         0            0
Building Painting        5              2         $6,000          0     6,000                0        0         0            0
    Pavement
   Resurfacing           20             3        $10,000          0         0        10,000           0         0            0

Pool Re-Marcite          10             4         $8,000          0         0                0    8,000         0            0



  Total Projected Cash Outflows:                                 0     (6,000)     (10,000)      (8,000)        0        0
  Beginning Cash Balance:                                       $0    $6,000        $6,000       $2,000       $0     $6,000

  Annual Reserve Requirement:                               $6,000    $6,000        $6,000       $6,000    $6,000    $6,000
  Ending Cash Balance:                                      $6,000    $6,000        $2,000          $0     $6,000   $12,000

                                                                                                                        25
Reserve Calculation, continued…

Note: Projected cost may be determined by
  incorporating a calculation for expected interest
  and inflation.




                                                      26
Interest
              718.112(2)(f)3., F.S.

   Must remain in reserve accounts.
   Association may establish policy regarding
    allocation of interest among reserve accounts.




                                                     27
Commingling
            61B-22.005(2), F.A.C.

The portion of periodic assessments that are for
  reserves must be deposited in the reserve account
  in no more than 30 days of receipt.




                                                      28
Other Reserves
               61B-22.005(4), F.A.C.
   The formula used need not be the statutory
    formula.
   Must show the reserve calculation in a separate
    reserve section of the budget




                                                      29
Waiving Reserves or Providing Reserves
         less than Full Funding
                  718.112(2)(f)2., F.S.
   May be accomplished at a duly called unit owners’
    meeting.
   Vote required is a majority of those present or voting by
    limited proxy at the meeting, (assuming the quorum
    requirement is met).
   Vote applies only to one fiscal year.




                                                            30
Use of Limited Proxy
             718.112(2)(f)4. F.S.

The limited proxy for waiving of reserves must contain
  the following in bold letters in a font larger than any
  other used on the face of the proxy ballot:
•   WAIVING OF RESERVES, IN WHOLE OR IN
    PART, OR ALLOWING ALTERNATIVE USES OF
    EXISTING RESERVES MAY RESULT IN UNIT
    OWNER LIABILITY FOR PAYMENT OF
    UNANTICIPATED SPECIAL ASSESSMENTS
    REGARDING THOSE ITEMS.




                                                            31
Limited Common Elements
                  718.113(1), F.S.

   Handled just like reserves for other common
    elements.
   Reserve assessments applied only to those
    specified in the declaration as sharing the cost of
    those limited common elements.




                                                          32
Unrestricted Expense Categories
             61B-22.003(2), F.A.C.

Expense categories that are not restricted as to use
  shall be stated in the operating portion of the
  budget rather than the reserve portion of the
  budget.




                                                       33
Customer Contact Center
For additional information concerning the
  Condominium Act and to request copies of
  educational materials available to condominium
  unit owners you may contact the Department’s
  Customer Contact Center at Center at
  1-800-226-9101 (Florida Only) or 850-488-1122.
You may also e-mail the Department at
            call.center@dbpr.state.fl.us
Statutes and other information concerning the
  division are available on the World Wide Web at
  www.myfloridalicense.com/dbpr/lsc/index.html

                                                    34

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Condominium Budgets and Reserves

