By Attorney Steven J. Adamczyk
Q: Our condominium insurance premium increased this year by a significant amount. Rather than increase assessments by the same amount, we want to reduce the reserve assessment to minimize the impact on the premium increase. I read somewhere that the board has discretion over the budget but was also told that there is no discretion with reserves. How do we accomplish this?
A: This has actually been a common question over the last few months and an important issue for many, particularly during a time when many owners are asking for financial relief in any form due to COVID-19.
The short answer is that the board must adopt a budget that fully funds the reserves unless the membership votes to authorize the board to partially fund reserves or waive reserve funding altogether. Fully funded reserves is a phrase which effectively means that you are putting away enough money each year so that you have enough money in the bank to replace every component in the reserve schedule when each component’s useful life expires. The amount is calculated based on the balance today, the anticipated replacement cost in the future, inflation, and remaining useful life.
If these are the variables used to calculate the reserve assessment, then some condominiums may reduce the reserve assessment and still fully fund the reserves. In other words, if the useful life of the roof, for example, is longer than originally anticipated, and if the replacement cost of the roof has decreased because of materials and labor demands, then you need less money and can put the money away over a longer period of time. This reduces the annual contribution. Alternatively, some clients have a surplus at the end of the year and budget to rollover the surplus into the reserve account which effectively increases the beginning balance and therefore reducing the annual reserve contribution.
The statute governing reserves in a Florida condominium also provides that the board can annually consider changes in the remaining useful life or replacement cost of a component. This means that the board is not required to forever accept the original useful life or replacement cost when it was originally determined. It does not, however, mean that the board can be cavalier with these determinations. To justify a change in the useful life or replacement cost, the board would typically need a professional reserve study, engineering opinion, or a good faith estimate from a licensed contractor. Note, however, that this works both ways and that the opinion could very well be that the useful life has shortened and/or that construction costs have increased which means a fully funded reserve contribution will be greater than last year.
Assuming the required contribution would remain the same, and the board wants to partially fund the reserves this year, the membership must authorize the board to adopt a budget which does not fully fund the reserves. The good news is that most owners are happy to lower assessments and the threshold to carry this approval is relatively low. Specifically, Florida Statutes Section 718.112 requires a majority of the voting interests present in person or by proxy at a membership meeting where a quorum is present to authorize partially funded or waived reserves. This vote would take place at a members’ meeting after providing 14-days mailed and posted notice or any different requirement specifically included in your governing documents.
It is also important that the vote take place before the board adopts the budget with partially funded reserves. Once the membership votes to authorize a budget with reduced reserve funding, yes, the board has discretion with respect to how much to partially fund (if at all) and that provides some flexibility to arrive at your desired assessment.
It is important to note three additional points. First, this analysis can be very different in a homeowners’ association under Chapter 720 and readers should not automatically assume this applies to your homeowners’ association. Second, many communities switch to pooled reserves because of flexibility and because the reserve assessment often decreases. The procedure to switch to pooled reserves has been the topic of previous articles. Finally, if you pursue the vote discussed above, the statute requires some specific language in the limited proxy and you should consult with your legal counsel to make sure that the vote complies with the statutory requirements.
Q: Our board has been meeting via digital platforms such as Zoom and GoToMeeting. Our community has a significant number of residents who are over 65 years old, including most of the board of directors, and we want to keep ourselves safe and respect the health concerns of residents during the COVID-19 pandemic. Some residents are demanding that we have meetings with physical attendance because they don’t like the digital platform. Do we have to provide a physical location?
G.D., Bonita Springs
A: For now, my opinion is no, you are not required to provide a physical location assuming you follow a few protocols. Because of the Florida governor’s emergency declaration, the rising number of COVID-19 cases, and because of the safety concerns arising out of the pandemic, most communities are still exercising emergency powers authorized under the statutes and their specific governing documents. These emergency powers include the ability to declare certain portions of the community or building closed to residents and the ability to implement an emergency plan. In my opinion, this would include temporarily moving to a virtual platform for board meetings.
In the same manner that it would be problematic to force owners to use technology to attend a virtual meeting, it would be equally problematic to force uncomfortable residents to physically crowd in a room to attend a board meeting. An analogous situation is conference calls. The Florida Condominium Act authorizes the board to attend a board meeting via telephone call, but it also requires the association to provide a physical location where owners can attend and listen via speaker phone and participate via speakerphone in the room. Although this is certainly acceptable outside of a pandemic, you likewise do not want residents crowded around a speakerphone or, with digital meetings, you do not want residents crowded around a shared laptop computer where they can look at the computer and speak into a microphone and camera.
Thus, for now, we believe that digital platforms will be acceptable for board business. The association, however, must include the instructions for the digital meeting in the notice itself and should include a phone number allowing participation via telephone without a computer or other device. The association also needs to find a way to allow owners to speak on each agenda item while utilizing the now popular mute button. This may include allowing owners to unmute themselves at the appropriate time or it may require owners to register in advance that they want to speak on an agenda item at the board meeting.
Finally, note that this is not indefinite and absent an amendment to the statutes, the board will eventually need to facilitate a physical location in addition to utilizing a digital platform to conduct business.