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 “2022 Legal Update” educational webinar with Michael Bender from Kaye Bender Rembaum

 “2022 Legal Update” educational webinar with Michael Bender from Kaye Bender Rembaum

  • Posted: Sep 23, 2021
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 “2022 Legal Update” educational webinar with Michael Bender from Kaye Bender Rembaum to discuss recent legislation.

The webinar covered:

  • Senate Bill 602: Business Organizations (3:33)
  • Senate Bill 56: Assessment Notices (8:04)
  • Senate Bill 630: Community Associations (22:57)
  • Senate Bill 1966: Department of Business and Professional Regulation (1:28.29)
  • and More!

Click here to watch the recorded webinar or Watch it below now.

https://www.youtube.com/watch?v=OYek0k9Per0

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Why Is Your Community Association Still Using a Lawyer for HOA Collections?

Why Is Your Community Association Still Using a Lawyer for HOA Collections?

  • Posted: Sep 21, 2021
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Why Is Your Community Association Still Using a Lawyer for HOA Collections?

Axela Technologies / Bob Gourley

Condos and HOAs Still Paying Outrageous Legal Fees for Collections

If your condominium or homeowners’ association is facing a purely legal issue – a lawsuit, construction defect, governing documents updates, and such, having an experienced and qualified community association attorney is mandatory. But should you contact your lawyer for HOA collections?

Community associations are creatures of statute and attorneys are important to maintain proper governance. These experienced legal professionals deliver the expertise and legal finesse the community association will need to stay compliant with state statutes and their own bylaws. This avoids missteps and potential future lawsuits brought on by inappropriate actions.

Since attorney fees are generally significant, condominium associations and HOA boards should be judicious when engaging an attorney as it will cost the association a good bit of money. With that in mind, there are times when the cost and risk of using an attorney are wisely avoided.

Legal Fees 1

Don’t Just Skip Ahead to Foreclosure

When home and unit owners in condominiums and HOAs fall behind in their common fees and assessments, it can feel like very few options are available to collect on those missed payments. Communities generally turn to the usual suspects — an endless string of reminders and warning letters requesting payment, or referring the delinquent owner to a lawyer for HOA collections. But those are actually steps 1 and 3 (the warning and the foreclosure) of the full collections process. Step 2 is your opportunity to recover those debts without expending any additional energy or paying outrageous fees to an attorney on retainer: a collections solution, rather than legal enforcement.

A community association foreclosure should always be a last resort. It’s like fishing with a shotgun–sometimes it’ll get the job done, but it’s more costly, less efficient, and you don’t gain as much as you could with other collection methods. Wise associations seek a non-attorney remedy.

When you retain an attorney for collections, the end game of the attorney is foreclosure on the property. This isn’t collections, but rather “a security interest enforcement” action. In the Supreme Court case, Obduskey v. McCarthy & Holthus LLP, 139 S. Ct. 1029 (2019), the court ruled that in states that use non-judicial foreclosures, law firms are subject only to the requirements and prohibitions of one narrow section (1692f(6)) of the FDCPA.  In essence, the United States Supreme Court is advising community associations that attorneys foreclosing in non-judicial states are by no means a “collections entity.” More to the point, it’s expensive and can take years before the association sees a dime of what they’re owed, leaving communities in a lurch for funds.

Legal Fees 2

So you Foreclosed… Now What?

Let’s say you followed the legal process to its desired conclusion of foreclosure. The previous owner (as in many cases) becomes overwhelmed with the costs of legal fees and they lose their property.

The best result for a community association lien foreclosure on a property is getting an encumbered title. That means that the association takes the title, but the title is encumbered by the mortgage, which is still attached. The first mortgage can still be foreclosed upon and it will be eventually, at which time the community will lose access to that title.

…But what happens after the community takes the title? How do you monetize an association lien/foreclosure? Perhaps an investor will pick it up and now your community becomes a plaything of real estate investors. Or perhaps the association will rehabilitate the property and rent it out to recover delinquent fees and costs. Does the community association really want to get into the business of managing rentals? That’s a lot of work and liability to take on!

It’s a shame on many levels.

Legal Fees 3

The Burden of Legal Fees on Homeowners

Take a look at this example of fees charged to one delinquent homeowner:

attny fees

This is a real-world example. A condominium unit owner had fallen behind in their common fees in the amount of $1,830.00. The Board of Directors referred the matter to their attorney. As you can see, the legal fees mounted quickly, and by the time of this invoice, the association has already laid out $17,193.68 in legal fees due to the attorney. Even worse, these fees were going to be assessed to the delinquent unit owner by the association.

The total owed by the homeowner was now nearly 10 times what was owed to the association! This is completely unfair and unnecessary.

The final insult to the community is that this case is yet to be concluded and the delinquent unit owner may never be able to afford to pay for this issue, leaving the owner homeless, and the community on the hook for the legal fees. It does not have to be this way.

Legal Fees 4

The Argument for Ethical Collections

We wish we could say that is the only example of homeowner debt spiraling out of control, but it isn’t. In the community association management industry, it’s heartbreakingly common to hear of homeowners who ultimately lose their homes through foreclosure. Enormous legal fees amassed during long, drawn-out legal processes take away any chance of paying back what they owe. It can ruin lives and is why we at Axela always insist that foreclosure be viewed as a last resort.

A specialized collections process is a far simpler, cost-effective, and humane solution to attempt before considering going through a lawyer for HOA collections. From coast to coast, we hear similar stories where a collection process would have allowed the owner to remain in their home, and just as important, the association wouldn’t have had to pay an attorney only to have to “write off” the loss when no collection event occurred.

