Tuesday, October 2, 2018

A Primer on Budgeting and Reserves


Few aspects of condominium and cooperative association operations are as heavily regulated as the budgeting process and yet too many boards take an informal approach to these crucial director functions.  From Section 718.504, which lists the required operating expense categories, to Section 718.112, which delineates the process and the requirements for reserve disclosures, budgeting, funding and use of reserve funds, to Section 61B-22 of the Administrative Code, which addresses even more detailed aspects of the process we can see how broadly the Florida Legislature has addressed budgeting and reserves.  Errors in the manner in which budgets and reserves are handled can subject associations to monetary penalties imposed by the State.

 

Budgeting is a process of estimating upcoming expenses.  On the operating side, most communities rely on prior years’ budgets and financial statements to develop the upcoming year’s budget for operating expenses.  The operating budget should be designed to meet the reasonably anticipated operating expenses.  All board members should do everything they can to deliver value to the members for their assessment dollars, but some boards make the unwise decision to keep assessments down artificially for political purposes at the expense of performing necessary maintenance.  When this occurs, the ultimate repair costs are usually higher because of the damage and deterioration that could have been avoided had repairs been done in a responsible and timely manner.  To put it simply, budgeting to properly maintain the community is, of course, a fiscal issue, and a planning issue, but it should not be a political issue. 

 

On the reserve side, many communities that went years or even decades without funding any reserves are finally starting to fund at some level and are considering the cash flow funding model over the component funding model, usually because the cash flow model funds a pooled reserve rather than a reserve fund in which funds are restricted for specific reserve assets rather than being available to use for any reserve asset.  For those communities without fully funded reserves, an accurate reserve study is the best defense against complaints over the inevitable special assessments needed to supplement underfunded reserves or fund projects for which the membership has voted to have no reserves. Boards that pull reserve estimates out of thin air are setting themselves up for future complaints and possible recall when the figures they chose prove wildly inaccurate.

 

There are too many communities that do not attach an accurate reserve schedule to the proposed budget, as required by Statute.  Usually this is because these communities have not obtained a reserve study from a reliable professional or, in an even worse scenario, have a reserve study and have chosen not to disclose its contents.  All board members and managers are encouraged to remember that the purpose of a reserve study is to allow the board to make accurate disclosures of the upcoming reserve expenses.  The purpose of the disclosure is to enable the owners  to know what expenses are coming up, but does not deprive the members of the right to vote each year to waive or reduce the funding of the reserve portion of the budget.  The assets for which reserve disclosures are required by law are the roof, paving and painting, regardless of cost, and any other component for which deferred maintenance or replacement cost will exceed $10,000.00.  Assets costing less than this dollar threshold can be aggregated for the purpose of reserve budgeting and the Administrative Code allows the board to create other reserves (other than those required by Statute).  For each reserve asset, the reserve schedule must disclose its estimated total useful life, estimated remaining useful life, estimated deferred maintenance or replacement cost, and for reserves funded on the component model, the estimated balance in the reserves for that asset at the end of the current fiscal year. 

 

This analysis applies to both condominiums and cooperatives (the citations above are for condominiums, but there are identical requirements for cooperatives in other portions of the Statute and Administrative Code).  Homeowners association are not subject to the same requirements unless the developer (before turnover) or a majority of the members (after turnover) vote to opt into the statutory reserve structure.

Preparing your operating budget and planning for reserves each year requires thoughtful deliberation as to the needs of the community both short and long-term.

 

 

Wednesday, August 8, 2018

Some States are protecting First Amendment Rights in Private Residential Communities. Will the Sunshine State follow suit?

In 2012, the New Jersey Supreme Court ruled 5-1 that a condominium owner could place election signs on his front door and side window of his townhome over the objections of his association.

Wasim Khan, an oncologist who was a Democratic candidate for the Morris County Board of Freeholders, fought the Mazdabrook Commons HOA when they began fining him $25.00 a day for each day his election signs remained. That wasn't the first time that Khan tangled with his association; they had previously fined him for his rose bush vines growing too high.

Khan was ecstatic over the Court's ruling, saying "We won for the rights of a million fellow New Jerseyans and countless more across the U.S."

