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Subject: New Reserve Study Changes with Current Pooled Reserve Account Overfunded in Some Categories - Complexities with Reallocation
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GeorgeS21
(Florida)

Posts:3411


11/19/2020 9:12 AM  
Hi All,

Same 650 single family home HOA in and Florida - gated, amenities, pool, lodge, security, private roads. I’m on the Finance Committee in this community.

We have a generally well funded “pooled" reserve account based on 2014 reserve study with an annual contribution amount defined as a specific dollar amount (not percentage). There are 10 line elements in the reserve account that are tracked separately (but still funded as a pooled single account). The 2014 study did not include many elements of the complex community.

2020 reserve study recently completed by nationally known reserve analysis company with onsite reviews of amenities, etc. Results indicated lower than needed reserves, but not a crisis - total account could be corrected to that recommended by the reserve analysis by small transfer increases over the next four years. This reserve study is comprehensive, follows industry guidelines, and shows 35 separate lines in three very broad categories - site, buildings and pool.

Our first really large outlays include detention pond refurbishment continuing in 2021 (an underfunded component because the community ignored the maintenance of these 17 ponds for 10 years), and roads refurbishment (less % underfunded than ponds, but still a couple hundred $K) around 2027-2028 - most of the increases recommended from 2021-2027 are to increase funds to allow this to be accomplished and stabilize the process for the future. However, the reserve study does not address how to rebalance the funds already in the account.

We have already decided to increase reserve contributions (transfers) from assessments for 2021, and this process will continue , but, at the same time need to rebalance what is in the current pooled account. The process for doing this is something I have not had to address before.

The core question is how to rebalance per FS 720?

FS 720 (http://www.leg.state.fl.us/statutes/index.cfm?App_mode=Display_Statute&URL=0700-0799/0720/0720.html) is a bit long winded, but seems to state that any change in the allocation inside a current reserve account requires a majority vote of the membership. This seems onerous, but possibly reasonable given how this could be manipulated by uninformed boards.

Is the easy answer to seek assistance from the reserve study company to assist in rebalancing, then package this proposal for membership vote? Is there a way for the Board to do this without membership involvement?

Given our timeline for billing for 2021 assessments we should have addressed this about six months ago, but the comprehensive 2020 study only completed in Oct, and Hurricane Sally cleanup has consumed a lot of time.

Anyone see other options?

Thanks in advance!
AugustinD


Posts:4421


11/19/2020 9:40 AM  
Posted By GeorgeS21 on 11/19/2020 9:12 AM
We have a generally well funded “pooled" reserve account based on 2014 reserve study with an annual contribution amount defined as a specific dollar amount (not percentage). There are 10 line elements in the reserve account that are tracked separately (but still funded as a pooled single account). The 2014 study did not include many elements of the complex community.

2020 reserve study recently completed by nationally known reserve analysis company with onsite reviews of amenities, etc. Results indicated lower than needed reserves, but not a crisis - total account could be corrected to that recommended by the reserve analysis by small transfer increases over the next four years. This reserve study is comprehensive, follows industry guidelines, and shows 35 separate lines in three very broad categories - site, buildings and pool. [snippage] However, the reserve study does not address how to rebalance the funds already in the account. [snippage]
The core question is how to rebalance per FS 720?
I am looking at FS 720.303 (6) and especially 720.303 (6) (g) . As allowed by FS 720, your HOA has a pooled account, reflecting in part expected future expenditures for all reserve components. I am not persuaded your HOA has to "rebalance" anything. I think your HOA need only have a statement each year that reflects each component, its remaining expected useful life, and how much is needed to pay for this expected useful life. Then the total dollar figures for each reserve component should be added. The total should be compared to what is actually in the pooled account.

Posted By GeorgeS21 on 11/19/2020 9:12 AM
FS 720 [snippage] seems to state that any change in the allocation inside a current reserve account requires a majority vote of the HOA membership.
This is not my interpretation. Here is what FS 720.303 (6) (f) says about a meeting of the membership on this subject: "After one or more reserve accounts are established, the membership of the association, upon a majority vote at a meeting at which a quorum is present, may provide for no reserves or less reserves than required by this section. If a meeting of the unit owners has been called to determine whether to waive or reduce the funding of reserves and such result is not achieved or a quorum is not present, the reserves as included in the budget go into effect. After the turnover, the developer may vote its voting interest to waive or reduce the funding of reserves. Any vote taken pursuant to this subsection to waive or reduce reserves is applicable only to one budget year."