Some associations engage collection agencies that offer to buy the association’s debt, but those are also ripe for abuse of the homeowners. Collection agencies that perform at no cost or risk to the association like Axela Technologies are a preferred collection remedy because they are an effective solution that follows the collection regulations set forth in the community’s governing documents and costs the association nothing. Collection fees, which are quite modest compared to attorney fees, are passed through to the delinquent homeowner. This benefits the association as well as the delinquent homeowner because of the huge discrepancy between collection fees and legal fees charged by an attorney.

Legal Fees 5

Choose a Merit-Based Collections Agency

Axela Technologies offers a far better solution. Instead of burying the homeowner in tremendous legal fees, we work with them to figure out how best to pay off their indebtedness to their association and return them to good-paying status. Instead of charging by the hour for our work, as attorneys do, our fees are set at the onset (hard set fees with no hidden or junk fees) and passed through to the delinquent homeowner. We work diligently to explain the benefit of keeping the equity in their home and provide a solution to their problem. There is no need to put the association or the homeowner at risk of losing additional money.

In fact, since the Axela Technologies collection solution is 100% merit-based, our interests are perfectly aligned with the association. If we don’t collect from the homeowner, we don’t get paid. We collect 100% of what is owed to the association 19 out of 20 times without the need for the association to move the matter to an attorney for foreclosure.

Even when the matter does go to foreclosure, we stand with the association until the conclusion, which often yields a successful collection event for the association. If a lender forecloses on a unit we will not advise the association to write off the loss. We will follow the ownership of that unit and if the bank sells it with a surplus we will petition the court for the benefit of the association to recover that surplus. We don’t like write-offs and neither should you.

If your association gets sued, or if you need to change the language in your bylaws, you should absolutely be consulting with or employing an attorney. But, if your association is experiencing delinquency at any level, don’t get a lawyer for HOA collections. Skip the high legal fees and partner with Axela Technologies. Get in touch today and learn how Axela Technologies can help. Axela Technologies handles all collections on a merit-based system. Get your free collections analysis today.

 

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TO ARBITRATE OR MEDIATE?  By Eric Glazer, Esq.

TO ARBITRATE OR MEDIATE? By Eric Glazer, Esq.

  • Posted: Sep 21, 2021
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TO ARBITRATE OR MEDIATE?

By Eric Glazer, Esq.

Prior to July 1st, 2021 if a condominium dispute arose, the parties were forced to first arbitrate the matter before the Department of Business and Professional Regulation.  The law has now changed and reads as follows:

(a) Before the institution of court litigation, a party to a dispute, other than an election or recall dispute, shall either petition the division for nonbinding arbitration or initiate presuit mediation.

As you can see, now the plaintiff has a choice to start the matter in arbitration or mediation.  So which one do you choose?

If you decide to go to arbitration, your case will be assigned to an arbitrator in Tallahassee.  The arbitrator will read the briefs, hold hearings and ultimately enter an order.  Someone will win and someone will lose.  The loser will pay the winner’s attorney’s fees.  The loser can then file in court for a trial de novo.  In effect, it’s an appeal of the arbitrator’s order and the case starts all over again.  The winner of the trial de novo gets their attorney’s fees and costs from the loser, including the arbitration fees.

So….the risk in going to arbitration is that if you lose, you may wind up not only paying your lawyer, but the other side’s lawyer too.

The alternative is to mediate the dispute.  I have been certified since 2007 as a Circuit Court mediator.  I truly enjoy mediating cases and helping the parties resolve their disputes.  At mediation, the parties appear with their attorneys.  The mediator explains that today is a good day to settle the case on mutually agreeable terms, rather than leave your fate up to a judge or jury.  If an agreement is reached, it is enforceable in a court of law.  The mediator allows the parties to make opening statements, then separates the parties and goes back and forth trying to achieve a settlement.

There is very little risk in going to mediation.  There is no “winner” or “loser” at mediation, so neither party has to worry about paying the other side’s attorney’s fees.  The parties split the cost of the mediator.

When I act as a mediator, I explain to the parties that neither side will get everything they want today, and that if at the end of the day both parties feel a little miserable, I probably achieved a fair result.

 

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BEG, STEAL OR BORROW – OR FORECLOSURE?

BEG, STEAL OR BORROW – OR FORECLOSURE?

  • Posted: Sep 21, 2021
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BEG, STEAL OR BORROW – OR FORECLOSURE?

Many of the old condo buildings in the State of Florida are facing serious structural repairs that will cost millions of dollars. And – from what I hear from many owners – most of these buildings have no reserve funds that will cover even most of the cost of these structural repairs.

But these repairs have to be done if the building doesn’t want to face the same fate as the Champlain Towers South in Surfside. And you can be sure that building departments will now push the issue of certification requirements.

That begs the question: How are these associations are paying for these very costly repairs?

The smart associations took care of fully funded reserves, but as we have seen, most of these associations are not really “smart!”

But having reserve funds may cause another problem: Big amounts of money are very tempting – and we have seen in the past that board members and CAMs can’t resist the temptation – and the money is gone when needed.

Asking for fully funded reserves require laws that protect these reserve funds and answers any scams and/or embezzlement with harsh punishments, not just a slap on the wrist. And that should go as well for board members who buy nice palm trees with the money that was in the roof reserve fund!

The other option to pay for these repairs are bank loans, an option available to most of these associations if properly done. But don’t forget: Owners will have to pay in the future monthly quite a lot of money to service this loan. Now owners are paying the money they didn’t pay in the reserve funds earlier – but now with lots of interest added. Smart move? Definitely not!

But the only other option to pay for these repairs is to levy a special assessment. That’s the worst of all options because these special assessments can be very huge, in the tens of thousands of dollars. Amounts many families living in these condos don’t have available – and the worst scenario will happen: FORECLOSURE! Families will be losing their homes. Is that the option you want to go?