Well, maybe not so fast here in Florida. Our State's Supreme Court has not ruled on the issue of whether a private residential community's governing documents can restrict signs without running afoul of the U.S. Constitution's First Amendment protections which prohibit government from abridging the freedom of speech. Generally speaking, there would have to be some "tie in" between a private residential community and state action in order to have the First Amendment apply. Some people think that the fact that Florida condominiums are regulated by the State is sufficient to create that necessary state action but that theory has not yet been tested in our highest court.

In a Florida decision that arose from a Naples neighborhood, a homeowners association sued an owner who refused to remove a “For Sale” sign, which violated the restrictive covenants, from their front yard. The trial judge ruled in favor of the homeowner, finding the association’s rule to be an abridgment of free speech. Upon appeal, the appeals court sided with the association, finding that the association was not an arm of government, that there was therefore no “state action, and enforcement of the no-sign-in-the-yard rule did not violate free speech rights.  See Quail Creek Homeowners’ Association vs. Hunter.  Since the Quail Creek case involved what is called “commercial speech”, which is afforded less protection than pure “political speech”, it is perhaps debatable whether the same result would have happened if the test case was a political yard sign.
Meanwhile, the State of California has also taken steps to safeguard the rights of those living in common interest ownership communities to express themselves via signage. A 2011 law sponsored by Senator Christine Kehoe even went so far as to ensure that tenants in these communities could display political signs. There were some limitations on this right including the requirement that such signs be no larger than 6 square feet and that the signs not be installed more than 90 days prior to the election or vote and must be removed no later than 15 days after such election or vote. Moreover, the signage must relate to a specific election, referendum, recall or issue before a public body and not just contain a general political sentiment.

A ride through my own HOA last weekend revealed one brave soul who had installed a small sign for a local candidate near his mailbox. Our community's covenants ban all signs except the statutorily-permitted security signs. Sure enough, the latest issue of our HOA Newsletter contains a bolded section reminding us all that signs are not permitted including political signs.

What are your thoughts about private covenants and political signs given the upcoming midterm elections in November? Do such restrictions save us all from visual clutter and our neighbors' questionable political choices or do they abridge our freedom of speech? Will Florida follow the examples set by other states or are we still a long way off from that happening?

Sunday, August 5, 2018

FL Division of Condos Proposes Greater Financial Penalties on Associations

Florida condominiums, cooperatives and, to a lesser degree, homeowners' associations are subject to the imposition of fines and penalties by the Division of Florida Condominiums, Timeshare and Mobile Homes ("Division") for a variety of mistakes and missteps.  The Division plans to pass sweeping changes to Chapter 61B-21 of the Florida Administrative Code which may go into effect in the coming weeks.

Why is this important for your Board to know?  Because many of the actions listed below occur on a regular basis in many associations that can otherwise be described as high functioning communities.

The category of minor violations has been narrowed while the category of more egregious violations has been expanded. The following violations are considered minor violations for which a Notice of Noncompliance will be issued:


  • Failing to disclose the beginning and ending dates of the period covered by the proposed budget.
  • Failing to disclose periodic assessments for each unit type in the proposed budget.
  • Distributing candidate information sheets consisting of more than one page.
  • Verifying the outer envelope information BEFORE the date of the election.
  • Failing to disclose the amount required to fully fund each reserve account as of the end of the fiscal period covered by the annual financial statements.
  • Failing to disclose the method of allocating income and expenses in the annual financial statements or turnover audit.
The following violations will result in a MINIMUM total penalty of $10-$30 PER UNIT or $1,000 whichever amount is greater. In a high rise with 350 units, a penalty for one of the following violations could cost $10,500.  As you can see, some of the violations below are much more egregious than others. 

