Reserve accounts are established and maintained by Clubs to hold funds for the long-term or deferred maintenance and replacement of any assets that the Club owns or is responsible for maintaining.Â Generally these assets have a remaining useful life of less than thirty years.Â For example, a Club would hold funds in a reserve account for the replacement of items such as the repair or replacement of the HVAC system or the roof on the clubhouse, or funds for replacement of exercise equipment in Club’s fitness center, as well as less obvious items such as replacement of property following wind-storm damage.Â Reserves are also needed for all furniture, fixtures and equipment in ample amounts.
Requirements for the establishment of reserve accounts vary from Club to Club and depend on whether the Club governing documents require establishment of such accounts.Â While it is a widely accepted principle that the establishment of a reserve account is both necessary and prudent, the requirements for funding and management of association reserve accounts are significantly less clear.Â To complicate matters further, funding requirements for reserve accounts depend entirely upon the physical components of the property and rarely are two identical.Â This leaves developers, Club managers and board members wondering whether to pay now, or possibly pay later.
Clubs that fail to adequately fund reserve accounts face serious risks, including the potential of lawsuits from members. Past failures to adequately fund reserve accounts have led to special assessments of Members, dues increases and the need for the Club to borrow funds.Â With current real estate market conditions depressed in many regions and with the litigious nature of our society, Clubs, legislatures and courts will be facing the issues relating to reserve funding now more than ever.
Club reserve funding issues can be compared to the reserve funding issues related to homeowner and condominium association reserve funding.Â In the association setting, the prevailing trend is toward stricter regulatory reserve funding requirements.Â Like many states, the State of Florida has reserve account requirements in the Florida Condominium Statute, Chapter 718, as well as Florida’s Vacation and Timeshare Plans Statute, Chapter 721.Â Â The State of California, Department of Real Estate established guidelines in addition to its statutory requirements, and published the “Reserve Study Guidelines for Homeowner Association Budgets” just a few years ago.Â One example of courts facing reserve account issues is the January 2007, New Jersey case, Ebert v. Briar Knoll Condominium Association, where a unit owner sued the condominium association for inadequate reserves for the maintenance of the condominium’s common areas.Â The Superior Court of New Jersey agreed with the unit owner holding that the Association had failed to provide adequate reserves for the maintenance of the common elements.Â The court added that the Association breached its fiduciary duty “to preserve and protect the common elements and areas for the benefit of all of its members”.Â A breach of fiduciary duty could be alleged in the Club setting if the Club board fails to establish and maintain reserve accounts appropriately.
Comprehensive reserve analysis and reserve account management advisors are readily available.Â Club boards should consider their reserve account needs, consider utilizing these services and fund reserves prudently.Â Taking these steps will help developers, Club managers and board members avoid attacks from disgruntled members looking to make somebody else pay.
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