 

CAMs – a CAM has no part in a board decision regarding the use of the reserve funds.
How about the responsibility of owners to look after their investment? It’s easy to point fingers at usually well-meaning but inexperienced boards.
Rather than pointing fingers left and right, how about encouraging owners to participate in a constructive manner?
And last not least – the people coming to Florida to buy a condo with the proceeds of their home sale should be aware that you get what you pay for. You pay 500 K for a waterfront two bedroom condo built in the 60’s and expect that is all it will cost you?

 

 

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Becker Launches Interdisciplinary Sea Level Rise Advisory Team to Serve Florida’s Coastal Residents

Becker Launches Interdisciplinary Sea Level Rise Advisory Team to Serve Florida’s Coastal Residents

  • Posted: Sep 21, 2021
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Becker Launches Interdisciplinary Sea Level Rise Advisory Team to Serve Florida’s Coastal Residents

As one of the first law firms in Florida to address the legal issues stemming from sea level rise, Becker is excited to announce its interdisciplinary Sea Level Rise Advisory Team which includes experienced and knowledgeable lawyers ready to assist our clients in preparing for the future.

Our multifaceted team is comprised of specialists at the forefront of this emerging area of environmental law. This includes attorneys and government relations professionals across our Land Use & Zoning, Government Law & Lobbying, Community Association, Real Estate, and Construction Law & Litigation practices.

Led by Ellyn Bogdanoff, the team provides a comprehensive range of services to address flooding and other impacts of sea level rise. In 2021, for example, Becker’s Government Law & Lobbying Practice was instrumental in helping to secure the passage of Florida’s “Always Ready” legislation which will provide more than $100 million every year to help Florida communities combat the effects of rising sea levels.

Flooding due to sea level rise is and will continue to be a big challenge, not just for those living on South Florida’s waterfront, but across the state. Local governments are realizing the significant impact of flooding and are combatting sea level rise by creating resiliency task forces and taking action to revise land use planning and zoning requirements and make upgrades to their stormwater infrastructure and sewage systems.

But it’s not only local officials that must have a plan to respond to rising seas, landowners, developers, condominium and homeowner associations, and everyone in between, must also be prepared for the impacts posed by sea level rise, and develop strategies to prepare their properties accordingly.

Becker’s Sea Level Rise Advisory Team is prepared to help clients mitigate damages from sea level rise, evaluate options to prepare for the short and long-term, and develop financially feasible adaptation strategies. To learn more, please visit FloridaRisingSea.com.

 

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Scratch Removal Specialists is dedicated to providing the finest customer service and most cost-effective solutions for your glass restoration needs. 

Scratch Removal Specialists is dedicated to providing the finest customer service and most cost-effective solutions for your glass restoration needs. 

  • Posted: Sep 13, 2021
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We take the scratches out of glass

As a trusted partner for over 22 years, Scratch Removal Specialists is dedicated to providing the finest customer service and most cost-effective solutions for your glass restoration needs.

 

 

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Can Remote Meetings Be Held Now That the State of Emergency Has Expired?

Can Remote Meetings Be Held Now That the State of Emergency Has Expired?

  • Posted: Sep 08, 2021
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Can Remote Meetings Be Held Now That the State of Emergency Has Expired?

The “state of emergency” that had been imposed by Governor DeSantis in light of the COVID-19 pandemic expired on June 26, 2021.  As a result, the “emergency powers” given to condominium, cooperatives, and homeowners’ associations in Sections 718.1265, 719.128, and 720.316, Florida Statutes, respectively, are no longer in effect.  The emergency powers that were in effect during the COVID-19 state of emergency included conducting board meetings and membership meetings with notice given as is practicable, but did not specifically give associations the authority to conduct meetings remotely.  Nevertheless, many associations did hold meetings remotely in an effort to slow the spread of the virus and to protect its residents and employees.  (NOTE:  The emergency powers statutes were amended effective July 1, 2021, and now specifically provide that during a declared state of emergency, the association may conduct board meetings, committee meetings, elections, and membership meetings, in whole or in part, by telephone, real-time videoconferencing, or similar real-time electronic or video communication.)

Now that the state of emergency has expired, what meetings can associations hold remotely, either in whole or in part?

With regard to board meetings, the statutes specifically address the board members’ participation by telephone or videoconferencing, but do not address whether owners may participate remotely or whether the owners can be required to participate remotely.  The statutes do provide that meetings of the board must be “open” to all owners.  If your board wishes to hold remote board meetings, the board can allow owners to also participate remotely in the same manner as the board members by giving the owners the call-in number or videoconference link.  The law is unsettled as to whether a remote only meeting is valid, as some owners may not have the capability or desire to participate remotely.

With regard to owner meetings, the statute governing corporations not-for-profit, Section 617.0721(3), Florida Statutes, provides that owners and proxyholders may participate remotely and can also vote remotely if authorized by the board of directors, and subject to such guidelines and procedures as the board may adopt.  But as with Board meetings, none of the statutes indicate whether “remote only” meetings, which require the owners to participate remotely, are valid. (Note that this type of “remote voting” contemplated by Section 617.0721(3) is different than the electronic/online voting that is permitted by Sections 718.128, 719.129, and 720.317, Florida Statutes).

For owner meetings at which an election will be held, the issue is more difficult.  The Condominium and Cooperative Acts require owners to vote by “secret ballot” and many homeowners’ associations governing documents also have a secret ballot requirement.  In that case, an owner participating remotely would be unable to vote on the election of directors unless the owner voted in advance of the meeting or unless the association had authorized electronic/online voting pursuant to Sections 718.128, 719.129, and 720.317, Florida Statutes).  Further, in condominium and cooperative associations, the “election committee” that opens and counts the election ballots must be physically together, and owners are entitled to observe the ballot counting process in the owners’ “presence”.