  • Failing to maintain complete accounting records.
  • Failing to maintain separate accounting records for each condominium.
  • Not passing assessments sufficient to meet expenses.
  • Collecting assessments less frequently than quarterly.
  • Not apportioning assessments correctly amongst multiple condominiums.
  • Failing to charge interest on past-due assessments.
  • Improperly excusing the developer or other owners from paying assessments.
  • Improperly amending the Declaration of Condominium to change the percentage by which the unit owners share the common expenses.
  • Imposing improper use fees.
  • Imposing late fees, transfer fees or security deposits without proper documentary authority to do so.
  • Failing to maintain adequate fidelity bonding.
  • Compensating board members or officers without proper documentary authority to do so.
  • Improperly allocating reserve requirements.
  • Failing to include a separate budget for each condominium operated by the Association as well as a budget for the Association.
  • Failing to obtain competitive bids fore each contract that exceeds 5% of the association's budget.
  • Imposing fines and suspending use rights without proper notice and an opportunity for a hearing.
  • Allowing an ineligible person to fun for the Board.
  • Failing to adopt a budget each year.
  • Commingling reserve funds with operating funds.
  • Using Association funds for items other than proper common expenses.
  • Contracting with a service provider owned by a board member.
  • Using an association debit card for any association expenditure.
  • Failing to hold an annual election. The caveat here is that if you do not have more candidates running than open seats or if you do not have at least 20% of your eligible voters cast a ballot you will not have an election.
  • Failing to use ballots or voting machines.
  • Failing to provide space for the name, unit number or signature of the outer envelope used for elections.
  • Failing to provide timely first and second notices of the election.
  • Using improper nomination procedures in the election.
  • Holding the election at a time and place other than the annul meeting.
  • Failing to provide a candidate with a receipt for written notice of his or her candidacy.
  • Permitting ineligible candidates to be listed on the ballot.
  • Allowing members to rescind or change their previously cast election ballots.
  • Including comments from the board about election candidates in the Second Notice of Election and accompanying documents.
  • Not using an impartial committee to count the ballots.
  • Altering or editing candidate information sheets. The caveat here is that if a candidate submits a double-sided candidate information sheet or a candidate information sheet that is more than one page long, that candidate must be told that only one side of a page will be distributed.
  • Failing to place the inner envelope in a separate receptacle before being opened.
  • Not using uniform ballots.
  • Not checking the outer envelopes against a list of eligible voters.
  • Counting ineligible ballots
  • Failing to count properly cast ballots.
  • Opening outer envelopes prior to the election meeting or opening outer envelopes outside the presence of unit owners.
  • Failing to maintain official records.
  • Requiring a unit owner to pay a fee for access to association records.
  • Failing to timely provide access to records or failing to allow scanning or copying of records.
  • Improperly purchasing a unit at a foreclosure sale.
The foregoing list of violations is not inclusive and, in addition to the penalties established by the rule chapter, the Division may also seek to recover any other costs, penalties, attorney's fees, court costs, service fees, collection costs and damages allowed by law. . There are a lot of other areas where a volunteer board can unknowingly go astray and wind up being monetarily penalized as a result. The changes being proposed by the Division to 61B-21.003 F.A.C reflect a shift in the Division's focus from education to enforcement. While both are important, education helps boards avoid the types of infractions which result in fines and penalties.

The Division has posted notice of a Public Meeting/Workshop Hearing for Monday, August 13th from 9:30-11:30 am in Tallahassee. I realize that most of you reading this blog are not likely to make it up to Tallahassee for this hearing.  However, you can submit a comment regarding the proposed rules by sending an email to the following email address which has been set up for this purpose:

fctmh.rulehearing@myfloridalicense.com

The imposition of fines against associations will have a financial impact and may result in the community looking for ways to hold individual board members accountable for the costs to the association. Do not expect insurance to cover fines or penalties.  Given these new enforcement parameters, I am urging associations to consult with their management professionals and experienced legal counsel to ensure that they are operating within the requirements of the Statute and Administrative Code.  Particular attention should be paid to fiscal operations (budgeting, calculating and handling of reserves, collection of assessments), imposing fees of any kind other than assessments, elections and board member conduct and the awarding of contracts.  Serving on your board of directors is almost guaranteed to be a thankless job but you should try to avoid it also becoming a costly job!



Monday, July 9, 2018

Guess Who's Coming to Speak? Florida condominium owners have statutory right to invite a candidate for public office or a public officer to speak in common areas.

With the midterm elections right around the corner in what can only be described as a politically charged environment, what would you say if a member of your condominium association wanted to invite a political candidate to speak in your community?  Would your answer change if you found the candidate to be one who does not support your views on issues?  Even worse, one you found to be repugnant?  If you serve on a Board of Directors of a Florida condominium association, your answer to the request would have to be "yes" regardless of your personal opinions on the candidate.