It appears to me that the Board has no obligation to call such a meeting of the membership. Instead, if Owners (members) think they need a meeting pursuant to FS 720.303 (6) (g), then the onus is on the Owners (members) to call such a meeting.
AugustinD


Posts:4421


11/19/2020 9:48 AM  
Oops; I think I conflated (f) and (g) above a bit. If one looks at the statute, I think one can figure out where I meant (f) and where I meant (g).
KellyM3
(North Carolina)

Posts:1575


11/19/2020 11:24 AM  
I agree w/ Augustin. Your rebalancing can be done "on paper" as, overall, the board of directors is not determining whether or not to under-fund the reserve. Raising dues to better fund "under-funded" components while having verifiable overages in other line-items seem fiscally harsh and unnecessary to ask of the dues payers.
GeorgeS21
(Florida)

Posts:3411


11/19/2020 12:56 PM  
OK - I'm following.

Our HOA does have an attorney, but they are not an HOA attorney.

I will summarize the gist of the responses, herein, as, "The Board would be realigning funding inside a “pooled” HOA reserve account, but not reducing funding for the “pooled” HOA reserve account."

Is this accurate?
AugustinD


Posts:4421


11/19/2020 2:13 PM  
Posted By GeorgeS21 on 11/19/2020 12:56 PM
I will summarize the gist of the responses, herein, as, "The Board would be realigning funding inside a “pooled” HOA reserve account, but not reducing funding for the “pooled” HOA reserve account." Is this accurate?
Are you attempting some sort of qualitative and quantitative reconciliation of what was done in 2014 with what was done in 2020? If so, I suggest forgetting about 2014. It's as relevant as where things were in 2010. Which is to say: 2014, 2010, and even 2019 are irrelevant except for off-the-cuff observations like, "Whew, that unexpected roof repair on the clubhouse in 2019 took a toll on our reserves. As a result, the HOA has had to adjust its reserve planning more than usual."

I think I'd just present a spreadsheet of the 2020 reserve components; estimated useful life; and expected cost of replacement/refurbishment. Then I would present a matrix showing:

Recommended Reserve Account Dollars Expected Reserve Account Dollars
2020
2021
2022
.
.
.
[to whenever]

Then list a number of assumptions. Include the fact that 'Need to Replace' a reserve component and Costs to replace are moving targets. Reserve planning is not an exact science. But Reserve planning is essential to ensure the HOA is not caught with surprise expenses, leading to the need to borrow and/or special assess members large amounts of money.

I think something like 99% of Members are not going to understand what you present. But they will think you are a genius, and rightly so.
GeorgeS21
(Florida)

Posts:3411


11/19/2020 3:01 PM  
Augustin,

The reserve study is every well done and lays out, in 35 separate line items, all the components normally covered per national standards for reserve studies.

It has year by year funding outlays for each of the 35 components and recommends levels of total funding to be transferred into reserves, based on our total starting point balance. So, pretty darn comprehensive - BUT, it does not integrate the various lines in the original pooled account with the new list of 35 lines.

There are a couple of lines overfunded, and could of lines underfunded - as it stands now - but these are tracking lines, not separate accounts.

We would be adding about 20% more funds to the reserve account each of the next 5-6 years to bring it to levels of fully funded. It is pretty clear to the membership this is needed - no real pushback, yet.

My initial read of FS 720 was that we could reallocate inside the reserve account since it was and had always been a "pooled" fund per 720. Then the long-time, but non-HOA attorney said otherwise - then I started doubting my read of the statute - hence my post.

Avoiding a massive effort on something so straightforward was one of my goals ...
JohnC77
(Washington)

Posts:245


11/19/2020 3:08 PM  
The process to allocate reserve funds is the same as variable assessments, where assessments are based on square footage. In this instance, the value is based on a percentage of the number of remaining years to the reserve fund.

Not rocket science.
GeorgeS21
(Florida)

Posts:3411


11/19/2020 3:19 PM  
JohnC,

Right - we have a full allocation of how to spend based on 35 new categories.

The kerfuffle is about how to integrate those line items previously tracked from the last study - difference number of categories - and far larger number of specifics with this, professionally conducted study.

It would easy to simply not track the various components - as had been done since the last study in 2014 - but, the board has been accustomed to doing this, potentially because some of the the various components were underfunded - and, they got somewhat disjointed advice from the attorney when requiring a vote last time this was addressed.
GenoS
(Florida)

Posts:4158


11/19/2020 3:32 PM  
I'm not understanding how pooled reserves need to be "rebalanced". As long as there are enough funds available from the pool to fund replacement of reserve components at the start of the year when funds are planned to be spent according to the reserve schedule, it doesn't really matter how they're "balanced". The entire concept of "balancing" reserve funds among the various reserve components doesn't sound like anything I've seen in any Reserve Study that uses the "Pooled" method of calculating reserve requirements.
GeorgeS21
(Florida)

Posts:3411


11/19/2020 5:43 PM  
Geno,

I agree, as well.