Because of these legal issues, a “hybrid” approach where owners are given the option to participate remotely, but are not required to participate remotely, is the best approach.  Some meetings lend themselves to remote participate more than others.  For instance, board meetings and non-election owners’ meetings are the types of meetings that can be managed remotely.  However, if there is an election, there will need to be additional considerations.

Boards should discuss these issues with the association’s attorney so that all of the necessary board authorizations can be prepared and approved by the board.

 

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Homesteading and the Homestead Exemption: 3 Things to Know for Your HOA by Mitch Drimmer

Homesteading and the Homestead Exemption: 3 Things to Know for Your HOA by Mitch Drimmer

  • Posted: Sep 08, 2021
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‘Homestead’ (or perhaps ‘homesteading’) is a word you’ve probably heard, but aren’t clear on what it is or means. So when we talk about homestead exemptions for housing, there can be some confusion. A “homestead” is defined as a house, or more specifically a farmhouse, and “homesteading” is defined as, “a lifestyle of self-sufficiency.” Homestead law allows an individual to register a portion of their primary residence (and only their primary residence) as “homestead” to reduce the taxes paid on it. The original goal was to preserve the family farm, home, or other assets in the face of severe economic conditions. See how it all connects?

Homestead exemptions exclude a portion of a home’s value from taxation

Homestead Law Today

Homestead exemptions exclude a portion of a home’s value from taxation, so they lower the taxes. For example, if a home is appraised at $100,000, and the owner qualifies for a $25,000 exemption (this is the amount mandated for school districts), they will pay school taxes on the home as if it was worth only $75,000. It also makes that portion of the individual’s estate off-limits to most creditors and protects that value from financial situations that arise due to the death of the homeowner’s spouse (to guarantee that the surviving spouse has shelter).

Now the real disconnect between the homestead exemption and homestead/homesteading is that the only requirement needed to get a homestead exemption is that the home is the owner’s primary residence–no farming necessary.

A homeowner doesn't have to have a farm to take advantage of the Homestead law

What Does This Mean For HOA Collections?

Homestead, homestead exemptions, and homesteading are all a little confusing. So at some point, you start to wonder how the exemption might impact your community funds or a future collections process. Here’s what you should know:

HOAs and Condo Associations Can Still Collect

Luckily, there are some exceptions to the homestead exemption: taxing authorities (state and federal), mortgage lenders, and the community association where the property is located (that’s you!) all have the ability to foreclose and collect if payments are missed.

So if one of your homeowners is behind on their assessment fees and all efforts to collect the debt have failed and the next step for your community is to foreclose, even if they have a homestead exemption, your community association is legally one of the only entities able to go to foreclosure.

Homesteading Not Required

Even though “homestead,” “homestead exemption,” and “homesteading” all call back to farming in some way, the homeowner doesn’t have to have a farm, product, or any other traditional ‘homestead’ good or service to take advantage of the homestead law–they just have to own the property it’s being applied to.

That said, there has been a massive resurgence of homesteading in the millennial generation–sort of. Thousands of influencers across social media document their zero-waste lives that use composting, in-home gardening, and reusable items (like fabric grocery bags, beeswax wrappings, and mason jars) to show that they can successfully and beautifully live off of only what they sustain and grow. Some even make their own products to sell like all-natural candles or deodorants.

The Homestead Exemption is Not a Homesteading Hall Pass

Depending on the location and size of your community, you may have a few homesteading homeowners yourself. Maybe they’re growing fresh habaneros and cilantro in their garden for homemade salsa, or knitting sweaters out of thread they made from their pet cat Fluffy’s fur (yes that’s a real thing–a real weird thing in my opinion but to each their own).

Whatever they’re doing, they still have to follow the HOA or condo association’s community guidelines. A homestead exemption does not give any homeowner the right to ignore community rules, even if those rules might clash with their new homesteading lifestyle. If they want to raise chickens to have fresh eggs in the morning and so they don’t have to go out and buy eggs from the grocery store, more power to them, but they probably can’t do it in an HOA, and they definitely can’t have chickens in a condo building.

Homestead exemptions may vary widely from state to state

Foreclosing in a Homestead State

It’s important to know that the homestead exemption varies widely between each state. Some states like New Jersey don’t even have the exemption at all. So for some HOA or condo associations, foreclosing on a home with a homestead exemption might ever happen. If it does happen in your community, remember that the community association has every right to foreclose and collect on a property even if it has a homestead exemption, but working with a specialized collection agency will help make the process that much smoother.

What you need is a specialized community association collection agency that will work with your owners and recover the past due amounts at no cost and no risk to the association. Give Axela Technologies a call today and receive a no-cost analysis and review of a collections process that will fit your community association delinquency problem.

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Learn Everything about Reserve Funds For Homeowners Associations

Learn Everything about Reserve Funds For Homeowners Associations

  • Posted: Aug 12, 2021
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Although reserve funds are often not mandatory, an ample reserve can play a big role in protecting a community’s long-term financial health.

 

To function as intended, a homeowners’ association (HOA) must rely on assessment revenue from its members.  Most communities calculate assessments, at least in part, based on an annual budget of anticipated expenses.  These typically include the costs involved in performing all of the HOA’s maintenance duties, procuring necessary insurance, and covering overhead, along with any other fixed or reasonably foreseeable outlays.  The resulting gross budget is then divided among the members of the association, and homeowners are assessed accordingly.

When creating an annual budget in this manner, it’s generally a good idea to be as precise, analytical, and transparent as practically possible.  However, a budgeting approach that relies exclusively on predetermined, repeating, line-item expenses doesn’t leave much room for error.  After all, what if an essential common element is unforeseeably damaged—resulting in significant repair or replacement costs—and there’s no money in the budget or insurance to cover the loss?  Or it may be that the association has some legal issues arise and incurs attorney’s fees much higher than could have been reasonably anticipated.  And, of course, some common elements don’t need maintenance every year, but, when maintenance time comes, it’s costly.