Section 718.123 of the Florida Condominium Act is entitled "Right of owners to peaceably assemble" and Subsection (1) requires the board to allow any member to invite a public officer or candidate for public office to appear and speak on the common elements, common areas and/or recreational facilities.

If your board were to deny an owner the right to invite the candidate or public officer of his or her choice to speak in your community, your board could be sued for breach of the statute.  However, this provision of the statute raises issues which may run contrary to your board's desire to stay out of the political fracas by not inviting political candidates or existing public officials to speak inside your community.  However, given that Florida condominium owners have this statutory right, the Board needs to discuss how to manage these requests if they ever materialize. Certainly, one person's candidate of choice might not be another person's "cup of tea" and this law allows just a single member of your community to invite a candidate for public office or a public officer in to speak on the common elements or association property without any sort of consensus on the invitation being extended.

A board who receives this kind of request should consider the following:

  • What day of the week and time would impose the least inconvenience to residents who use the common areas for other purposes.
  • Whether or not security will be required and who will pay for same.
  • Whether or not your rules regarding the private use of the common elements such as a refundable security deposit should apply to this kind of political event on the common areas if a deposit is required when the common areas are reserved by members for other types of use.
  • Whether or not to allow members of the general public or guests to attend the speaking event.
  • Whether or not to impose time limits and other reasonable restrictions on the event.
  • Whether or not to publicize the event to members.
Naturally, once an event like this takes place, it is likely that the Board will receive additional member requests to allow countervailing candidate voices to be heard. One of the few palatable things about political discourse these days is that you can choose to tune in or tune out, especially when you find the rhetoric to be distasteful.  You can switch the channel, block the newsfeed or choose not to attend the local town-hall debate. However, when politics is invited into your community, the opportunities to avoid the rhetoric decreases.

It is anyone's guess why the Florida Legislature thought the topic of allowing candidates to speak inside residential communities was so important that it warranted protecting that right by law. I suspect that it was borne out of the potential to address a large group of constituents in one place. This is certainly a convenience to political candidates and public officials but the residents in your community may not all welcome campaigning within the sanctity of their community, especially with the level of personal attacks and lack of decorum we see in today's discourse.


I wonder if our state legislators would still see the wisdom in passing this law today. The last thing any of our condominium communities needs is more rancor and this provision in the Florida Condominium Act makes your private community a little less private by being denied a choice on this subject.

Wednesday, June 27, 2018

Deadline looms for older Florida High-Rises to Install Engineered Life Safety Systems!


Florida’s 2019 60-day Legislative Session will begin on March 5, 2019 and is expected to end on May 3, 2019.

 

The Florida Fire Protection Code, Section 31.3.5.12 of the National Fire Protection Association (NFPA) 101 requires existing (pre-1992) “high-rise” buildings which are not otherwise exempt to be protected either by an automatic sprinklers system or by an Engineered Life Safety System (ELSS) by Jan. 1, 2019. Given the timing involved, any further legislative remedies no longer seem feasible.

 

The components of an ELSS may vary from one jurisdiction to another but the ELSS must meet all of the other requirements of the NFPA 101. A typical ELSS requires the following:

 

1.      A report by a licensed architect or engineer identifying the building’s existing condition and outlining the alterations needed to comply with the NFPA 101.

2.      A complete fire sprinkler system for all common areas.

3.      A partial fire sprinkler system for the condominium units which typically is one sprinkler head inside each unit located above the entrance door to the unit.

4.      A complete fire and smoke alarm system which complies with current life safety codes.

5.      An approved compartmentation plan designed to restrict a fire from spreading which typically includes either smoke-proof elevator lobbies or pressurized elevator hoistways, sealing of floor and wall penetrations, etc.

 

Naturally, it will take time to complete the necessary Engineer’s Report and to locate, vet and hire a contractor who can perform this work in your community. Also, there is the large matter of how to pay for the ELSS installation. If you plan on using reserve funds to do so you will need a membership vote to approve using those funds for that purpose unless you had a special reserve earmarked for ELSS installation. If you plan on obtaining financing to pay for the installation it takes time to apply for and secure such financing.

