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What Are the Duties of Condominium Boards?

What Are the Duties of Condominium Boards?

What Are the Duties of Condominium Boards?

Condominium boards have complete management responsibility for their community. Even if they outsource some duties to a professional management company, boards still retain these responsibilities. Since individual homeowners, who may not be well-versed in real estate management and legal issues, serve on these boards, all members should understand their duties and responsibilities. Condominium boards should also retain experienced legal counsel and/or accountants to be information resources and advisers.

Condominium Association Bylaws

Board members must become intimately familiar with their condominium association bylaws. Management of all condominiums is governed by the association bylaws. Board members must understand all items addressed in the bylaws, often called the “condo docs.” Further, boards must learn all state statutes that relate to bylaw subjects and strictly follow the letter of state laws to avoid legal problems.

Common Areas and Building Exteriors

The condominium association board must maintain–and keep in good repair–all common areas and building exteriors. Common areas are those used by all unit owners who have deeded title to small percentages of these areas. These areas include building lobbies, open land or parks, tennis courts, pools and other amenities available to all residents. Whether a high-rise style, townhouses or cluster housing, building exteriors require maintenance and repair, particularly the siding and roofs.

Condominium Association Budget

Creating and managing the association budget is a critical duty for condominium boards. The most common reason for condominium problems is mismanagement or misuse of the budget. Association boards without an experienced accountant as a member should consider getting advice from an outside CPA to ensure that their budget is reasonable and complete. Condominium budgets should be built like those of nonprofit corporations. By estimating expenses, including insurance, landscaping, trash removal and similar operating costs for the coming year, the association board determines the amount of monthly individual homeowner assessments, commonly called “condo fees.”

Maintenance and Repair Reserves

Along with operating expenses, the association must carefully consider the funds needed as “reserves” for maintenance and repair. As part of the budgetary process, establishing realistic reserves is often overlooked by association boards, sometimes with dire consequences. For example, picture a 48-unit high-rise condominium, with each unit having a suspended wooden deck for relaxing and entertaining. Decks need periodic staining and water protection applications. Further, on older condominium projects, deck replacement would be needed at some point. Neglecting to build reserves into the annual budget for deck maintenance and replacement could result in “special homeowner assessments” of thousands of dollars. Condominium boards must diligently add these to annual budgets to build up cash to make these repairs.

Collecting Assessments

Monthly homeowner assessments–condo fees–must be collected by condominium boards. While most condominium bylaws permit boards to place liens on individual units for unpaid condo fees, liens do not equal money. Unit owners may not refinance or sell their homes for many years, leaving the condominium association short of funds to meet budget and reserve demands. Boards have a duty to establish an effective collection policy, much like a bank, to ensure consistent monthly cash flow into the association account to meet operating expenses.

Fiduciary Duty

Condominium associations must fulfill their fiduciary responsibility to manage the project in a businesslike and conservative manner. Depending on the size of the condominium project, association boards may manage many dollars and complex business issues. Fiduciary duty is typically measured by evaluating the actions of individuals or groups that “reasonably prudent” persons would take. For example, neglecting to collect condo fees, putting sufficient reserves in the budget or not completing necessary repairs is a breach of fiduciary responsibility. Condominium boards usually have individual and collective fiduciary responsibility and could be subject to serious lawsuits from unit owners for failing to act prudently.

 

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The Truth About HOA Bank Foreclosure, by Mitch Drimmer

The Truth About HOA Bank Foreclosure, by Mitch Drimmer

The Truth About HOA Bank Foreclosure

Mitch Drimmer

This subject is very painful. We see it all too often in the HOA delinquency and collection world. And yet, it is not hopeless.

It is hard for a community to have to write off amounts that were left owing from a bank foreclosure in your community association. If you are in a super lien state, upon an HOA bank foreclosure, lending institutions will throw you a few bucks for your trouble. If an owner was foreclosed upon in a super lien state, don’t expect more than 6 months’ worth of assessments (it varies between states, but six months is the average).

It’s a pittance! And what makes it worse is that the banks are often unconcerned about speed when foreclosing–especially when dealing with a non-performing unit. Is a super lien amount enough to satisfy your association’s needs? I think not.

Communities will wonder: does my association have to write off the balance owed?

But that isn’t the question you should be asking. Instead, you need to focus all of your attention on recovering that money.

Was It Really an HOA Bank Foreclosure?

When the bank foreclosed, did they take title, or did they sell the property to a third-party purchaser?

This is a critical question. The answer can make all the difference between getting nothing or getting everything–and I mean every dime that was owed when the bank foreclosed.