Rather than get caught scrambling for cash when an unexpected contingency or major maintenance need arises, many communities maintain “reserve accounts” or “reserve funds,” as a sort of back-up savings slated for emergencies, long-term upkeep costs, and irregular expenditures. Although reserve funds are often not mandatory, an ample reserve can play a big role in protecting a community’s long-term financial health.

 

What are Reserve Funds?

We’re all familiar with the differences between checking and savings accounts.  Aside from cash itself, a checking account is as liquid as assets get.  You use it to pay bills, buy groceries—the sort of everyday expenditures it takes to run a household.  A savings account, on the other hand, serves as a rainy-day fund you can tap when something unexpected arises—like, say, your vehicle needs a new catalytic converter.

Most homeowners’ associations have an operating account or similarly designated checking account to cover the routine expenses.  Office supplies and regular maintenance of common elements, for instance, are typically paid from the operating fund.

An HOA’s reserve fund, in contrast, is an account dedicated to unanticipated and deferred expenditures, particularly large ones.  The association allocates money toward its reserve account over time so that, when a costly repair or comparable outlay becomes necessary, cash reserves are available to handle the expense without sacrificing day-to-day functions.

By way of example, an HOA might pay out the costs of routine snow removal from its operating account.  If the community expects to need plowing a few times each winter, the board will build the costs into the annual budget.  But when all the plowing over the years leaves a significant portion of the development’s roads in need of repaving, the money is more likely to come from a reserve fund.

Reserve requirements are not addressed under every state’s HOA laws.  And some states that do address them, leave a lot to the board’s discretion.  More commonly, reserve account standards are found in a community’s declaration or bylaws.  Statutes governing condominiums are usually more explicit in setting forth precisely what is required of an association with regard to reserves.

 

The Purpose of Reserve Funds

An association’s annual budget takes into account reasonably foreseeable expenses like landscaping, equipment upkeep, and payroll if the HOA has employees.  But when an association-owned building needs a new roof, the community pool requires a major repair, or all the equipment in the fitness center starts breaking down, the unbudgeted costs will need to be paid from reserves.

A reserve fund can also be used to cover expenses that are not necessarily unforeseen, but arise infrequently enough that it wouldn’t make sense to include them within annual budgets.  If the community’s tennis courts need to be resurfaced every ten years, the board might hold back in reserve around ten percent of the cost each year so that, when the time comes, the resurfacing costs can be paid outright.  Of course, it’s not always so easy to predict precisely how much money will be needed.

 

Boards and Reserve Accounts

For the most part, deciding just how much cash a community needs to hold in reserve is the responsibility of an association’s board.  Under state HOA and condominium statutes, board members owe a “fiduciary duty” to the association. See, e.g., Fla. Stat. §§720.303(1), 718.111(1); 765 ILCS 605/18.4.  The obligations of a fiduciary are among the highest recognized by the law.  In carrying out their responsibilities, a board and its members must act in good-faith, prudently and loyally, and always in furtherance of the association’s best interests.  Id.

“Board members must avoid conflicts of interest when budgeting and allocating reserves.”

The duty of good-faith loyalty includes not wasting or misappropriating an association’s money, including reserves.  HOA funds should only be used for their intended purposes and in the best interests of the community.  Anything less potentially breaches the board’s fiduciary obligation.  Condo associations in Florida, for instance, can only expend reserve funds for authorized reserve expenditures or if a specific outlay is approved in advance by majority vote of the association.  Fla. Stat. §718.112(2)(f)(3).

In furtherance of their fiduciary duties, board members must avoid conflicts of interest when budgeting and allocating reserves.  If a board member, family member, or related business could potentially bid on or otherwise benefit from an association contract, that board member should recuse him or herself from any discussion or voting related to that contract.  See, Tex. Prop. Code § 209.0052.

The duty of prudence means taking reasonable steps to avoid a scenario where a cash-strapped HOA is unprepared for a major expense it should have seen coming.  This means budgeting realistically and ensuring the association has sufficient reserves.  Deciding what is “sufficient,” though, can be difficult because, by definition, reserves pay for expenses that are irregular and not reasonably foreseeable.  Even a board making a good-faith effort to act prudently might not recognize all potential expenses a reserve fund needs to cover.

When setting reserve requirements, the key questions board members need to ask are (1) what unbudgeted expenses are likely to arise over an extended timeline; (2) how much are those expenses likely to cost; and (3) how much additional savings will that necessitate per year.   Most board members are volunteers just trying to help keep their communities running on all cylinders, so it’s probably unrealistic to expect them to know the answers without some professional assistance—especially in large communities with substantial common elements.  Fortunately, though, there are accounting professionals who specialize in “reserve studies” designed to calculate the cash-reserve needs of HOAs and similarly situated organizations.

 

Reserve Studies for Homeowners’ Associations

Reserve funds present something of a conundrum for HOA boards.  If you maintain reserves for the express purpose of paying expenses that are unanticipated and infrequent, then how does the board decide how much it needs to hold in reserve?  If the association holds back too much, it is essentially over-taxing its members.  But if reserves are inadequate, then the HOA might find itself insufficiently liquid to meet its obligations without imposing a costly special assessment or taking out a loan—neither of which is likely to be popular with homeowners.

Reserve studies are intended to help Goldilocks (i.e., the HOA board) find the porridge (i.e., the reserve amount) that’s just right.  A reserve study is an examination conducted by a consultant or accounting firm for the purpose of analyzing probable long-term expenses.  The idea is to use the analysis to estimate the community’s reserve needs as scientifically as possible.

