Answers: Understanding Budgets, Rule Enforcement, and Management Qualifications

by Richard White / Published August 2014

INSURANCE DEDUCTIBLE

Our condominium has a line item in the budget for an insurance deductible in the amount of $5,000. Our actual deductible is $112,000 per building, and we have three buildings. Each year the amount is rolled over to the general fund as surplus because it has not been needed for several years. I am a director and at a recent directors’ seminar, the speaker said that this line item could not be placed in regular reserves, but if I understood him correctly, a special reserve fund could be established. Would you comment on this please? 

MC, Naples 

RICHARD WHITE
Richard White is a long-time licensed manager who lives in Florida. He answers questions on a wide variety of community issues. You may send your questions to Richard at camquestion@cfl.rr.com..

A couple of decades back, deductibles were almost nonexistent. Since Hurricane Andrew and the four hurricanes in 2004, insurance companies have steadily increased the deductibles. It is now a problem for all boards to review their situations concerning insurance and the ever enlarging deductibles. Before I give you my advice on your budget collections to cover these deductibles, let me give you a short lesson in budgets. I like to specify that the board must create three distinct budgets: the income budget, the operational budget, and the reserve budget. The income budget must be calculated to equal the sum of the reserve budget and the operational budget. The operational budget is the sum of all known and estimated expenses for the coming year. In other words, the operational budget would cover known and estimated expenses for 12 months. To help boards to correctly calculate the reserve budget, the state has published a book: www.myfloridalicense.com/dbpr/lsc/documents/BudgetsandReserves.Master06092010.pdf. It can be downloaded in a PDF file or you can call DBPR at (850) 488–1122 and ask for the Budget and Reserve Handbook. As to the recommendations that you received at the seminar, it would be my belief that he was referring to a line item in the reserve budget. This would mean that each year your total collected would be placed in a separate account to be used in the event of a disaster. Using the figures in your question, you should establish a reserve account to cover deductibles of approximately $336,000. 

Your $5,000 a year is totally inadequate. To cover the $336,000, it would take you more than 67 years to cover this amount with only $5,000 each year. Your owners need to be aware that in the event of an emergency a special assessment would be needed to cover emergency expenses. I would further suggest that you engage professionals to assist you in the development of future budgets and acquire a reserve study from a professional.

RULES ENFORCEMENT 

    I am the manager of the condominium where the owners are allowed to have private gardens that must be maintained to a community standard. We have a resident who refused to maintain their private garden, so the board directed me to send them a letter asking them to clean up their garden within 30 days. The 30 days went by and the garden was still not maintained, so the board asked me to send a second letter by certified mail. When the owner did not respond to the second letter, the board asked me to send a third certified letter to the owner that the association was going to have the garden cleaned up by a landscape contractor, and the association would forward those costs to the homeowner. The owner refused to pay the costs. What options does the association have to recoup their money? Filing a lien is expensive. Can we take them to small claims court and try to get judgment? Or does the association have to go through mediation or arbitration first? 

SS, Boynton Beach 

The question of small claims court comes up quite often. When you use the small claims court, you only receive a judgment right. To enforce the judgment, you need to take it to the next level and lien the owner. Like delinquent accounts, rules enforcement also requires the guidance of an attorney. Fines for rules enforcement cannot be liened directly. 

In your case of the cost for landscaping, you could have special assessed the owner and that would have allowed the attorney to file a lien. Most legal costs in collection of delinquent accounts, as well as rules enforcement, can be added to the amounts owed by the owner. The statutes and the documents for associations provide the directors the most powerful tools to enforce delinquent accounts and rules enforcement. Done correctly with legal guidance, owners can lose title to the property and find themselves on the street. In your case of landscape problems, you need to understand the legal term “self-help.” That is a process that allows the association to enter upon private property to repair, cleanup, and replace necessary conditions. Never refuse to seek legal guidance as the cost would be considered an “expense of doing business.” My advice is to enforce the rules all the way or do not enforce them at all. If you’ve done as much as you can to enforce the rules, then it is time to turn the matter over to the attorney. Advise the board to stop playing games and take the matter seriously by engaging an attorney.

NON-ENFORCEMENT OF RULES

What can be done when the HOA board refuses to enforce the rules and also is letting the property decline? 

ER, Orlando

The bottom line to the correct answer is simply the board has total responsibility to maintain the common elements and properly operate the association. You are addressing a failure of the board and the members. If the owners and members of the association allow the directors to improperly manage the community, then the members themselves must pay for the mistakes, and they will lose equity in their homes. Many communities have members who simply say, “Let others do it.” When this happens, directors do what they want and take the easy way out. They know that regardless of the job that they are accomplishing, good or bad or failing to operate properly, they will be re-elected because no one wants to volunteer to be a candidate. There are several solutions that are available. The first action is to sue the board, but this should be the last recommended action. The second action, and the best solution, is to try to get other members involved. This means that maybe you need to be a leader to help redevelop new board members. In my opinion based upon my observation of communities and the public as a whole, this is the biggest mistake in society today.

Very few want to be leaders. My hats off to those that volunteer to become directors as they do play a major role in volunteering their time and effort, which is rarely recognized by the members. Until you can get your neighbors involved, your community will continue to decline. There is no outside help to force a board to properly operate. You and your neighbors must force the issue by becoming involved.