In state statutes (and most likely in your governing documents) there is the concept of “Joint and Several Liability.” This doctrine makes it possible for community associations to exist, in that if I sell a property and owe the association money that obligation rides along and is the responsibility of a new purchaser.

With that in mind, when a bank forecloses and the unit is purchased, it is important to determine who was on the chain of title. If the bank foreclosed and sold the unit before they took title, then the association’s lien was not extinguished. This was not a foreclosure where the bank could hide behind their lien priority. THIS WAS A SALE.

Because it was a sale, the association is entitled to recover every penny. When Axela Technologies is servicing a debt, we do not depend on the lender to be an honest agent. This is an arm’s length transaction, and although the association is not a buyer or a seller in this deal, they do have money at stake and require professional representation (that does not cost $350 an hour) that has their interests at heart.

When a bank forecloses, look and see if they had title and sold it, or sold it post-judgment. If they did not take title, this is the difference between a successful collection event and taking a hit (sometimes substantial).

Pursuing a Surplus From a Bank Sale

Often when a bank forecloses and takes title, they will sell their REO (Real Estate Owned Property) at auction or through standard real estate brokers. In these times of real estate appreciating at a rapid rate and inflation roaring, banks will often sell the property that they foreclosed upon for more than they are allowed to recover. That results in a foreclosure surplus, and the association (by right of the contractual lien in your governing documents) has the right to claim that surplus amount.

At Axela Technologies we do this every day because if we do not recover our fees, then we do not get paid. Unlike your attorney, we don’t tell you to write it off and send you a bill, because our interests are aligned with the association. If you have had a unit foreclosed upon and don’t know if it was sold at a surplus, then somebody is not trying hard enough to recover what is legally, rightfully, and ethically money that belongs to the association.

Post-Foreclosure Recovery From the Delinquent Owner

Let’s assume that when the HOA bank foreclosure concluded, everything was done in order and there was no surplus for the association to recover. What happens then?

Well when the bank foreclosed on that unfortunate member of your association, and they left the membership holding the bag for their delinquent assessments, the debt was not extinguished.

Let me repeat that: an owner who owes the association money before an HOA bank foreclosure STILL owes that money after they have lost their house.

Now you may be inclined to say that this was a poor unfortunate person and to pursue them is heartless. In reality, it is heartless NOT to pursue this money. You must consider the good paying owners who picked up the cash shortfall by way of increased assessments and special assessments. Choosing not to pursue that debt means they footed the bill for nothing.

Axela Technologies has a cure for that as well.

Our Post-Foreclosure recovery program allows us to pursue these debts on a contingency basis. If we recover, it is like finding $20.00 in your jeans when you pull them out of the dryer, but way better. (Note: Contingency collections are not available in Texas.)

Let Axela Technologies Help

If your community association has delinquencies, remember that they do not end with an HOA bank foreclosure, or even an association/foreclosure. It ends when the debt is either collected or determined to be absolutely, positively uncollectible. Contact Axela Technologies and speak with our knowledgeable recovery specialists. Let us help you obtain the holy grail of community association governance that is a balanced budget.

 

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Its Budget time

Its Budget time

Its Budget Time, and that means it is that time of year for boards of community associations everywhere to prepare next year’s association budgets. A good budget is reflective of good financial planning. In practice, it is anything but an exact science.

When examining the community association budget process, there are a few subtle nuisances and a couple of glaring distinctions between those budget related laws set out within Chapter 720 that governs homeowner associations (HOAs) as compared to Chapter 718 that governs condominium associations (CAs). Let’s take a look.

 

Notice Requirements:

• HOA board meeting notices must include a statement that assessments will be considered and, as per statute, “the nature” of the assessments. There is no definitive advance HOA board budget meeting notice requirement set out in Chapter 720, so be sure to check your HOA’s bylaws for any specific requirements. (As an aside, please do not confuse this with the special assessment procedures where it is required for any meeting at which special assessments will be considered that written notice mustbe mailed, delivered, or electronically transmitted to the members and parcel owners and such notice must be posted conspicuously on the property or broadcasted on closed-circuit cable television not less than 14 days before the meeting.

• At least 14 days before any CA board meeting at which a proposed annual budget of an association will be considered, the board must hand deliver to each unit owner, or mail to each unit owner at the address last furnished to the association by the unit owner, or electronically transmit to the location furnished by the unit owner for that purpose 1) a notice of such meeting and 2) a copy of the proposed annual budget

 

Committees and Workshops:

• The HOA’s notice requirements apply to the meetings of any HOA committee or other similar body, when a “final decision” will be made regarding the expenditure of association funds.