Along with reviewing the association’s assets (including current reserves), budget, and anticipated revenue, the auditor will survey community equipment, buildings, and other common elements.  Based on all available information, the auditor comes up with a long-term schedule of expected repairs, replacements, major maintenance, and any other relevant liabilities likely to affect the HOA’s bottom line.

Once the study is concluded, the board uses the estimates to calculate the level of regular homeowner assessments needed to maintain the optimal reserve account balance.  For instance, if the study estimates that a parking lot within the community will need new asphalt in ten years, and that the cost will be around $20,000, the board might adjust the budget and assessments to hold back $2,000 in additional reserves each year.  That additional $2,000 is divided among all members’ annual dues so that, when the time comes for new asphalt, the funds are already available in the reserve account.

Of course, a study will in all likelihood identify numerous potential expenditures over the relevant period, and the reserve recommendation will be based on the aggregate anticipated long-term cash needs—not just any single item.  But the principle is still the same.

Reserve studies cost money, so they don’t make sense in every situation.  In a small association with only minimal commons and simple maintenance duties, a reserve study would probably cost more than the value it could reasonably be expected to provide.  At the same time, a large association with elaborate commons and extensive duties would be imprudent not to use a reserve study or other means of scientifically calculating reserve needs.

 

Reserve Funding Requirements

The appropriate dollar balance for any given community’s reserve fund depends in large part on the size of the association, the nature of the common elements, and the extent of the HOA’s obligations.  Some state HOA and condo laws establish specific reserve requirements, but funding needs are more commonly set by the board in accordance with standards detailed in the association’s governing documents.  A reserve account is “fully funded” if it covers 100% of the community’s reasonably foreseeable expenses.  Many communities choose to set reserve requirements at a percentage of anticipated expenses, as estimated by the board or identified in a reserve study.  So, for example, an association might require the board to hold in reserve at least 75% of anticipated expenses at any given time, adjusted based on the schedule for deferred maintenance.

A few states establish specific funding requirements for reserves stated as a percentage of the association’s overall budget.  See, e.g., Ohio Rev. Code §5311.081(A)(1) (requiring annual reserve contributions of at least 10% of budget, but allowing waiver by majority vote).  More commonly, states adopt statutory principles for reserves but leave the specifics to the discretion of the board or community as a whole.  Generally, condo laws go into much more detail when it comes to reserve requirements.

Florida’s condo statute requires an association’s annual budget to include reserves for “capital expenditures and deferred maintenance … [including but not limited to] roof replacement, building painting, and pavement resurfacing,” and any other deferred maintenance or replacement cost exceeding $10,000.  Fla. Stat. §718.112(f)2a.  For each included item, the calculation must be based on the “estimated remaining useful life and estimated replacement cost or deferred maintenance expense.”  Id.

Though Florida’s condo statute requires reserves by default, it also allows a condo association to waive reserve requirements, or require a lesser amount, by majority vote.  Id.  Florida’s HOA statute likewise makes reserves optional.  If a community opts for reserves, the reserve account funding must be calculated based on each asset’s estimated deferred maintenance or replacement cost divided by its predicted useful life remaining.  Fla. Stat. §720.303(6)(g).

California requires associations to maintain reserve balances based on reserve studies conducted at least once every three years and including diligent, on-site inspections.  Civil Code §5550.   The study must, at a minimum, identify all major components the HOA is obligated to maintain, the estimated costs and useful life associated with each, and the annual reserve contribution necessary to defray the costs.  Id.

Similarly, Washington requires calculation of reserve contributions in communities with “significant assets” (defined as assets valued at 50% or more of the association’s gross budget) based on regular reserve studies.  Wash. Code §64.34.020.  At least every three years, the study must be conducted by an independent professional who visually inspects the relevant assets.  Notably, though, the Washington statute merely “encourage[s]” HOAs “to establish a reserve account… to fund major maintenance, repair, and replacement of common elements.”  Wash. Code §64.34.380.

State legislation routinely recognizes the importance of reserve funds to homeowners’ associations but doesn’t make them mandatory. However, deferred maintenance, repair and replacement of major elements, and surprise expenses will inevitably come up.  When adequate reserves aren’t available, a community will need to employ alternate means of paying for these significant costs.

 

Alternatives to Reserve Funds

Boards often face a temptation to underfund reserves—or even dip into reserves to pay for what would normally be regular operating expenses—to cover increasing operating costs without raising assessments.  Homeowners often object to additional assessments or reject them altogether.  But paying a little extra up front to make sure sufficient cash-flow is available for adequate reserves can actually save money over time.  And, the alternatives—special assessments, loans, and putting off repairs and replacements—are not particularly attractive options.

“The duty of prudence means taking reasonable steps to avoid a scenario where a cash-strapped HOA is unprepared for a major expense it should have seen coming.”

With a special assessment, the community is paying all-at-once what it could have paid over time.  In effect, current owners are footing the bill for costs that were rightfully the responsibility of prior owners.  And, of course, special assessments often require member approval.  A rejected special assessment is just as helpful to a board facing a major expense as an unfunded reserve account.

If an HOA can’t cover unexpected expenses and long-term maintenance directly from member assessments, there’s also the option of taking out a loan in the name of the HOA.  Obtaining a loan probably won’t be too difficult for an association with regular revenue and relatively little debt, but it may require the use of community assets as collateral.  And, just as significantly, loans require interest.

Even assuming the HOA can secure a loan with a competitive interest rate, the cost of repaying the loan still ultimately comes from assessments, but members end up paying a lot more than the actual expense cost due to interest and transaction costs.  By contrast, an adequately funded reserve account itself earns interest, leading to the opposite result—members pay less out of pocket because money applied to reserves is earning interest up until the expenses become necessary.

