Articles Posted in Budgets and Reserves

Michael-Hyman-srhl-lawThe firm’s Michael L. Hyman authored an article that appeared as a “Board of Contributors” guest column in today’s edition of the Daily Business Review, South Florida’s exclusive business daily and official court newspaper.  The article, which is titled “Association Deficits Don’t Excuse Developer From Funding HOA Reserves,” focuses on a recent decision by the Florida Fifth District Court of Appeal that found a developer was not excused from funding reserves while it remained in control of the association and was funding deficits in the operating expenses.  Michael’s article reads:

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.

dbr-logo-300x57Based 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.

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While maintaining an adequate level of reserve funds for deferred maintenance, capital improvements and other major expenses is always recommended, community associations that find their reserves do not cover all of their needs have a worthwhile option other than special assessments that they should explore and consider.

Bank loans and lines of credit for associations were very difficult to obtain during the height of the foreclosure crisis, but happily for many Florida communities those days are long gone.  Now, there are a number of lenders that focus on loans for associations and offer highly competitive rates and terms.

Special assessments are typically the first option that associations consider to cover shortfalls in their reserves and take on important renovations or other unforeseen expenses.  However, it may not be the preferred choice for many communities.  Millions of U.S. homeowners are still recovering from the crash of the housing market and do not have the ability to secure a home equity line of credit in order to pay a special assessment.  In addition, the implementation of a special assessment is viewed as a sign of financial distress in an association by lenders considering FHA-backed home loans for buyers ipool-deck-renovation-300x224n a community, and this can ultimately take a significant toll on sales and property values.

Most associations will begin their research into their financing options by first turning to the bank that maintains their operating and/or reserve accounts.  While this is the obvious place to start, in the majority of cases they are also going to need to shop around.

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GaryMars3

Gary M. Mars

The firm’s Gary M. Mars authored an article that appeared in today’s edition of the Daily Business Review, South Florida’s exclusive business daily and official court newspaper.  Gary’s article, which was titled “Ruling Reminds New Associations to Watch for Developers Waiving Reserves,” focuses on a recent appellate ruling regarding the issue of developers waiving their funding of reserves prior to the turnover of an association for a new community from the developer to the unit owners.  His article reads:

A recent appellate ruling shined a spotlight on the all-too-common issue of developers improperly waiving their funding of reserve accounts while they retain control of an association for a new community before its turnover to the unit owners.

The ruling served as an important reminder for the owners at new developments of the careful vigilance that they need to exercise for any questions involving the funding and use of reserves by developers.

The ruling was filed by the Fifth District Court of Appeal in the case of Meritage Homes of Florida v. Lake Roberts Landing Homeowner Association. Meritage, the developer of the subdivision located in Winter Garden, appealed the trial court’s final judgment in favor of the homeowner association, which found that the requirement for HOA reserve accounts in the city code of Winter Garden cannot be waived as Meritage had attempted.

Meritage based its appeal on its contention that the lower court’s ruling created an impermissible conflict with section 720.303(6)(f), Florida Statutes, which expressly grants homeowner associations the right to waive reserves. The developer’s initial annual budget planned for the HOA’s operating expenses as well as an $11,000 deferred maintenance reserve account, but it later approved a budget that completely waived its funding of the reserves.

dbr logo-thumb-400x76-51605Meritage asserted that it issued written notice to all of the association members, which included several homeowners at that point, but none of the members other than Meritage attended the budget meeting in which the board members approved the budget sans reserves.

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The start of a new year represents a slew of new beginnings for most community associations. From holding annual elections to the preparation of annual budgets, the first quarter of the year marks a pivotal time for many associations. With that comes a great deal of confusion, particularly with regard to the proper way to fund reserves.

Contrary to common misconceptions, Florida Statutes require that associations must present a fully funded reserve to their fellow unit owners. An association may also present to the membership the option of either waiving reserves, or funding reserves less than fully, but it is not required to do so.