The issue, I think, is that the Board, and community, have become accustomed to seeing the various line items on a spreadsheet with specific numbers associated with each one - still in a single account, btw, and transfers made from assessments to that account - ie no sub accounts.

So, a clear position might be expressed? "While many of you have become accustomed to seeing these numbers broken out by the ten line items adopted following our first reserve study in 2014, it is important to recognize these were simply internal tracking numbers and are not "sub accounts" of the reserve fund. Our reserve fund is
"pooled" per the provisions of FS 720 - a single account. We are re-baselining our contributions to follow the categories determined by our recent reserve study, completed two months ago. Also, as the Board is not decreasing or waiving any transfers into the reserve fund, no vote of membership is required."
AugustinD


Posts:4421


11/19/2020 5:54 PM  
Posted By GeorgeS21 on 11/19/2020 5:43 PM
So, a clear position might be expressed? "While many of you have become accustomed to seeing these numbers broken out by the ten line items adopted following our first reserve study in 2014, it is important to recognize these were simply internal tracking numbers and are not "sub accounts" of the reserve fund. Our reserve fund is "pooled" per the provisions of FS 720 - a single account. We are re-baselining our contributions to follow the categories determined by our recent reserve study, completed two months ago. Also, as the Board is not decreasing or waiving any transfers into the reserve fund, no vote of membership is required."
This clarified or confirmed a lot for me. For those members paying attention, I should think this explanation would be just fine.
GenoS
(Florida)

Posts:4158


11/19/2020 8:42 PM  
Posted By GeorgeS21 on 11/19/2020 5:43 PM
Geno,

I agree, as well.

The issue, I think, is that the Board, and community, have become accustomed to seeing the various line items on a spreadsheet with specific numbers associated with each one - still in a single account, btw, and transfers made from assessments to that account - ie no sub accounts.

So, a clear position might be expressed? "While many of you have become accustomed to seeing these numbers broken out by the ten line items adopted following our first reserve study in 2014, it is important to recognize these were simply internal tracking numbers and are not "sub accounts" of the reserve fund. Our reserve fund is
"pooled" per the provisions of FS 720 - a single account. We are re-baselining our contributions to follow the categories determined by our recent reserve study, completed two months ago. Also, as the Board is not decreasing or waiving any transfers into the reserve fund, no vote of membership is required."

Had sort of the same reactions here last year. Changing from straight-line reserves to pooled (cash flow) reserves was confusing to many. The board thought it was up to the homeowners whether or not to change the method. Finally, the HOA attorney opined that while the board had the authority to switch from "straight line" to "pooled" reserves without the approval or consent of the owners, it would be proper to have the homwowners approve the transfer of funds from the individual reserve accounts to a single "pooled" account because one could argue that reserves set aside for the roofs, let's say, were being re-purposed for something else; i.e. the pooled reserves account. Such a minor change and it caused a big commotion as some tried to make a mountain out of a molehill. All the sub-reserve accounts added up to X dollars and, once combined into the pool, the total was still X dollars.
GeorgeS21
(Florida)

Posts:3411


11/20/2020 5:37 AM  
Been trying to simplify this for broader consumption ... in addition to the explanation would be what will happen.

“In the future you will see us following the reserve study recommendations for funding our pooled reserve fund, and we will be guided by the recommended outlays for repairs and replacements from the reserve study. We will not be breaking out the amounts by category, as this is unnecessary and confusing with a pooled account. This process is per FS 720, and HOA reserve study industry standards.””
JohnC77
(Washington)

Posts:245


11/20/2020 6:04 AM  
I think you need to have serious conversion with someone who actually understand the reserve study and how it works for a community. The answers I see here leave much to interpretation. Pooled funding may work for smaller association with very few components, but never for larger communities with many assets and especially with private streets, sewer systems and gate components.
AugustinD


Posts:4421


11/20/2020 6:49 AM  
Posted By GeorgeS21 on 11/20/2020 5:37 AM
Been trying to simplify this for broader consumption ... in addition to the explanation would be what will happen.

