Reserves and reserve funding can be described as both simple and complicated.
One simple way to describe reserves is as funds for the replacement of major components of an association. A building roof is a common example of what an association pays for using reserve funds. Reserve funds contrast with operating funds, which cover day-to-day expenses of the associations. One example of an operating expense is monthly landscaping maintenance.
The article "Don't Forget Reserves!" by Florida law firm Becker & Poliakoff presents some of the more complicated considerations of reserves and reserve funding. These condo reserve considerations include:
Potential Florida condo buyers may want to read about assessments and their connection to reserve funding.
In 2022, Florida state lawmakers passed Florida Senate Bill 4-D, which created another form of reserve study and additional requirements for reserves. The article "Senate Bill 4-D And The Champlain Towers South Disaster: A Problem In Response To A Problem" presents information about the bill.
Some Florida condo buyers wish they had read the most recent reserve study report before making an offer to buy a condo unit. Reserve studies are often completed months before the following year's condo budget and assessment are prepared. The study can provide an indication of reserve requirements, and therefore assessments, may change in the future.
Some Florida condo buyers wish they had better understood whether the current reserve funding level was based on a reserve study, and if so, when the reserve study was completed, before making an offer to buy a condo unit. For example, if reserve funding was not based on a reserve study, it is possible, if not likely, that reserve funding will eventually be based on a reserve study produced by a reserve study firm. And that reserve funding, and therefore the condo assessment, will increase.
Similarly, if the reserve study is old, it is possible, if not likely, that the reserve study will be updated. It is not unreasonable to expect that reserve requirements will increase by the amount of condo construction related inflation for the years since the previous reserve study.
For example, the Construction Financial Management Association (CFMA) estimated 2021 construction inflation at 19.6%
CBRE reported estimated 2022 U.S. construction inflation of 14.1%.
Just these two years seem to imply that a reserve study completed before 2021 could see an increase in replacement costs of about 35% plus the inflation for the additional years before 2021 or after 2022.
Some Florida condo buyers wish they had better understood the qualifications of the vendor who completed the reserve study on which an association based its annual reserve contribution before making an offer to buy a condo unit.
Some Florida condo buyers wish they had better understood whether an association board passed a special assessment to handle a reserve deficit before making an offer to buy a condo unit.
Prospective Florida condo buyers should, if they don't understand reserves or reserve funding, engage licensed and reputable attorneys and advisors to guide their buying decision.