|Your Location: Timeshare Users Advice: Reserve Funding for Timeshares in Florida |updated: 1/29/08|
DISCLAIMER: The article you are about to read contains financial and management review information from my own experiences as a financial analyst for the Florida Bureau of Timeshare. Information disclosed in this article does not discuss on-going investigations nor does it name specific Timeshare resorts. Examples are provided anonymously from actual financial reviews. The intent of this article is to inform the Florida Timeshare ownership at large of statutory compliances, legislative changes and resort management practices used in the day-to-day operation of a Timeshare Resort. Opinions expressed are the author’s and do not constitute legal /financial advice. Please seek the advice of an attorney or a licensed CPA for your specific needs. (LLS)
Introduction: Greetings to all and I do thank you for the opportunity to share with you what services the Florida Bureau of Timeshare offers to Owners of Florida Timeshare unit weeks. The Bureau of Timeshare consists of four sections: Enforcement, Examination, Financial Analysis and Administration. I work in the Financial Analysis section in Tallahassee. Here is a brief description of what each section does:
1) Enforcement: Investigate complaints filed (Verbal and Written) concerning the day-to-day operations of timeshare resorts, investigate violations of the Florida Statute that are non-financial related, investigate interstate statute violations as needed.
2) Examination: This section reviews, makes corrections and approved all timeshare plans filed with the Division. This critical step is the intial filing for a Timeshare to begin operations. The Public Offering Statement and Declaration of Condominiums are throughly checked out for customer protection and legal business practices. These are the thick documents a sales person hands you when you buy and what few people ever read. This section also reviews and approves written and video advertising the Resorts use in and out of the State of Florida.
3) Financial Analaysis: This
section reviews all financial documents filed and recorded with the
Bureau for statutory violations and compliance with GAAP/GAAS
standards. Investigates all financially related violations of
the Florida Statute. We see all approved annual budgets, Tax
escrow account statements, and annual financial audits for over 375
currently registered resorts. We monitor all resorts for
fiscal performance and the managing entity for it’s statutory fiduciary
4) Administration: This section collects fees/penalties paid by resorts. Tracks all enforcement actions in progress within the Bureau. The Bureau Chief is the legislative focal point in seeking statutory changes/rule definitions that relate to the regulation of the Florida Timeshare industry.
Annual Budgets/Assessments and
Florida Statute 721.13 governs the financial reporting/compliance requirements for all registered Timeshare plans. Timeshare plans must file a copy of the approved annual budget for the upcoming fiscal year within 30 days of approval. This annual budget is used by managament as a tool to guage your annual assessments for operating costs and required reserves. Ad Valorem taxes are generally billed to timeshare owners separately with a few exceptions.
Annual assessments for Florida Timeshares are currently caculated by two statutory methods: Percentage of Ownership in the timeshare plan or square footage of the unit occupied. There is a proposed change in the Florida Senate in SB 626 that would modify this to include some subjective criteria, i.e. location of unit, ammenities, etc. The points system some resorts use will be adjusted to meet the statutory requirment of a (one-to-one) ratio that must be maintained at all times, else a violation will have occured. Resorts that offer an exchange program/reservation system must be careful of violating this part of the statute by over booking units.
The annual budget should be broken up into (3) sections: Revenues (Annual assessment), Expenses (Operating/Reserve costs) and a Reserve Schedule. Annual assessments should be based upon all unit weeks filed with the Bureau, including the units weeks owned by the developer/managing entity/majority unit owner(s). No owner may be excluded from paying an expense item unless all owners are excluded. The Enforcement section gets periodic complaints questioning the validity of certain exclusions/privaledges of unit owners.
Developers must pay their full portion of annual assessments on inventory owned, except during a guarantee period (specific period) for new resorts. Note: A developer may elect to extend a guarantee period for a specified period of time. A developer may elect to exclude him/herself from paying annual assessments on inventory they own during a guarantee period with the understanding that they will pay all operating/reserve costs that exceed annual assessments recieved from the other unit owners. As you are aware, a low annual assessment is part of the sales program offered to new purchasers and is often subsidized by the developer in this fashion.
There are two main categories of funds used in fund accounting relating to non-profit timeshare plans: Operating and Reserve funds. Florida Statutes require reserve funds to be kept separate and untouched by operating expenses, unless voted upon at a duly called meeting and voted to move out of the reserve fund with a majority vote! Board members may move funds around within the reserves, but not into the operating fund. This would be a major violation and subject the board to a severe penalty. Operating funds may be moved into the reserves freely but must remain there once placed and become part of the reserve balance. Operating funds can flow freely to the reserve fund but not vice-versa
Reserves are mandated by Florida statute and must be included in the annual budget. Reserves are prepayment to replace large cost items affecting all unit owners. Florida Statutes require a developer/managing entity to conduct or have completed a engineering study to determine the lifecycle of long term assets (Reserve components) owned by the association.