“In the future you will see us following the reserve study recommendations for funding our pooled reserve fund, and we will be guided by the recommended outlays for repairs and replacements from the reserve study. We will not be breaking out the amounts by category, as this is unnecessary and confusing with a pooled account. This process is per FS 720, and HOA reserve study industry standards.””
I would change,

"We will not be breaking out the amounts by category, as this is unnecessary and confusing with a pooled account."

to

"We will not be breaking out the amounts by category, because with a pooled account, this is unnecessary; confusing; and entirely redundant to the 2020 Reserve Study itself. The Reserve Study breaks down the estimates of funding by component and is available for review upon request."

AugustinD


Posts:4421


11/20/2020 8:44 AM  
Posted By GenoS on 11/19/2020 8:42 PM
Had sort of the same reactions here last year. Changing from straight-line reserves to pooled (cash flow) reserves was confusing to many.
My take:

-- The Florida Condominium Act was enacted in 1963. Over the years the Florida legislature has added to and amended the Act many times. The Florida Condo Act speaks of each method (straight-line accounting and pooled) method for reserve funding once, in Section 718.111 (13). Section 718.112 (2) (f) 3. seems to me to be the basis for law firms opining that a membership vote must occur for a HOA to switch from straight-line to pooled in its reserve planning. Here is one such opinion: https://www.floridacondohoalawblog.com/2018/11/19/procedure-to-convert-to-pooled-reserves/. This vote is mandatory. That is, the Board must arrange for it.

-- I think the Florida HOA Act was enacted around 1992, with again, many additions and amendments over the years. Section 720.303 (6) (g) states in part: "Funding formulas for reserves authorized by this section must be based on a separate analysis of each of the required assets or a pooled analysis of two or more of the required assets." The only section of the Florida HOA Act addressing votes on reserve funding is 720.303 (6) (f). The membership has the option of initiating such a vote. Otherwise, the statute does not mandate this vote.

-- With the advent of personal computers and mass usage of spreadsheets, the pooled (cash flow) method became the recognized superior method of estimating reserve funding.

-- Reserve Study standards only came into existence in the late 1990s (possibly reflecting the availability of the personal computer).

-- Regardless of what the HOA/Condo is doing in any annual presentation of reserve funding, today companies that perform Reserve Studies are going to do two things:

(1)
Estimate replacement costs (with COLA/interest/yada factored in) and years to replacement for each reserve component it identifies (sometimes with input from the Board).

(2)
Use the pooled (cash flow) method to determine future annual reserve funding, based on the current point in time; the current assessment; and recommended increases in the assessment as needed.

-- Reserve funding is not an exact science. For one, actual annul reserve component expenditures can vary widely from a Reserve Study's estimates. A condominium using the straight-line method must get votes anytime its published annual estimates vary from the actual expenditures, requiring some re-arranging of the dollar figures for the reserve components. Estimate errors are piled on top of estimate errors, all ridiculously demanding not a little labor, and I think entirely in the way of Sisyphus (rolling a boulder up a hill only to have it roll back down upon him again and again).
Posted By GenoS on 11/19/2020 8:42 PM
The board thought it was up to the homeowners whether or not to change the method. Finally, the HOA attorney opined that while the board had the authority to switch from "straight line" to "pooled" reserves without the approval or consent of the owners, it would be proper to have the homwowners approve the transfer of funds from the individual reserve accounts to a single "pooled" account because one could argue that reserves set aside for the roofs, let's say, were being re-purposed for something else; i.e. the pooled reserves account. Such a minor change and it caused a big commotion as some tried to make a mountain out of a molehill. All the sub-reserve accounts added up to X dollars and, once combined into the pool, the total was still X dollars.
Was this a condominium?
GenoS
(Florida)

Posts:4158


11/20/2020 6:02 PM  
No, it's an HOA.

I found a couple of videos discussing reserves at the "Florida Association News Blog".

Fundamentals of Reserves
and
Reserve Study: Road Map for Managers

I found these to be very informative and not that hard to understand. When I hear that members of my HOA, especially candidates for the Board of Directors, express interest in the Reserves I point them to those 2 videos as an introduction. Each is about an hour long with another half-hour of Q&A.

The presenter says he dealt with reserves in different parts of the country for years and it wasn't until he moved to Florida that he had to familiarize himself with "straight line reserves". According to him, Florida was a little late to the party and only allowed for "cash flow" (i.e. Pooled) reserves starting in 2002. He also says just about everywhere else in the country uses pooled reserves.

At one point he answers an audience question about "non-statutory reserves", which may be Florida-centric. Nevertheless it's good to hear someone (besides myself) explain the deal with statutory vs. non-statutory reserves. Despite several years of urging, my own HOA still maintains non-statutory reserves. Almost everyone here thinks the reserves may only be spent on items on our Reserve Components list. Which is only true IF you've got statutory reserves; which we don't have.
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