 

At this point, if your pre-1992 high-rise is not exempt and you have not yet made plans to install the necessary ELSS prior to the end of 2019 you need to speak to experienced Association counsel immediately to take the steps needed to ensure you do not miss the deadline and wind up being fined as a result.

Monday, June 18, 2018

Know what you are getting into before your Board agrees to an Indemnification Clause

Many boards focus on only a few provisions of the contracts they sign. What service or materials are they getting? What are they paying? When will the contract commence? Far too many other crucial provisions are overlooked as boilerplate.

Indemnification clauses are often seen as part of the standard boilerplate provisions in most contracts and have become commonplace in all types of association contracts. To indemnify someone means to compensate him or her for a loss, sometimes even for a loss caused by the person being indemnified.  The first question to ask is why the association should be indemnifying another party.  The second question is to inquire about the extent of the indemnity obligation.

Let's look at how these indemnification provisions are treated in a variety of contracts your board might sign.


MANAGEMENT AGREEMENTS:

With your manager, the first question is easy to answer. Your manager is on the front lines daily, takes direction from the board and acts as the agent for the association.  It would be foolhardy for any manager or management company to serve in that capacity without an adequate indemnification clause.  However, even easy solutions can become complicated when you are faced with an overly broad indemnification clause.  For instance, some indemnification clauses in management contracts have the association agreeing to indemnify the management company even for their own gross negligence or willful misconduct. Other clauses are drafted to require the manager or management company to be found 100% liable before their reciprocal obligation to indemnify the association kicks in.  In a wrongful death case, personal injury or premises liability case, that means your manager or management company could be found 99% liable for the damages and your association would still be indemnifying them.

Fairness would dictate that each party (the Association and Management Company/Manager) agree to indemnify the other.  Since the manager is typically an additional insured on the association's liability policy, the manager and management company are typically indemnified for their negligence but should not be indemnified for gross negligence, criminal acts or willful misconduct or for damages attributable to a direct breach of the management contract.  The management company should indemnify the association for its gross negligence, criminal acts, willful misconduct or for its breach of the management contract.

SECURITY CONTRACTS:

Agreements with vendors who provide security services to your community require close scrutiny of the indemnification provisions given the potential for something to go awry.  If your guards are armed, the potential for liability increases even more.  If your security company requires an indemnification from the Association, that indemnification should be very limited because the security company should be responsible for the conduct of its employees on your property.  Moreover, if you are relying on security services to avoid a negligent security claim, be sure to have your security company provide recommendations of what is needed to properly secure your community.  Security companies often attempt to limit their liability to not exceed the contract sum; naturally, such limitation often does not come close to covering the damage they might actually cause.


ELEVATOR, LAUNDRY AND OTHER SERVICE CONTRACTS:

Similar to security contracts, there are other service contracts where the contractor is independent from the association and the association has little to no impact on the services or products being provided.

It is very important that these contractors carry their own insurance, name the association as an additional insured and indemnify the association for claims brought against the association because of the actions of these service providers.  Do not count on the association's insurance to protect the association in the event of an indemnity claim by one of your vendors or contractors. If you sign  the agreement with an indemnity clause, you have taken on a contractual liability and your insurance will likely not provide coverage. It is important to verify coverage or the lack thereof before you sign contracts requiring the association to provide an indemnification to another party.

Lastly, you must remember that your vendors' insurance policies cover not only your potential claim but the potential claims of all other associations with whom they have contracted. In a wrongful death or personal injury cause of action, awards or settlements can quickly exceed a $1 million coverage limit.  As such, sufficient umbrella coverage is needed.









Monday, May 21, 2018

What are your Board's Rights and Obligations with regard to Sales and Financing in Your Community?

On any given day in any given Florida community association, a manager or director may receive a frantic call from a real estate or title agent about an upcoming closing. These frantic calls typically include an immediate request for information in the form of affidavits, estoppel information, lender questionnaires or other records and information. Naturally, if there is any delay or a refusal to provide certain information, the next call or email contains threats of dire legal consequences should the closing not occur on time or at all.

Responding to inquiries about the monetary amounts owed to the Association on a particular property (also known as estoppel certificate requests) are relatively easy. The shared ownership statutes mandate a certain form be used and outline the maximum fees your Condominium, Cooperative or Homeowners' Association board may charge to provide those estoppel certificates. However, when it comes to other information being demanded these days from lenders and their title/closing agents, the waters are not so clear.