• Meetings of a CA committee to make recommendations to the board regarding the association budget are subject to the Notice Requirements, above.

Providing Copies:

• The HOA must provide each member with a copy of the annual budget ORa written notice that a copy of the budget is available upon request at no charge to the member.

• The CA must send a copy of the proposed budget (showing reserves fully funded for the year) with the board’s budget meeting notice. Limited proxies for unit owner vote must include a statutory proscribed disclaimer regarding the inherent financial risk in rendering such a decision.

Budgetary Considerations:

• The HOA’s budget must reflect the estimated revenues and expenses for that year, along with expected deficits (bad debt) and surpluses. The budget must also set out separately all fees or charges paid for by the association for recreational amenities, whether owned by the association, the developer, or another person.

• The CA’s proposed annual budget of estimated revenues and expenses must be detailed and must show the amounts budgeted by accounts and expense classifications. The CA can only assess for such items as authorized by statute or the CA’s own governing documents.

 

Reserves:

• HOA reserves are not mandatory but can be mandatorily required only IF they were initially created by the developer orwere voted on, and approved, by a majority of the total voting interests of the community. Both of these types of HOA reserves are loosely referred to as “statutory” reserves. If your HOA assesses for “statutory” reserves, then the assessment revenues collected must only be used for authorized reserve expenditures unless their use for other purposes is approved in advance by majority vote at a meeting at which a quorum is present. If your HOA assesses for “non-statutory” reserves, (meaning that the budget may have a line item called “reserves”, but they are not “statutory” reserves), then there are no limitations on the board’s expenditure of these monies.

• CA reserves are initially mandatory in that all residential CA boards must pass the budget with reserves included. After, the unit owners can vote to waive or reduce the reserves. CA reserves can only be spent for their designated purpose unless otherwise approved by a majority of a quorum comprising the voting interests.

 

PRACTICAL TIP 1: Compare last year’s actual expenditures to last year’s budget, and also compare it to what is set out in the upcoming year’s budget. This simple comparison can be most illuminating.

PRACTICAL TIP 2: Take a look at the existing “bad debt” and see how aged it is. Determine whether it is time to “write it off”. In practical terms, this means that the dues paying members in good standing have to make up that shortfall as required to meet the ongoing expenses of the association. In the event that your community association budget does not include a bad debt line item, then consider adding a “bad debt” line item at this time.

 

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HOA Statement of Receivables

HOA Statement of Receivables

HOA Statement of Receivables

A statement of receivables, or accounts receivable statement, is a document that details the outstanding charges owed to the community association. This can be from sources such as overdue dues, vendor credits, late fees, or any other outstanding source of income. It is essentially a list of every account that still owes the HOA money.

 

What is in a Statement of Receivables

These statements should contain all accounts that owe money, along with the grand total of overdue funds. The total will help with budgeting purposes. Knowing how much money is available, if collections are being handled properly, can help with financial planning. The list of all overdue accounts can act as a checklist for anyone working in collections to ensure that no account is missed.

Some associations prefer to go one step further and detail which accounts are 30 days, 60 days, and over 90 days past due. For example, if a homeowner has missed their dues in March, April, and May; they will have money in the 30, 60, and 90-day categories. This way, collections agents will know to put more pressure on collecting the April dues versus following up on another account that is only 30 days behind. Just like with all financial statements, the more detail you provide, the easier it is to plan and manage.

 

How Often Should They be Prepared

While the HOA statement of receivables should be prepared at the same frequency as all other financial statements, it is helpful for the accounts receivable statement to be released more frequently. There are even programs available to keep up with AR statements in real time and have them available on demand. This can be immensely helpful for collection purposes to make sure that everyone is on the same page.

 

Need More Information

Financial management can be one of the toughest aspects to operating a successful HOA. If you are having trouble with reviewing financial documents such as the HOA Bank Statements, contact the professionals at CSM. We have years of experience working with homeowner’s associations from all over the United States. Using state-of-the-art technology, we can provide financial management assistance while still allowing association directors to remain independent.

 

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SFPMA’s Maintaining an Condo & HOA General Ledger

SFPMA’s Maintaining an Condo & HOA General Ledger

  • Posted: Oct 31, 2022
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Maintaining an Condo & HOA General Ledger

The foundation of all  accounting is the general ledger. Much like your checkbook at home, the Condo & HOA general ledger keeps an ongoing record of all transactions made by the community association. All other financial statements such as the balance sheet, income statement, and statement of receivables are created based on the ledger.