And there’s also the option of simply not paying for maintenance, repairs, and replacements that aren’t included in the annual budget.  In this scenario, homeowners lose access to benefits of the community.  If the pool needs an overhaul, but there’s no money to pay for it, members and their families no longer have a neighborhood pool to swim in.  Not to mention, property values may decrease, as the allure of living in a community with a pool is reduced when the pool is inaccessible.

Kicking the can down the road by underfunding reserves almost always leads to losses in the end.  With this in mind, Florida’s HOA statute requires associations without reserves to notify members annually that no reserves are held and that special assessments may be enacted to pay for capital expenditures and deferred maintenance.  Fla. Stat. §720.303(6)(c).

Inadequate funding can lead to safety concerns as well.  Association-owned equipment or facilities that are not receiving scheduled maintenance due to insufficient reserve funding can increase the risk of injury and create unnecessary liability exposure.

Under the right circumstances, insurance coverage can help defray some of the costs caused by underfunded reserves.  Many states mandate that HOAs carry insurance coverage.  Arizona requires property damage coverage for at least 80% of the value of common elements and liability insurance with coverage limits decided by the board.  A.R.S. §33-1253A(1) – (2).   Eight states (Alaska, Colorado, Connecticut, Delaware, Minnesota, Nevada, Vermont, and West Virginia) have adopted the Uniform Common Interest Ownership Act (“UCIOA”), which has requirements similar to Arizona’s, along with mandatory fidelity insurance.  See, e.g., Conn. Gen. Stat. §47-255.

Insurance, though, isn’t foolproof.  A policy won’t cover every major expense that comes up.  A property policy might cover losses due to accident but not if damage results from inadequate maintenance.  A major expense like a new roof might be needed as a result or ordinary wear and tear that a regular property damage policy excludes from coverage.

And for insurance to help, you have to actually procure a policy.  State condo association laws often require insurance, but it’s frequently optional for HOAs.  Even in states that ostensibly require insurance like Arizona and the eight UCIOA states, there’s a limitation—a policy must be obtained “to the extent reasonably available.”  Id.

HOA insurance is generally a good thing to have; it’s just not a foolproof substitute for reserves.  Ideally, it’s more of a supplement, avoiding a scenario in which a catastrophe like a fire or major storm completely saps a community’s reserve funds or forces the association to write off common elements that were once valuable community resources.

Reserve Disclosure Requirements

Most state HOA laws require associations to make regular budgetary disclosures to members, usually including the status of reserve funding.  Florida HOAs, for instance, must prepare yearly budgets estimating anticipated expenses and revenue and identifying any reserve accounts or funds set aside for deferred expenditures.  Fla. Stat. §702.303(6)

In Washington, the statutorily mandated annual budget report must state amounts currently held in reserve, estimate year-end reserve balances, propose a plan for funding reserves, and project future reserve balances if the plan is adopted.  Wash. Code. §64.38.025.  Colorado requires a similar disclosure of present reserve balances, along with the board’s proposal to ensure the community’s reserve needs are adequately funded.  Col. Rev. Stat. §38-33.3-209.5.

California requires a detailed reserve report based on the most recent reserve study, including the remaining useful life of each major component, estimated repair or replacement costs, and the amount of reserve money held by the HOA.  Civil Code §5565.  California HOA members also have a right to notice of “the mechanism or mechanisms by which the board of directors will fund reserves … including assessments, borrowing, use of other assets, deferral of selected replacements or repairs, or alternative mechanism.”  Civil Code §5300.

Particularly in condo associations, prospective purchasers often have a right to receive notice of current reserve balances.  Tex. Prop. Code § 82.157; A.R.S. §33-1260.  Absent an affirmative disclosure requirement, homeowners have a right to request inspection of association records.  See, e.g., Fla. Code §720.303(4).  Records subject to an inspection typically include financial records and budgets.

 

Homeowner Recourse

A homeowner who believes an association’s board is mishandling or underfunding reserves has a few options.  First, the homeowner can bring up reserve issues at the next homeowners’ or open board meeting, or informally discuss concerns with a board member.  A formal records request can also help provide detailed information about how reserves are being maintained and used and whether there is in fact a problem.

Because of the democratic character of community associations, there’s also the option of running for the board in the next election or organizing a campaign to amend the association’s declaration to include more stringent or specific reserve requirements. If misconduct or fiduciary lapses are involved, an individual homeowner or group of homeowners usually have standing to pursue legal claims against the board or its members, depending upon the specifics of the situation and whether actual damages have been incurred.  It’s almost always a good idea to consult with an experienced attorney before asserting or pursuing legal claims.

In situations involving outright fraud or embezzlement, homeowners should bring the matter to the attention of local law enforcement agencies.  Misappropriation of funds entrusted to an individual is criminal conduct in every state, though, of course, the precise standards vary by jurisdiction.

 

 

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Selective Enforcement: A Grossly Misunderstood Concept in the entire body of community association law.

Selective Enforcement: A Grossly Misunderstood Concept in the entire body of community association law.

  • Posted: Jul 14, 2021
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Selective Enforcement: A Grossly Misunderstood Concept in the entire body of community association law.

by https://kbrlegal.com/

Without exception, the affirmative defense of “selective enforcement” is one of the most misunderstood concepts in the entire body of community association law. How often have you heard something like this: “The board has not enforced the fence height limitation, so it cannot enforce any other architectural rules”? Simply put, nothing could be further from the truth.

