“Florida law requires every condominium’s annual budget to include both operating expenses and reserves for capital expenditures and deferred maintenance. Operating expenses are those incurred during the day-to-day operations of the condominium (e.g., landscaping, pool maintenance, and management fees). Capital expenditures and deferred maintenance, on the other hand, are those incurred during the sporadic repair or replacement of major components of the condominium property (e.g., the roof, parking lot, and exterior painting).
To properly budget for reserves, condominium associations must conduct a reserve study. A reserve study is a long-term financial planning tool that analyzes the physical condition of major components of the condominium property, and their estimated repair or replacement costs. By determining these factors, condominium associations can then accurately budget for capital repair and replacement expenditures over time. For example, if a condominium needs $1 million to replace its roof in 10 years, its next annual budget should include $100,000 in reserves. Ideally, the association will continue to reserve $100,000 each year for the next 10 years in order to raise the necessary $1 million by the time the roof needs to be replaced. A reserve study takes this general formula and applies it to every major component on the condominium property.”