Unlike all the other financial statements which are prepared on a monthly, quarterly, or annual basis, the general ledger should be continuously updated. Whenever a transaction is made or received, it needs to be accounted for. At any point in time, you should be able to look at the ledger and see how much money the association currently has in all accounts and where money has moved. If you need to go back and see how much the association spent on landscaping in August three years ago, you should be able to find it in the ledger records.

 

Accounting Approaches

There are three basic approaches to manage finances. There is no right method for every association. Each HOA is different and may find that one method of accounting works better for them than another.

  • Accrual – The most popular and preferred method. In an accrual approach, revenues and expenses are recorded when they are incurred instead of when money changes hands. This means that communities using this approach will need to maintain two other ledgers for payables and receivables. For example, when invoices are sent to homeowners for dues, that money is marked down in the receivables ledger. As community members pay their dues, the money in the receivables leger is moved to the general ledger. The same process is used for expenses in a payables ledger. While this may take more effort than other accounting methods, it provides much more detail.
  • Modified Accrual – A mixture of accrual and cash approaches. In modified accrual, revenues get recorded when they are earned while expenses get recorded as money changes hands. Condo & HOAs that use this approach will need a separate ledger for receivables but will document expenses as they are paid in the general ledger.
  • Cash – Transactions are documented on one ledger as money exchanges hands. This is the simplest approach but provides the least amount of detail.

Once you find the approach that works best for your community, stick with it. Switching between different approaches can make reviewing financial information in the future confusing and may hinder your board of directors’ ability to make well-informed decisions.

 

What Should be Included

Depending on the system of accounting, your HOA may have several ledgers running at all times. But no matter the approach, ledgers should include all transactions made by the community association in and out. Each account owned by the Condo & HOA should also have its own ledger. Most associations have at least an operational account and a reserve account.

Regularly checking bank statements is a good way to double check the accuracy of the general ledger. Sometimes transactions can accidentally go unreported or, in some cases, fraudulent activity may occur. Whenever you receive statements from the bank, make sure all transactions match up between them and the general ledger.

 

Need Help Maintaining an Condo & HOA General Ledger

Finances can be confusing. It is always helpful to have a professional on your side to make sure everything is being done properly. If you are having trouble keeping up with all the financial documents necessary to properly manage an HOA, call the experts at CSM. We have years of experience working with homeowner’s associations in almost every state in the US. We offer a wide variety of financial management solutions to give you all the assistance you need while still maintaining your independence.

 

Find top companies working in the Condo HOA and Management industry in Florid on our Directory!

 

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The mandatory funding of all the required reserve funds will make living in these hi-rises very interesting in the next two years

The mandatory funding of all the required reserve funds will make living in these hi-rises very interesting in the next two years

  • Posted: Oct 28, 2022
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MANDATORY RESERVES

By Jan Bergemann

Finally the Florida Legislature got the message they should have gotten 20 years ago: FULLY FUNDED RESERVES ARE MANDATORY!

And even if the legislature gave condo owners a reprieve until December 2025, condo owners should start now to consider their options:

Will they be able to afford the much higher maintenance fees they will have to pay monthly in the future or will these much higher fees break their household budget?

Let’s just face it: For most of the years past condo owners waived reserves in order to keep maintenance fees artificially low – meaning that many of the associations at this point don’t have any reserves worth talking about. Remember: According to media reports the Champlain Tower South had only $700,000 in reserves, but needed about $16M to pay for the necessary repairs.

That will have to change real fast and the fact that many of the required inspections will have to be followed up by costly repairs and maintenance high special assessments are on the horizon for many hi-rise buildings (buildings higher than three floors).

As much as this change to the Florida statutes was long overdue it will definitely price quite a few families out of their homes. But in all reality there is really no other way around it and the fact that many condo owners used the loophole in the statutes that allowed waiving the funding of reserves is now coming back to haunt the owners who in former times dismissed the idea of funding reserves.

We already see condo owners protesting against boards about the problems that are visible in these buildings. The big question in these cases: Does the association have the necessary funds to take care of the needed maintenance and repairs or are the owners willing and able to pay the special assessment the board might have to levy in order to pay for the contractor?

The mandatory funding of all the required reserve funds will make living in these hi-rises very interesting in the next two years – and we will have to see how strong the government agencies tasked with overseeing these new provisions in FS 718 are enforcing these provisions.