Reserves are used by associations to fund capital expenditures and items of deferred maintenance. Some reserve categories are mandatory (e.g., roofing, painting, paving, and any item expected to cost in excess of $10,000), while others are discretionary (e.g., insurance premiums). However, once a reserve fund is established, the monies dedicated to each category, including interest, may only be used for that category (unless the membership approves an alternate use).

According to Chapter 718.112(2)(f) of Florida Statutes, Florida condos must fully fund reserve accounts for capital expenditures and deferred maintenance. The amount to be reserved must be computed using a formula based upon the estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item.

Now, what happens if once presented with a fully funded reserve account the association becomes interested in waiving or reducing all or specific reserve items? A vote must occur. Not only must a quorum be established in order for voting to take place, but a majority of the owners must be present either in person or by proxy in order to approve any changes.

Keep in mind that it is possible that certain owners will be voting via limited proxies. Should that be the case, special language must be included on the face of the proxy ballot, in capitalized, bold lettering, that should read as follows: WAIVING OF RESERVES, IN WHOLE OR IN PART, OR ALLOWING ALTERNATIVE USES OF EXISTING RESERVES MAY RESULT IN UNIT OWNER LIABILITY FOR PAYMENT OF UNANTICIPATED SPECIAL ASSESSMENTS REGARDING THOSE ITEMS.

Should a majority of the quorum of members not agree to waive or reduce the reserve account, then the association is responsible for fully funding the account. Whatever your association decides, keep in mind that the decision is only good for the particular year in question, and the whole process will have to be done again on the following year.

Running any type of business is no easy feat, and that is especially true for businesses that are operated by volunteer leadership. Nonetheless, community association officers and board members should engage in certain businesslike approaches to help ensure that they are running their association successfully.

A vital yet often overlooked fact that association leaders must keep in mind is that their association is a corporation – with officers and directors who are elected by their membership to govern and run their corporation effectively. Albeit categorized under the non-profit sector, associations are still responsible for preserving the association’s budgets and bank accounts. They are also accountable for maintaining and hiring vendors, management, and staff, increasing (or at least preserving) property values and sustaining the community’s quality of life.

Since the operation of a community association is the operation of a business, cultivating a business plan to help elected officers and directors run their “business” properly might serve a more useful purpose than most people think.

Foster Great Leaders

Elected officers and board members have a fiduciary duty to prudently serve their community, while always acting in the best interests of their organization. This means that however board members decide to act on behalf of their association, they must make sure they are doing so in good faith and with due care.

Ultimately, this means that whoever is elected to undertake this role must never place their personal wants and desires over those of the community as a whole. They must comprehend and uphold the association’s articles of incorporation, bylaws, declaration, and rules and regulations, and must always make sure they are acting within the scope of their authority.

This leads to the importance of customer service. In any business, the customer service department plays a pivotal role in the reputation of the corporation. While board members should always enforce their association’s rules and should abide by them as well, they also need to take care of their “customers.”

pool rules.jpgAs such, consistency is the key. There should never be any inclination of “favoritism” when enforcing these rules. Initiatives such as publishing newsletters, sending emails and posting up policies around the community’s common areas can serve as friendly reminders for those residents who are new to the community, or for owners who may have simply forgotten the rules. The golden rule that every successful business follows is: Treat others as you would like to be treated. When enforcing restrictions, make sure to stay polite. It is, after all, business.

Like other diligent business executives, board members must also invest time in learning about legal, financial and other community association-related topics that might help them evolve into effective leaders. Those that volunteer to serve should always engage in continuous learning – whether that means collecting newsletters, attending seminars or participating in LinkedIn discussions. Board members should never stop seeking information that can assist them in doing their jobs properly.

Stay Fiscally Responsible

Every business needs money to survive – as does every association. Community associations should always be financially responsible and act within their means.

Carrying the proper insurance policies is an extremely important factor for the financial wellbeing of any association.

Heavily researching contractors prior to commencing repair projects can also help associations to act correctly. This does not mean cutting corners. Research can prevent associations from overpaying for shoddy construction work and avert costly payments for low-quality materials.