Florida Statutes identify (4) categories which are not all inclusive but a start for those assets that have a lifecycle equal to the life of the building which houses the timeshare plan. These reserve component categories are: Roof replacement, Paving, Furniture & Equipment and exterior painting. There may be other reserve component categories for heat/air conditioning, pool repair, sea-walls, etc. These have an estimated lifecycle which must be updated regulary in the budget reserve schedule which is sent to each timeshare owner. If you get an annual budget that does not have this reserve schedule disclosed, ask for it!
Reserves must be fully funded based upon a straight-line calculation method. For example if a roof has an estimated life of 20 years with an estimated replacement cost of $100,000 and the current budget is for year #2 in the lifecycle, then the reserve schedule would have a line item for roof replacement assessment for $5,000 for this item. Ideally, the roof replacement reserve account should have $5,000 in it from the prior year, year #1, but it may not. Let me explain the concept of waiving all or partial reserves.
When a developer has a guarantee in place, he/she may waive all reserve assessments for themself and for all owners, per discusssion above, on an annual basis only. This guarantee is predicated upon an implied warranty period for major items found in the reserve components. Whether a developer or an association is in control, the waiving of reserves must be properly voted upon at a duly called meeting per statutory guidelines for each year the waiver is sought. Annual reserves can be partially waived at the duly called meeting per the statutory guidelines. The impact of waiving reserves is two sided. It may reduce the annual assessment in the short run, but it increases the future assessment to cover replacement of reserve items in later years. For example: A resort that has waived all reserves for a number of years has a greater risk factor in case of natural disaster. Reserves do not replace required insurance coverages required by Florida Statutes.
The Florida timeshare industry has recently underwent a major IRS review. The IRS has determined that the reserves accrued in non-profit timeshare plans may be taxable based upon the timeshare plans filing status. The timeshare plan’s CPA will know how to best file the timeshare plan with the IRS. The conflict comes with the Florida Statute mandating the storing of reserves for future replacement of major purchase items. The IRS sees this funding as some sort of slush fund used for operations. The American Resort Development Association (ARDA) has done battle with the IRS to stop this action. The result was for each timeshare plan to determine their preference of filing in a two year window of opportunity. After the period is over, the IRS will expect an answer and either the tax money owed or a change of filing status.
The impact of this IRS ruling in 1996-7 has caused multiple CPA ‘s in the timeshare industry to reduce the tax liability their clients face. The first action is to determine which of the reserve components needs to be replaced and is there enough money to do so? If there is funding for painting and paving available then get it done. This solution has two sides in this case. If replaced early in the lifecyle, the lifecycle starts over and a new projection for funding begins. A hurricane can ruin paint and paving, there will be no reserves to do the work if one occurs after being done. I will know the impact of the CPA’s advice concerning reserve accounts in the 1997-1998 financial statements to be filed with the Bureau. In 1996, the Florida timeshare industry had accrued reserves totaling over $70 million dollars.
The IRS ruling impacts older resorts that have had time to accrue reserves. Younger/new resorts are making adjustments to reduce/eliminate taxes on reserves required by Florida Statutes. What can you the timeshare owner expect to see in your annual assessments?
If your timeshare plan is older and has roof, pool, or building repairs needed, then you can reasonably expect to see these items scheduled to be repaired/replaced. This action may see your annual assessment increase slightly to cover inflation costs. If your timeshare is new, you may see a slight decrease or unchanged annual assessments where reserves will be waived each year and funds normally programmed for reserve items will be channeled into the operating fund for same year execution of funding.
A term you may know and directly relates to the annual budget is a special assessment. This a an assessment for a major expenses that occurs during the budget year that was not planned or anticipated. Payment for lawsuits, insurance deductables and one time major expenses are good examples. If your Florida Timeshare consistently sends bills for special assessments for the same expenses, call/write your management company and ask why these items are not included in the annual budget instead. As you know special assessments are not included in the current annual budget must be shown in the following year annual budget notes where a disclosure/description should be made. Special assessing recurring common expenses is a subjective violation of a managing entitie’s fiduciary responsibility and boarders on enforcement action when discovered.
In closing, if you own a timeshare week in another state, check with your state government office to find out what your rights of interval ownership are before you need to exercise them.
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