Just how much does your association need to facilitate sales and refinancing activity in your community?


Owners living in mandatory community associations are entitled to expect a certain amount of cooperation from the Board as it pertains to sales or financing transactions.  However, owners are not entitled to expect the association to expose itself to potential liability in doing so.  Boards need to strike a balance between not overextending themselves by providing information of which they are uncertain and not holding up sales and financing transactions by refusing to engage altogether.

The requests for information other than estoppel requests usually involve one or more of the following items:


1.    Lender Questionnaires. These forms are typically overly broad and require the board or manager to confirm information that might not be accessible to them.  For example, many communities are not certain of the exact number of units currently being leased because some owners hide leasing activity from the board. These forms require the board to function as a quasi loan risk officer to help the lender determine whether or not a loan in a particular community is a good risk.  There is little upside to the board or its manager in attesting 100% to answers for which there is not 100% certainty.  Any questionnaire which does not frame the information being provided as being done so "to the best of the signer's knowledge" is a big no-no.  If your board is inclined to fill out a lender questionnaire, work with association counsel to modify the language as needed to best protect the association's interests.


2.    Litigation Information.  Far too many associations are sued in routine "slip and fall" and water leak cases.  Those cases are then usually turned over to insurance defense counsel to handle.  Closing agents may want certain assurances from the board or the association's general counsel that the amount of potential loss or damage is known and can be covered by the association without the need for a special assessment or a loan from the reserves.  Also, they will want to confirm that the litigation has no impact on the safety, structural soundness, habitability or functional use of the building and that the amount of the litigation is covered by the association's insurance policy. Unfortunately, it is often not possible to fully assuage those concerns particularly if settlement negotiations are ongoing with no immediate end in sight. If you are confronted with this issue in your community, see if defense counsel can prepare a brief statement about insurance coverage for the claim(s) in question. While this option is rarely if ever used, counsel for the purchaser or the seller is also able to pull and read the court pleadings and draw their own conclusions about the potential impact in order to facilitate the closing.


3.   Public Records Concerns.  There are items recorded in the Public Records which can delay or complicate closings until they are resolved.  A classic example of this is a Notice of Commencement which was recorded by a contractor with regard to a construction project in the community.  Closing agents will want an Affidavit of Sufficient Funds confirming that the association has the funds on hand to pay for the work contemplated by the Notice of Commencement.  Providing such an Affidavit is fine, however, if the project has ended it is preferable to record a Notice of Termination in the Public Records to remove this concern for future transactions.  Even better, be sure that when you have ongoing construction projects in your community, you work with association counsel to ensure that all proper contractor documents are recorded in the Public Records to evidence in a timely manner both the commencement and the completion of these projects.


Naturally, gathering and providing all of the foregoing information takes time that volunteer boards and time-strapped managers cannot spare.  The shared ownership statutes confirm that your board is not expected to provide this information at no charge.

Sections 718.111(12)(e), 719.104(2)(d) and 720.303(4)(d), F.S. all provide that the association is not required to provide any information to a prospective purchaser or lender other than estoppel information but, if it chooses to provide other information, it can charge $150 plus any reasonable photocopying costs and attorney's fees incurred in responding to those requests as follows:

"The association or its authorized agent is not required to provide a prospective purchaser or lienholder with information about the condominium or the association other than information or documents required by this chapter to be made available or disclosed.  The association or its authorized agent may charge a reasonable fee to the prospective purchaser, lienholder or the current unit owner for providing good faith responses to requests for information by or on behalf of a prospective purchaser or lienholder, other than that required by law, if the fee does not exceed $150 plus the reasonable cost of photocopying and any attorney's fees incurred by the association in connection with the response."


Some of my clients have passed Board Resolutions confirming what information they are willing to provide to lenders and closing agents pursuant to the pertinent statutes.  Others are happy to provide any and all information requested and they are charging for the costs do so including my time to assist them with a response.  The foregoing sales and financing requests will confront every community association on a regular basis.  If your Board has been handling these requests on an ad hoc basis up until now, it is best to have your attorney craft a reasonable policy for you to enforce from this point forward.  Your first answer to that next urgent phone call or email should be "here is our policy on these kinds of requests".