All businesses, including community associations, must develop a system of checks and balances within their organization in an effort to protect their corporation from becoming victims of fraud. Community associations should work with their legal counsel and accountants to set-up precautionary measures that will help keep the association’s money secure. Maintaining adequate reserves, accurately understanding the association’s expenses (i.e., staffing, landscaper fees, etc.), and knowing which incidentals are covered by the association versus those covered by the owners can also help in ensuring an association stays economically viable.

Establish relationships with quality vendors and professionals. Dependable vendors allow board members and property managers to focus their attention on time sensitive matters, rather than having to micromanage every vendor that drives through their gates. Having a good rapport with CPAs, attorneys, management companies and other qualified professionals who serve the community association industry can save board members when they need to turn to an expert for advice. Knowledgeable and dependable resources are assets every association should try to cultivate.

All successful businesses rely on business plans and models to keep their corporations targeted on their respective goals. Treat your association as the business that it is, and develop and follow systems and procedures for operating that business. You will find that your association will thrive, and your “customers” will be happier.

For community associations, preserving the property and its common areas is one of the foremost duties of the association directors. Beyond the day-to-day maintenance responsibilities, association directors and managers are responsible to develop funding plans for the upkeep and replacement of common facilities such as elevators, roofs, heating/cooling systems, swimming pools, decks and balconies. These funding plans generally take the form of accumulated budgetary reserves to help spread the anticipated costs of deferred maintenance or capital expenditures for the associations’ common facilities or building components over the estimated remaining useful lives of the components. Maintaining well-funded reserves enables associations to avoid large annual assessment increases or special assessments that can create financial hardship for the unit owners at those times when raising funds is required to perform the necessary deferred maintenance or replacement.

For condominium associations, establishing and funding reserve funds is an obligation of the board, as reserves are statutorily required to be included in condominium association budgets that must be adopted each year. Specifically, condominium associations must maintain reserve funds for roof replacement, exterior paint, pavement resurfacing and all other items for which the replacement or deferred maintenance costs exceed $10,000. Additionally, depending upon certain circumstances, the boards of some homeowners associations may also be required to budget for reserves, depending upon whether it is required by the association’s governing documents as established by the developer or voted for by the association members. While the funding of reserves may be waived or reduced on an annual basis upon obtaining the appropriate membership vote, community association boards may not be automatically required to submit such a question for a vote of the membership.

In an effort to ensure the proper funding of reserves it is in the best interests of most associations to retain highly qualified and experienced consultants to prepare an objective reserve study for the association. These studies are used to assess the actual costs for the ongoing maintenance of all of common facilities and building components. They include a detailed analysis of the current condition of the major components as well as a financial breakdown for their expected maintenance, repair or replacement costs. The experts who prepare these studies use a formula that takes into account the estimated cost of deferred maintenance or replacement as well as the remaining useful life of the component.

In light of the higher costs typically associated with comprehensive reserve studies, some smaller associations have opted for a simpler analysis, such as a Five-Year Capital Plan that is prepared by experienced professionals. Such a plan may be used by the board to determine the level of reserves expected to be required.

In addition to properly establishing and maintaining reserve funding and preventing deficits thereof, association board members have a fiduciary duty to the unit owners to ensure that a community’s reserve funds are protected and invested properly. Risky investments are not appropriate for these funds, and it is highly recommended for associations to turn to qualified professionals for their investment and tax advice. It is also imperative for reserve funds to be accounted for appropriately and accurately in the financial statements, audit reports, budgets and other financial and administrative community association records
dbprlogo.jpgFor condominium associations and their directors, one of the most helpful informational resources related to reserves is available online from the Florida Department of Business and Professional Regulation, Division of Condominiums. The agency’s “Budgets and Reserve Schedules: A Self-Study Training Manual” is the state’s official training manual for condominium association directors and members on association budgets and reserves. Click here to read and print the manual.

Another very helpful resource for all types of community associations is the “Reserve Studies/Management Best Practices Report” issued by the Foundation for Community Association Research, which is available by clicking here.

Community association board members must consider many factors in order to properly assess and fund their associations’ reserve accounts. With the proper guidance and planning, properly established and funded reserve accounts assist associations to avoid unexpected financial burdens for all of the unit owners.