Our Blog ( Industry Articles ) can be found on SFPMA.com – between our writers and all members of sfpma we have been for over 15 years keeping our industry up to date with the right Legal, Business and Services Articles. SFPMA sends and publishes these and sends to over 230,000 emails keeping everyone informed.

Look for our article upcoming on Condo Funds and Investments, on SFPMA

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Guide to HOA Financial Statements

Guide to HOA Financial Statements

  • Posted: Oct 28, 2022
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HOA Financial Statements

Managing the finances of a community association is one of the most difficult, and most important, responsibilities of an HOA board of directors. Preparing detailed HOA Financial Statements on a regular basis serves a multitude of purposes from providing insight for financial planning, promoting transparency between the board and residents, as well as being a requirement by law in some instances. The frequency of preparation may vary depending on state laws, community bylaws, and the size of the association.

If you are having trouble preparing community financial statements, the professionals at CSM are standing by to answer all your questions. We have years of experience working with thousands of residents across the United States.

 

What is an HOA Financial Statement?

Simply put, an HOA Financial Statement is an official record that details all the financial activities of the community association. Specific details that must be included depends on state regulations and community bylaws, but there are some basic details that should be included regardless of size or location:

The most common mistake that people make when preparing HOA financial statements is not adding enough detail. Every detail that can be added, no matter how small, can provide a more thorough insight and lead to better decision making. When in doubt, include it.

It should also be put into an easy to read format. These documents will be available to everyone in the community, most of which do not have advanced accounting degrees. For an HOA financial statement to be effective, it needs to be prepared so that anyone can understand the content. Making it too complicated alienates people and hinders community relations.

 

How Often Do Financial Statements Need to be Prepared?

There is no standard frequency that HOA financial statements must be prepared. It will depend on state regulations, community goals, and the size of the community. Of course, the more frequently statements can be prepared, the more helpful they will be for the board of directors. Smaller HOAs with simpler budgets can prepare monthly without much problem. Larger associations with more complicated budgets may opt to prepare statements quarterly or annually.

No matter what decision is made regarding frequency, it must be maintained. Straying from the regular schedule only causes issues between the board members and homeowners. It leads to a feeling of distrust. When dealing with financial information, it is best to be open and honest in as much detail as is appropriate.

For smaller, self-managed associations, if there is trouble getting financial statements completed on time, it is relatively inexpensive to hire an accountant as needed to prepare balance sheets. This ensures that all the information will be completed in a timely manner without taking time out of community volunteer’s busy schedules. It also means that the statements have been professionally checked and relieves some of that stress from the board members as well.

There are also a multitude of services available from CSM to help homeowner’s associations get organized and prepare their own financial statements. With the professional support of an experienced team along with state-of-the-art technology, even the most inexperienced association members will be able to navigate the complicated waters that is HOA financial management with ease.

 

What is a Financial Statement Used For?

The obvious answer is that detailed HOA financial statements can be used by the community association board of directors to adjust budgets, dues, and allocate money for maintenance and projects. The more detailed the statement, the more effective the HOA.

It is a requirement for any sort of financial planning. For starters, if records are kept consistently, association directors can look back on previous financial years to identify patterns that could affect the current budget and adjust accordingly. It is also imperative to keep track of money owed. If detailed records are not kept, it can be near-impossible to keep track of delinquent dues or know how much money is available to budget for community maintenance and new projects.

In some states, it is a legal requirement for HOAs to maintain and submit regular financial statements. Even if it is not required in your state, it is a good idea to keep detailed records anyways as they will be extremely beneficial for all other aspects of homeowner’s association management.

Most importantly, having detailed financial statements readily available to all HOA members can promote transparency between the board and the community. If the homeowners can see what their money is going towards, they will be more agreeable and open with the board of directors. It promotes teamwork throughout the community.

 

Where Should the HOA Financial Statements Go?

As with most things regarding HOA financial statements, it depends on state laws and community bylaws. Generally, there are three places that they need to be turned in:

  1. The HOA Board of Directors – the board of directors should receive a full, unedited report. They will need all available financial details in order to make informed decisions and plans regarding community maintenance and future projects.
  2. Community Members – to foster an open and transparent relationship, homeowners should also receive copies of HOA financial statements. These statements, however, should be altered to exclude sensitive information such as delinquent accounts. There is a difference between being sensitive and being secretive. If it will not cause an issue between community members, it should be included in the documents sent to community members. All HOA financial statements should be available upon request.
  3. State Department – if a homeowner’s association is organized as non-profit, an annual report must be filed with the Secretary of State. Failure to do so could result in losing their “Good Standing” status. This may not be applicable to all HOAs.

