Developers must establish and fund reserve accounts for their projects during the initial years while they retain control of the homeowner associations. However, there are various legal and bookkeeping maneuvers that they often employ to attempt to avoid or diminish their contributions for reserves, which are intended for use for major future maintenance expenditures.

For the developer of the Sullivan Ranch community in Mount Dora north of Orlando, it appears that its decision to stop funding reserves after it established the account and began funding it in 2007 has significantly backfired. The Fifth District Court of Appeal recently overturned a lower court’s summary judgment, which concluded that the developer was excused from funding reserves while it remained in control of the association and was funding deficits in its operating expenses.

The Fifth DCA’s decision in Sara R. Mackenzie and Ralph Mackenzie v. Centex Homes et al. illustrates the importance for developers of HOA communities to tread carefully whenever they attempt to avoid funding for association reserves. Condominium developers are provided with a statutory mechanism to avoid funding for reserves if they guarantee a set minimum level for the association’s entire annual budget during its first two years of existence, but the laws governing HOAs do not include this exemption.

Based on the circumstances in this case, it appears that the developer of the community was either unaware of its statutory requirements governing the funding of reserves or it failed to adequately think through its actions. After establishing the account for the association’s reserves and funding it in 2007, the developer opted to pay Sullivan Ranch’s operating expenses in lieu of making any contributions to the reserve account in the following years, claiming that it had made no guarantee to fund the reserves.

Centex argued that by deficit funding the HOA, it was excused from any obligation to fund reserves based on ambiguity in the HOA statutes excusing a developer from paying its share of “operating expenses and assessments” if it funds a deficit in operating expenses. The statute is unclear as to whether the developer is excused from all other contributions, including for reserves, or if the developer is merely excused from paying the regular assessments.

Centex contended that because assessments are defined broadly to include all monies owed to the HOA, an excuse from contributing “operating expenses and assessments” must also excuse it from the reserve contributions, as those are also payments owed to the HOA.

The appellate panel determined that the community’s declaration is even more ambiguous on this point as it excludes contributions to reserves from the operating expenses without specifying whether Centex is liable for those expenses in addition to the operating deficit.

Funding Findings

The court found that Florida law requires HOAs to fund reserve accounts once they have been established, and the community’s declaration likewise requires its board to include a reserve fund in its budget (although it allows the board to exercise its “business judgment” in establishing the amount). It noted that the statute allows an HOA that is liable for deferred maintenance to forgo creating reserve accounts, but it requires the association’s budgets to indicate no reserves are being provided by making a specific declaration in conspicuous font. The statute also provides that the reserves may be reduced following a meeting and vote.

However, the Fifth DCA found that this interpretation creates a direct conflict with the statute requiring that reserve accounts must be funded once established or defunded according to a regular procedure with specific notice to the homeowners.

The court concluded that the law’s requirement for reserve funding changes to be conspicuously noted in the financial reports, which must be made available to all homeowners, indicates the Legislature’s intent to keep owners aware of the state of reserve finances and avoid unexpected special assessments.

By leaving the original obligation to fund reserves in place, the panel found it avoids a conflict and ensures that the purposes of the statutory sections are met, given that they were specifically amended to provide for reserve accounts and avoid the need for special assessments. It also forces developers to comply with the law by either paying the reserve funds or waiving them at a proper meeting and conspicuously noting their absence in the financial reports.

The appellate panel concluded that the community’s declaration provides for reserves, and Centex made an initial contribution of $32,300 before it ceased funding the account. It was therefore obligated under the statute to fund or maintain the reserves, or to hold a vote to reduce or eliminate them and provide notice in the financial reports.

Given this ruling, the developer’s decision to stop funding reserves for this community is likely to prove to be a costly one as the plaintiffs allege their HOA is due about $994,000. The case illustrates the importance of developing acting with a clear understanding of the statutory requirements as well as those of their own communities’ declarations in their decisions involving the funding of reserves.