  • 2. What is a budget?  The budget is a map that will guide the board in making decisions during the course of the year. It is the board’s formal written plan of the association’s estimated future expenses 2
  • 3. Budget Meeting 718.112(2)(e), F.S. Notice Must be mailed, delivered or electronically transmitted not less than 14 days prior to the meeting. • Proposed budget - Must be included with the notice. • Reserves - Must be shown as fully funded in the proposed budget. 3
  • 4. Adoption 718.112(2)(f)2., F.S. Unless documents call for unit owners to adopt the budget, the board must adopt a budget with fully funded reserves, (unless reserves have been properly waived or reduced by unit owners after mailing of the proposed budget, but before budget meeting). 4
  • 5. Official Records 61B-22.003(3), F.A.C. Both the proposed and adopted budgets must be maintained in the official records, along with an affidavit that the budget meeting notice and proposed budget have been mailed to the unit owners. 5
  • 6. Operating Budget Requirements 718.112(2)(f)1., and 718.504(21), F.S. Budget must include estimated revenues and expenses. Revenues must include, if applicable: • Assessments; • Interest; • Insurance proceeds; • Any other form of income. 6
  • 7. Operating Budget Requirements, continued… Expenses must include: • Annual condominium fees paid to the state; • Insurance/Fidelity bonding. 7
  • 8. Operating Budget Requirements, continued… Expenses must include, if applicable: • Administration expense; • Management fees; • Maintenance; • Rent for recreational and other commonly used facilities; • Taxes upon association property; • Taxes upon leased areas; • Security provisions. 8
  • 9. Operating Budget Requirements, continued… Expenses must include, if applicable: • Other expenses; • Expenses for a unit owner: - Rent for the unit, if subject to a lease; - Rent payable by the unit owner directly to the lessor or agent under any recreational lease or lease for the use of commonly used facilities, when payment is mandatory and when not otherwise included in common expenses. 9
  • 10. Other Required Information 61B-22.003(1), F.A.C.  Beginning and ending dates for the period covered by the budget, for example (Jan. 1 thru Dec. 31, 2012);  Total expenses, including reserves on a least an annual basis;  Assessments per unit according to proportion of ownership - periodic (no less frequently than quarterly). 10
  • 11. The 115% Rule 718.112(2)(e)2., F.S.  If assessments are greater than 115% of the previous year’s assessments, unit owners May be entitled to consider an alternative budget.  The calculation: • From the total budget assessment, subtract those portions that result from: - Reserves; - Expenses not anticipated to be incurred on a regular or annual basis; - Betterments to the condominium property. 11
  • 12. The 115% Rule, continued…  If the net assessments are still more than 115% of the corresponding net assessments from the previous year, then the process is as follows: • 10% of the unit owners may apply to the board for a unit owners’ meeting to consider an alternative budget within 21 days after adoption of the annual budget. • The meeting must be held within 60 days after the adoption of the budget. • As least 14 days prior to the meeting, the board shall hand deliver or mail to each unit owner a notice of the meeting. 12
  • 13. The 115% Rule, continued… • A majority of the voting interests may vote to approve an alternative budget proposed by either the board or the membership of the association. Failure to achieve the needed vote results in implementation of the board’s adopted budget. 13
  • 15. Definitions 61B-22.001(5), F.A.C. Reserves - Any funds, other than operating funds, which are restricted for deferred maintenance and capital expenditures, including the items required by the Condominium Act, and any other funds restricted as to use by the condominium documents or the condominium association. 15
  • 16. Definitions 61B-22.001(2) and 61B-22.001(3), F.A.C.  Capital expenditure – Purchase or replacement of an asset with life of more than one year, or addition to existing asset to extend its life more than one year.  Deferred maintenance - Any maintenance or repair that will be performed less frequently than yearly and will result in maintaining the useful life of an asset. 16
  • 17. Requirements Regarding Reserves 718.112(2)(f)2., F.S. Must include: • Roof replacement; • Building painting; • Pavement resurfacing, and; • Any other item of deferred maintenance or capital expenditure exceeding $10,000, which may include retrofitting of fire sprinklers. 17
  • 18. Requirements Regarding Reserves continued 61B-22.003(1), F.A.C.  Proposed budget must include fully funded reserves.  Reserve schedule must be included with proposed budget. 18
  • 19. Reserve Calculation 61B-22.005(3), F.A.C. Need to know • Total estimated life; • Remaining estimated life (# years); • Anticipated replacement/deferred maintenance cost; • Anticipated beginning balance in reserve fund. 19
  • 20. Straight Line Method Formula The formula for using the straight line method is:  Anticipated replacement/deferred maintenance cost less Anticipated beginning balance in reserve fund = Remaining reserves needed  Remaining reserves needed divided by Remaining life (# years) = Amount needed in current year to fully fund 20
