There are other differences in budgeting for insurance for a condominium association including that if a board proposes a budget in any fiscal year an annual budget which requires assessments against unit owners that exceed 115% preceding fiscal year, the board shall simultaneously propose a substitute budget that does not include any discretionary expenditures that are not required to be in the budget. The substitute budget must be proposed at the budget meeting before the adoption of the annual budget. However, in determining if the assessments exceed 115%, the calculation must exclude required reserves, deferred maintenance, repair or replacement of these required reserve items, and insurance premiums. By statute, cooperatives have a similar provision that excludes insurance premiums in calculating if the budget is 115% of the preceding fiscal year. Timeshares also include such a provision. Homeowners’ associations do not have such statutory restrictions, it’s important to consult the governing documents of the association for any similar restrictions. when preparing or assisting the association in preparing its annual budget. Keep in mind, although mathematics is a large part of a budget, being organized and diligent in chronicling and measuring the association’s financial activities is perhaps a CAM’s most important task here
At a minimum, most associations have at least the following: ● Property insurance ● General liability insurance ● Fidelity bond: ○ HOA, fidelity bond: If annually approved by a majority of the voting interests present at a properly called meeting of the association, an association may waive the requirement of obtaining an insurance policy or fidelity bond for all people who control or disburse association funds. ● Workers’ compensation insurance ● Directors and officers (D&O) liability insurance For condominium associations, F.S. 718.111(11) requires a condominium to specify the deductible amount on its property insurance policies, in a motion passed by the board. If the association does not pass such a motion at the time the insurance is renewed, it must do so at the budget meeting. Part 2 summary Well, we’ve talked about several of the important aspects of the operating section of the budget. Remember as noted earlier, not all budgets will look the same related to the type of association it is and the elements of a particular community. CAMs have a responsibility to use best practices
PART 3: RESERVES
The reserves must be funded or maintained in a way prescribed by statute and governing documents, or have their funding waived (currently there are limitations related to structural reserves for condominiums and cooperatives). In order to decrease the funding or to waive a reserve item, the membership must vote affirmatively on an annual basis. Funding methods for reserves include: ● Straight-line, also known as restricted, or component method ● Pooled, also known as the cash flow method. Pooled reserves generally provide more flexibility A reserve schedule included as an attachment to a reserve budget, provides the following: ● A list of all required deferred maintenance and capital expenditure reserve items ● The estimated useful life of each item ● The estimated remaining useful life of each item ● The estimated cost of deferred maintenance and capital equipment replacement for each item ● The estimated fund balance for each item as of the end of the current fiscal year ● The required funding amount for each budget year for each item A reserve study i s an in-depth evaluation of a property’s physical components and an analysis of its reserve funds. A reserve study projects the anticipated replacements or repairs to common-area elements and recommends annual reserve funding to cover capital expenditures and deferred maintenance for each year of a future thirty-year period. The steps for each reserve item: 1. Estimate the useful life less the current age equals the remaining useful life. 2. Replacement cost less the year-end balance. 3. Divide by the remaining useful life for the amount the association should reserve this year.
In accounting terms, reserves are portions of a company’s profits that are set aside for specific or general purposes. Setting aside money for reserves can help keep an organization such as a community association in a good financial state by providing savings to handle future expenses. Reserves are defined by the DBPR as, “Any funds, other than operating, that are restricted to deferred maintenance and capital expenditures and any other funds that are restricted to use by the association or its documents.” There are some basic concepts about reserves for community associations, however, there are significant differences in types of reserves and statutory requirements for reserves for condominium, cooperatives, HOAs, and timeshares. In this part of the course, we will take a look at some of the similarities and differences. The purpose of reserves includes helping the members of the association to avoid special assessments or loans to replace or repair significant physical components of the community association that, over time, are subject to wear, deterioration, or effects from natural or man-made disasters. Providing reserves helps to protect the investments of the members, reduces the cost of maintenance, fulfils a board’s fiduciary duty to an association and, in certain circumstances, provides for compliance with various state and local laws. The uses of reserves are restricted from day-to-day spending. They must designate individual components. These designations vary between HOAs, condominiums, cooperatives, and timeshares. Reserves schedules There are two different types of reserves schedules: straight- line (segregated) and pooled. Referring to the illustration below, using the straight-line method, how much should the association reserve?
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Book Code: CAMFL1526
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