When a community association seeks to enforce its covenants and/or its board adopted rules and regulations, an owner can, under the right circumstances, assert an affirmative defense such as the affirmative defense of selective enforcement. An affirmative defense is a “yes I did it, but so what” type of defense. In civil lawsuits, affirmative defenses include the statute of limitations, the statute of fraudswaiver, and more. However, it’s just not as simple as that. For example, a fence height limitation is a very different restriction than a required set back. Under most if not all circumstances, the failure to enforce a  fence height requirement is very different from the failure to enforce a setback requirement. Ordinarily, the affirmative defense of selective enforcement will only apply if the violation or circumstances are comparable, such that one could reasonably rely upon the non-enforcement of a particular covenant, restriction, or rule with respect to their own conduct or action.

In the seminal case of Chattel Shipping and Investment Inc. v. Brickell Place Condominium Association Inc., 481 So.2d 29 (FLA. 3rd DCA 1986), 45 owners had improperly enclosed their balconies. Thereafter, the association informed all of the owners that it would thereafter take “no action with respect to existing enclosed balconies, but prohibit future balcony constructions and enforce the enclosure prohibition.” As you might have already predicted, nevertheless, thereafter an owner of a unit, Chattel Shipping, enclosed their unit; and the association secured a mandatory injunction in the trial court requiring the removal of the balcony enclosure erected without permission. The owner appealed. In the end, the appellate court disagreed with the owner who argued that the association decision to enforce the “no enclosure” requirement only on a prospective basis was both selective enforcement and arbitrary. The court held that the adoption and implementation of a uniform policy under which, for obvious reasons of practicality and economy, a given building restriction will be enforced only prospectively cannot be deemed “selective and arbitrary.”

In Laguna Tropical, A Condominium Association Inc. v. Barnave, 208 So. 3d 1262, (Fla. 3d DCA 2017), the court again used the purpose of the restriction in its determination of whether the association engaged in selective enforcement. In Laguna Tropical, a rule prohibited floor covering other than carpeting unless expressly permitted by the association. Additionally, the rule provided that owners must place padding between the flooring and the concrete slab so that the flooring would be adequately soundproof. In this case, an owner installed laminate flooring on her second floor unit and the neighbor below complained that the noise disturbed his occupancy. As a result of the complaint, the association demanded that the owner remove the laminate flooring. However, the owner argued selective enforcement because the association only enforced the carpeting restriction against the eleven exclusively upstairs units in the condominium. The court noted that the remaining units in the condominium were either downstairs units only, or were configured to include both first-floor and second-floor residential space within the same unit.

Again, the court looked to the purpose of the prohibition on floor coverings other than carpet and found that the prohibition was plainly intended to avoid noise complaints. Therefore, no selective enforcement was proven because no complaints were shown to have arisen regarding any units except the eleven exclusively upstairs units.

What about cats and dogs? In another case, Prisco v. Forest Villas Condominium Apartments Inc., 847 So. 2d 1012 (Fla. 4th DCA 2003), the Fourth District Court of Appeals heard an appeal alleging selective enforcement regarding the association’s pet restrictions. The association had a pet restriction which stated that other than fish and birds, “no pets whatsoever” shall be allowed. In this case, the association had allowed an owner to keep a cat in her unit, but refused to allow another owner to keep a dog. The association argued that there was a distinction between the dog and the cat. However, on appeal, the court found that the restriction was clear and unambiguous that all pets other than fish and birds were prohibited. Therefore, the court reasoned that the facts which make dogs different from cats did not matter because the clear purpose of the restriction was to prohibit all types of pets except fish and birds. In other words, the court held that the plain and obvious purpose of a restriction should govern any interpretation of whether the association engaged in selective enforcement.

If an association has a “no pets” rule and allows cats, must it allow dogs, too? There is a long line of arbitration cases that have distinguished dogs from cats and other pets for purposes of selective enforcement. For example, in Beachplace Association Inc. v. Hurwitz, Case no. 02-5940, a Department of Business and Professional Regulation Division of Florida Condominium Arbitration case, the arbitrator found, in response to an owner’s selective enforcement defense raised in response to the association’s demand for removal of a dog, that even though cats were allowed, that comparison of dogs to cats was not a comparative, like kind situation. Further the arbitrator found that cats and dogs had significant distinctions such as barking versus meowing, and therefore the owner’s attempted use of the selective enforcement argument failed.

But, in Hallmark of Hollywood Condominium Association Inc. v. Andrews, Case 2003-09-2380, another Department of Business and Professional Regulation Division of Florida Condominium Arbitration case, the learned arbitrator James Earl decided that because the association has a full blown “no pets of any kind”  requirement and since cats were allowed, then dogs must be allowed, too. In other words, the defendant owner’s waiver defense worked. But, the arbitrator wisely noted in a footnote as follows: “The undersigned notes that there is a long line of arbitration cases that have distinguished dogs from cats and other pets for purposes of selective enforcement. However, the fourth district court of appeal has ruled that where the condominium documents contain particular language prohibiting all pets, any dissimilarity between dogs and cats is irrelevant and both must be considered. See Prisco.” The distinction between the two arbitration cases could be explained because of timing in that the 4th DCA’s decision in Prisco was not yet published when Hurwitz was decided.

From these important cases, it can be gleaned that

(i) even if an association has ignored a particular rule or covenant, that by giving written notice to the entire community that it will be enforced prospectively, the rule or covenant can be reinvigorated and becomes fully enforceable once again (though of course, prior non-conforming situations may have to be grandfathered depending on the situation),

(ii) if an association or an owner is seeking an estoppel affirmative defense, they must be sure all of the necessary elements are pled,

(iii) at times a court will look to the purpose of the rule itself where it makes sense to do so, and

(iv) dogs and cats are different, but they are both considered “pets.”

Remember to always discuss the complexities of re-enforcement of covenants and rules and regulations that were not enforced for some time with your association’s legal counsel in an effort to mitigate negative outcomes. The process (commonly referred to as “republication”) can restore the viability of a covenant or rule that may have been waived due to the lack of uniform and timely enforcement.