  • 21. SCHEDULE OF DEFERRED MAINTENANCE & CAPITAL EXPENDITURE RESERVES (for the budgeting period of January 1, ____ through December 31, ____) Estimated Estimated Estimated Cost Estimated Annual Total Remaining for Deferred Fund Funding Reserve Useful Useful Maintenance or a Balance (current year) Items Life Life Capital as of Expenditure 12-31-__ (in years) (in years) ($) ($) ($) Roof Replacement 12 1 95,000 87,000 8,000 Pavement Resurfacing 18 7 55,000 30,472 3,504 Building Painting 5 4 92,000 19,968 18,008 Elevator Repair & 25 14 20,000 8,800 800 Modernization TOTALS 262,000 146,240 30,312 21
  • 22. Pooled Reserves Defined - This means that an association may have a single source of funds to pay for multiple categories of reserve expenses.  For example, if an association establishes a pooled reserve account for roof replacement, building painting and pavement resurfacing, funds may be drawn from this account to pay for any of the three items.  Prior to the change in the rules associations were required to maintain separate accounts for each of these items and approval from the membership would be required in order to use funds from one category to pay for another. 22
  • 23. Pooled Method Formula The amount of the contribution to the pooled reserve account shall not be less than that required to ensure that the balance on hand at the beginning of the period for which the budget will go into effect, plus the projected annual cash inflows over the remaining estimated useful lives of all of the assets that make up the reserve pool is = or > the projected annual cash outflows over the remaining estimated useful lives of all of the assets that make up the reserve pool, based on the current reserve analysis. 23
  • 24. Pooled Method Formula, continued…  The ending reserve fund balance must never go below zero;  The reserve funding formula shall not include any type of balloon payments;  Reserve funding must be calculated out over the remaining useful life of the asset with the longest useful life. 24
  • 25. Pooled Reserve Schedule Pooled Reserve Schedule For the Budget Period January 1, 20___ Through December 31, 20___ Projected Cash Outflows Total Remainin Estimated g Life Replacement Item Life (Yrs) Cost Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Roof Replacement 30 8 $14,000 0 0 0 0 0 0 Building Painting 5 2 $6,000 0 6,000 0 0 0 0 Pavement Resurfacing 20 3 $10,000 0 0 10,000 0 0 0 Pool Re-Marcite 10 4 $8,000 0 0 0 8,000 0 0 Total Projected Cash Outflows: 0 (6,000) (10,000) (8,000) 0 0 Beginning Cash Balance: $0 $6,000 $6,000 $2,000 $0 $6,000 Annual Reserve Requirement: $6,000 $6,000 $6,000 $6,000 $6,000 $6,000 Ending Cash Balance: $6,000 $6,000 $2,000 $0 $6,000 $12,000 25
  • 26. Reserve Calculation, continued… Note: Projected cost may be determined by incorporating a calculation for expected interest and inflation. 26
  • 27. Interest 718.112(2)(f)3., F.S.  Must remain in reserve accounts.  Association may establish policy regarding allocation of interest among reserve accounts. 27
  • 28. Commingling 61B-22.005(2), F.A.C. The portion of periodic assessments that are for reserves must be deposited in the reserve account in no more than 30 days of receipt. 28
  • 29. Other Reserves 61B-22.005(4), F.A.C.  The formula used need not be the statutory formula.  Must show the reserve calculation in a separate reserve section of the budget 29
  • 30. Waiving Reserves or Providing Reserves less than Full Funding 718.112(2)(f)2., F.S.  May be accomplished at a duly called unit owners’ meeting.  Vote required is a majority of those present or voting by limited proxy at the meeting, (assuming the quorum requirement is met).  Vote applies only to one fiscal year. 30
  • 31. Use of Limited Proxy 718.112(2)(f)4. F.S. The limited proxy for waiving of reserves must contain the following in bold letters in a font larger than any other used on the face of the proxy ballot: • WAIVING OF RESERVES, IN WHOLE OR IN PART, OR ALLOWING ALTERNATIVE USES OF EXISTING RESERVES MAY RESULT IN UNIT OWNER LIABILITY FOR PAYMENT OF UNANTICIPATED SPECIAL ASSESSMENTS REGARDING THOSE ITEMS. 31
  • 32. Limited Common Elements 718.113(1), F.S.  Handled just like reserves for other common elements.  Reserve assessments applied only to those specified in the declaration as sharing the cost of those limited common elements. 32
  • 33. Unrestricted Expense Categories 61B-22.003(2), F.A.C. Expense categories that are not restricted as to use shall be stated in the operating portion of the budget rather than the reserve portion of the budget. 33
  • 34. Customer Contact Center For additional information concerning the Condominium Act and to request copies of educational materials available to condominium unit owners you may contact the Department’s Customer Contact Center at Center at 1-800-226-9101 (Florida Only) or 850-488-1122. You may also e-mail the Department at call.center@dbpr.state.fl.us Statutes and other information concerning the division are available on the World Wide Web at www.myfloridalicense.com/dbpr/lsc/index.html 34