The more accessible financial statements are, the better. Some community associations even opt to put their financial information on their website to allow homeowners to view it at any time. Of course, not all information needs to be publicly accessible, but everything that can be included should be included. Transparent financial processes help to promote teamwork and positive community relations between homeowners and association board members.

 

Who Should Prepare Financial Statements?

This answer depends on the size of the community. Smaller, self-managed associations may have an elected treasurer, financial officer, or president that is responsible for compiling financial documents. In such cases, it is a good idea to use a professional accountant to ensure that HOA financial statements are prepared correctly before releasing them to board and community members. Remember, just because someone was elected treasurer, does not necessarily mean they have accounting experience. It is always best to hire a professional. Large homeowner’s associations have more complex budgets and will usually have a management company, such as CSM, that handles all financial data.

If statements are self-prepared by an elected community member, make sure that there is a backup of all financial records. In the unfortunate event that something happens and the preparer is no longer able to maintain their responsibilities, it can be difficult for the next person to learn their accounting methods or sometimes even gain access to the records.

Whether an HOA is made up of ten units or ten thousand units, it could be beneficial to hire a management company to ensure that everything is being run as efficiently and effectively as possible. When looking into property management companies, it is important to look for a company with a strong financial background. If the finances are not well kept, the entire community association becomes ineffective. Hiring a company such as CSM to provide financial management assistance not only makes life easier for the board of directors but can also give community members peace of mind knowing that all finances are being managed accurately and efficiently.

 

The Importance of HOA Financial Statements

To make a great plan, it is important to have all the information possible. Reliable, consistent, and transparent financial statements not only help the HOA board of directors make well-informed decisions but also support community health by allowing all community residents and stakeholders to be a part of the team. Keeping members in the dark only promotes mistrust and working with inadequate or no financial information can lead to dwindling reserves for community upkeep and new projects.

Creating an effective HOA is as simple as choosing an accounting process that works for your team, keeping detailed records, and communicating openly and freely with the community about all financial information.

 

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Condo HOA Loans / Your Trusted Community Association Financial Resource

Condo HOA Loans / Your Trusted Community Association Financial Resource

  • Posted: Oct 17, 2022
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Condo HOA Loans

Your Trusted Community Association Financial Resource

 

 

Don’t go it alone. Whether your Community requires Conventional or Private Lending, CondoHOALoans can assist you in obtaining the necessary funds for Projects, Reserves, or Cash Flow.

When your Community Association works with our Law Firm to facilitate and secure financing, your Community will also have the optional benefit of receiving 100% FREE Delinquent Account Collection Services.

Not sure if financing is right for your Association? Download the Association Funding Options Infographic and take our Free Financial Health Survey to find out.

Click on the Ad below and Download the pdf.

 

 

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Searching for Money: A Condominium Association’s Guide to Acquiring Financing by Becker

Searching for Money: A Condominium Association’s Guide to Acquiring Financing by Becker

  • Posted: Sep 21, 2022
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Searching for Money: A Condominium Association’s Guide to Acquiring Financing

by Steven B. Lesser  of Becker

A Condominium Association enjoys broad powers based upon Chapter 718, Florida Statutes, otherwise known as “The Florida Condominium Act.” Despite the guidance provided by the statute and case law which interprets it, little has been written to guide Condominium Associations when borrowing funds to finance various projects.

Associations often borrow money to build capital improvements such as clubhouses; perform extensive remedial work and to buy out recreational leases. Associations must be careful to review its own condominium documents to evaluate whether limitations exist on the right to borrow. This article will discuss the practical considerations to be addressed by a Condominium Association when borrowing funds.

 

Review Of The Condominium Documents
The condominium documents including the Declaration of Condominium, Articles of Incorporation and By-laws dictate how money can be raised to fund certain projects. the procedure to be followed depends upon the purpose for raising such funds. To the extent that the Association desires to perform maintenance work to its own property or common elements, money can be raised by passing a special assessment on its unit owners pursuant to Section 718.116, Florida Statutes. Most condominium documents provide the Association with the authority to borrow funds for such purposes without acquiring unit owner consent. However, to the extent that the Association desires to buy out a recreation lease, build a clubhouse or otherwise perform material alterations or acquire substantial additions to the common elements or to Association property, unit owner approval is necessary. Section 718.113, Florida Statutes provides that if the Declaration of Condominium is silent on the percentage of unit owners required to approve such activities seventy-five (75%) percent shall govern.