Developers must establish and fund reserve accounts for their projects during the initial years while they retain control of the homeowner associations. However, there are various legal and bookkeeping maneuvers that they often employ to attempt to avoid or diminish their contributions for reserves, which are intended for use for major future maintenance expenditures.

For the developer of the Sullivan Ranch community in Mount Dora north of Orlando, it appears that its decision to stop funding reserves after it established the account and began funding it in 2007 has significantly backfired. The Fifth District Court of Appeal recently overturned a lower court’s summary judgment, which concluded that the developer was excused from funding reserves while it remained in control of the association and was funding deficits in its operating expenses.

The Fifth DCA’s decision in Sara R. Mackenzie and Ralph Mackenzie v. Centex Homes et al. illustrates the importance for developers of HOA communities to tread carefully whenever they attempt to avoid funding for association reserves. Condominium developers are provided with a statutory mechanism to avoid funding for reserves if they guarantee a set minimum level for the association’s entire annual budget during its first two years of existence, but the laws governing HOAs do not include this exemption.

Based on the circumstances in this case, it appears that the developer of the community was either unaware of its statutory requirements governing the funding of reserves or it failed to adequately think through its actions. After establishing the account for the association’s reserves and funding it in 2007, the developer opted to pay Sullivan Ranch’s operating expenses in lieu of making any contributions to the reserve account in the following years, claiming that it had made no guarantee to fund the reserves.

Centex argued that by deficit funding the HOA, it was excused from any obligation to fund reserves based on ambiguity in the HOA statutes excusing a developer from paying its share of “operating expenses and assessments” if it funds a deficit in operating expenses. The statute is unclear as to whether the developer is excused from all other contributions, including for reserves, or if the developer is merely excused from paying the regular assessments.

Centex contended that because assessments are defined broadly to include all monies owed to the HOA, an excuse from contributing “operating expenses and assessments” must also excuse it from the reserve contributions, as those are also payments owed to the HOA.

The appellate panel determined that the community’s declaration is even more ambiguous on this point as it excludes contributions to reserves from the operating expenses without specifying whether Centex is liable for those expenses in addition to the operating deficit.

Funding Findings

The court found that Florida law requires HOAs to fund reserve accounts once they have been established, and the community’s declaration likewise requires its board to include a reserve fund in its budget (although it allows the board to exercise its “business judgment” in establishing the amount). It noted that the statute allows an HOA that is liable for deferred maintenance to forgo creating reserve accounts, but it requires the association’s budgets to indicate no reserves are being provided by making a specific declaration in conspicuous font. The statute also provides that the reserves may be reduced following a meeting and vote.

However, the Fifth DCA found that this interpretation creates a direct conflict with the statute requiring that reserve accounts must be funded once established or defunded according to a regular procedure with specific notice to the homeowners.

The court concluded that the law’s requirement for reserve funding changes to be conspicuously noted in the financial reports, which must be made available to all homeowners, indicates the Legislature’s intent to keep owners aware of the state of reserve finances and avoid unexpected special assessments.

By leaving the original obligation to fund reserves in place, the panel found it avoids a conflict and ensures that the purposes of the statutory sections are met, given that they were specifically amended to provide for reserve accounts and avoid the need for special assessments. It also forces developers to comply with the law by either paying the reserve funds or waiving them at a proper meeting and conspicuously noting their absence in the financial reports.

The appellate panel concluded that the community’s declaration provides for reserves, and Centex made an initial contribution of $32,300 before it ceased funding the account. It was therefore obligated under the statute to fund or maintain the reserves, or to hold a vote to reduce or eliminate them and provide notice in the financial reports.

Given this ruling, the developer’s decision to stop funding reserves for this community is likely to prove to be a costly one as the plaintiffs allege their HOA is due about $994,000. The case illustrates the importance of developing acting with a clear understanding of the statutory requirements as well as those of their own communities’ declarations in their decisions involving the funding of reserves.