 

Where To Seek Financing
Once the Association has determined the purpose in raising funds, a source of financing must be located. Financing is often sought when the Association is unable to raise sufficient funds through a special assessment of its members. In many instances, some or all members may not have the money to pay a large lump sum assessment. Typically, an Association will first attempt to look to acquire financing from the bank that handles its operating account. However, the Association should not view the bank as its only source. Often times, members of the Association’s Board of Directors or unit owners may have personal contacts with a lender that is able to provide more favorable rates and flexibility in terms of structure and cost of financing. In some circumstances, a willingness to shift the Association’s operating account to another lender will provide the Association with leverage to acquire the most favorable financing program.

 

Structuring The Deal
Once the Association has acquired authorization to borrow money and has located a lending institution, structuring the deal becomes the next significant step.

It is not unusual for an Association to borrow in excess of $ 1 Million to finance the purchase of recreational lands from a Developer or to perform significant renovation work to remedy structural defects such as those associated with balconies located in close proximity to the ocean. Lending institutions, with the assistance of counsel for the Association, can be creative in formulating a plan to achieve the financial goals of the Association. The most significant aspect is how the lending institution will secure its loan to the Association.

Unlike other private entities and individuals, a Condominium Association has the statutory right to raise money by a special assessment of its members. Under this scenario, a unit owner’s failure to pay a special assessment will constitute a lien on each condominium parcel for any unpaid assessments. The lien for unpaid assessments will also be subject to an award of interest and reasonable attorney’s fees incurred by the Association to collect or enforce the lien. This statutory right to pass and enforce a special assessment provides security to a lending institution that elects to lend money to an Association. Consequently, a lender will often accept an Assignment of the Association’s right, title and interest in and to all current and future assessments made by the Association against its unit owner members for the purposes of timely payment of all sums due to a lender. For example, an agreement for the purchase of a recreation lease and underlying property between an Association and lender will often include an Assignment which provides as follows:

“The Association hereby irrevocably and unconditionally assigns all of its right, title and interest in and to all special assessments now existing or hereinafter levied by the Association against its unit owner members which are made for the purposes of repayment of the loan or the payment of rent under any lease or lease on real property owned by the Association.”

The foregoing procedure provides the lender with assurance that the loan will be repaid. However, financing a special assessment is expensive when considering loan and interest charges. Certain unit owners may be opposed to being assessed finance charges when they are financially capable of paying the special assessment in a lump sum at the time the loan is acquired. Should a number of unit owners have the ability to pay the special assessment in a lump sum, this process would reduce the total amount of money to be borrowed by the Association along with incidental finance charges.

As a special assessment constitutes an encumbrance on property, the Association would negotiate elimination of any prepayment penalty charges should the loan in whole or in part be paid early. Consequently, elimination of a pre-payment penalty clause would enable the Association or a unit owner to avoid additional finance charges should they pay off the debt prior to the maturity date.

 

Typical Costs Associated With Financing
Should the Association elect to mortgage its property to acquire financing the following fees will be generated:

Bank loan fees, Bank counsel fees, corporate searches, Survey, Title insurance costs, accounting costs, Documentary stamps, Intangible documentary stamps on the amount of the note and mortgage, Environment assessment of property, Recording charges, The cost of amending the condominium documents if additional property is acquired by the Association.

The Association and its counsel should attempt to discuss and negotiate the above-listed fees with the lending institution prior to signing a commitment letter. The Association should never sign a commitment letter without first consulting with counsel. Once the commitment letter is signed, the Association may be obligated to pay a non-refundable fee. Moreover, attempting to re-negotiate the terms of the loan may delay the process as it would require reconsideration by the loan committee.

 

Conclusion
In closing, a condominium Association must identify its purpose in raising funds. The purpose of raising funds will dictate the procedure to be followed. If funds are to be raised for maintenance repairs, a special assessment can be passed without unit owner consent. Condominium documents typically authorize the Board of Directors of a Condominium Association to borrow funds without owner consent. However, certain condominium documents may require unit owner approval. To the extent that the Association elects to borrow funds to perform material alterations or to acquire a substantial addition to Association property, the condominium documents will govern the procedure to be followed. If the condominium documents are silent, seventy-five (75%) percent unit owner approval must first be acquired before a special assessment can be passed pursuant to Section 718.113 (2), Florida Statutes.

When attempting to acquire financing, look to the members of Association’s board of directors and its unit owners to identify lender’s that can provide the most favorable rate. The bank handling the Association’s operating account is often the best source of financing and may be willing to negotiate certain costs associated with financing. Likewise, conferring with an attorney that specializes in association work can often assist you in reducing the costs associated with obtaining a loan.

Most importantly, shop around and take advantage of the collective financial strength of the Association and its unit owner members.

Steven B. Lesser

Shareholder

Ft. Lauderdale

 954.987.7550

 SLESSER@beckerlawyers.com

 

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The Infinite Game in Condo Governance by Mitch Drimmer of Axela Tech.

The Infinite Game in Condo Governance by Mitch Drimmer of Axela Tech.

In 1986, Professor James P. Carse presented the concept of finite and infinite gaming. He said, “there are at least two kinds of games: finite and infinite.

A finite game is played for the purpose of winning, an infinite game for the purpose of continuing the play.” Sports games, like football and baseball, are clearly finite games. They have specified chunks of time in which one is expected to do better than the other. An infinite game has no winners and no time length. Instead, it’s just a set of rules and expectations you must continue to participate in without end.

Simon Sinek took this game theory and applied it to the planning and continued success of a business enterprise. Businesses are not time-restricted games. You don’t have a year or five or ten in which to complete some kind of final objective. Sure, there are benchmarks and points of obvious success, but there is no end to business.

Now apply that kind of thinking to the HOA and condo industry: community associations, and in particular, condo governance. A condominium should be run with an “infinite game” mentality, with the goal of the structure being maintained to reach the ripe old age of eternity. Can a structure last infinitely? Maybe not, but even so, that is how it should be governed. There is no shelf life on a condominium building.

Keeping Score in Condo Governance is Playing a Finite Game

Condominiums all too often live on a budget-to-budget basis (or a special assessment to special assessment basis) with very little regard for the future. This kind of condo governance manifests itself in an inadequate capital improvement plan or a functioning preventative maintenance protocol.

Many condominiums are run by a seat-of-the-pants mentality–the pinnacle of finite thinking. This budget-to-budget, board-to-board, manager-to-manager mentality is destructive and a clear blueprint for a condominium’s demise. It pits past, present, and future against one another, each one keeping a score of who did what and who should be responsible for what comes next. Often, this means everyone is passing the buck, and no one is actually accomplishing anything. Managers and board members need to think in terms beyond their tenure with the community and consider the far future in their planning and attitude.

Recently, we have witnessed the results of a condominium playing a finite game. Could there be a better example of misguided short-term planning than what happened in Surfside, Florida? Reports all indicated that the board of directors thought about only the short-term struggles–their time in office, the quickly-mounting immediate expenses, the inconvenience of a serious construction project–and played a finite game with disastrous consequences.

But the board is not alone in their fault. They had no direction from their law firm (which was fined $31 million dollars), which should have known better. This tragedy did not happen in a vacuum.

Sustaining Through an Infinite Game

As extreme as an example Surfside is, the thinking remains endemic. It is not an anomaly, it is only the worst-case scenario and a scenario many buildings are facing after so many years of neglectful condo governance.

It all begins with a reserve study. A quality reserve study can start the process of future planning for a condo building. Ideally, the results will physically lay out what the future may hold. It won’t be perfectly spot-on, but it is at least there as an initial guide.

This is how communities play the infinite game–a good reserve study is not a one-and-done event. A proper reserve study requires long-term maintenance and updating as inflation, and other infrastructural issues inevitably erode the previous year’s budget. Playing an infinite game in condo governance will ensure its longevity, value, comfort, and positive residential experience.

Start Playing an Infinite Game

A condominium that has a good reserves program, maintains an honest budget, pursues delinquencies, seeks out stability in management, and continues to embrace new technologies to reduce expenses is playing the infinite game.

It’s election season for boards of directors, so why not campaign on governing with an infinite mentality? Govern and manage your building like it is supposed to last forever. For more advice on condominium fiscal management and collections, contact us today.

 

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Webinar: Loans and Borrowing Money – What Community Associations Need to Know

Webinar: Loans and Borrowing Money – What Community Associations Need to Know

Webinar: Loans and Borrowing Money – What Community Associations Need to Know

WEDNESDAY, AUGUST 10, 2022 AT 10 AM-11AM

There is a lot of confusion when it comes to obtaining a loan as a community association. This webinar is intended to clear the confusion and provide you with the necessary tools to obtain a loan.
You will learn:
• What is and is not collateral for a community association loan
• What type of loan documents to avoid
• The borrowing process from beginning to end
• When to get your attorney involved
This program is not eligible for CEU credit or certificate of completion.
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This is going to be presented on Zoom! Full live viewing instructions will be sent to all registrants.
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REGISTER NOW: