By Lilliana Farinas-Sabogal, Esq. / Published August 2018
In Florida, particularly in the summer months, a beautiful sunny day can suddenly morph into a torrential downpour. Similarly, a community association with no obvious financial problems can suddenly find itself in the perfect storm that arises when restrictive financial language in the governing documents, unexpected yet necessary repairs, and a shortage of funds collide. In order to best navigate these matters, community associations should take the time to review their options and plan accordingly prior to the need ever actually arising.
There are various ways a community association can address unexpected financial needs. This piece does not intend to address them all, but rather seeks to remind associations that preparation in the way of understanding its rights and the procedures necessary to implement them before a need arises is important.
Despite fiscally responsible budgeting, which attempts to anticipate all the possible needs of the association and addresses the estimated operating expenses of the condominium, a community association could unexpectedly find the roof that should have lasted another five years must be replaced now, for example. Similarly, the price of a particular project could have tripled between the initial investigative planning stage and the time the contract is ready to be signed, due to complications in the project, changes in code requirements, unforeseen market forces, or any number of other reasons that can affect the pricing of work. In any case, even the most fiscally responsible association could find it is unable to meet the community’s immediate needs. In these situations, an association may consider a number of options, including but not limited to, using reserve funds, levying special assessments, or borrowing the money.
The Florida Condominium Act, Cooperative Act, and Homeowners Association Act all address annual budgets. Generally, the annual budget should set out the estimated revenues and expenses for the year. Florida law provides that community associations have the authority to levy assessments pursuant to these budgets to pay for the common expenses of the community. These types of assessments, often referred to as “regular assessments” or “maintenance,” are divided into shares that are payable by the association members pursuant to the association’s governing documents. In addition to annual operating expenses, a condominium association and a cooperative association are required to include reserve accounts for capital expenditures and deferred maintenance items. These accounts must include roof replacement, building painting, and pavement resurfacing (regardless of the amount of the deferred maintenance expense or replacement cost), as well as for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000. The budgets for Florida homeowners associations may include reserve accounts for capital expenditures and deferred maintenance for which the association is responsible, depending on whether the developer originally established them and/or if the membership affirmatively elects to do so.
In any event, statutory reserve funds are protected under Florida community association law, in that they may only be used for authorized reserve expenditures. Use of reserve funds for any other purpose must be approved by the membership. Further, even if the money is needed for repairs of items that are within the items specifically reserved for, if the money that is available to the association in its reserve accounts is insufficient, due to prior waivers of full funding of reserves or the repair simply costing more than expected, the association must seek the remainder from other sources.
As noted above, Florida law discusses regular assessments for operating expenses of the association. Assessments that are levied above and beyond the assessments derived from the budget are referred to as special assessments. However, Florida community association law does not specifically state that a community association has unfettered special assessment authority. Turning to the governing documents of the association for guidance is then necessary. Some governing documents place restrictions on the right of the association to levy special assessments. For example, some governing documents may allow special assessments only upon the approval of a certain percentage of the members, or they may allow collection of special assessments only for particular purposes. If the association has a membership with a historically low percentage of member participation or voting, it may become difficult or impossible to obtain the needed approval percentage. It is important that an association know in advance of actually needing the money whether levying a special assessment is an option available to it and/or what would be needed in order to authorize one. Even in cases where the board of directors is empowered to levy a special assessment without membership approval, the statutes (and sometimes the governing documents) impose specific notice requirements for the meetings at which these assessments will be considered and notice requirements to advise owners of what their share is and when it is due. Finding out about the restrictions, notice requirements’ specifications, and other legal requirements too late can hamper an association’s ability to begin collection of necessary funds in a timely manner.
Another option to consider as a solution when funds are unexpectedly needed in short order is borrowing the money in the form of a loan or line of credit to fund the needed repair or replacement. As with the special assessments referenced above, some association governing documents require a particular percentage of owner or other approval to authorize the association to borrow money. Further, loan documents can be complex and extensive and have a number of requirements that the association will have to meet before closing the loan. The association should consult with its legal counsel to assist with this. If the association does not plan for this in advance or take into account the time that it can take to properly approve, close, and fund the loan, the loan process could be frustrating.
The words “unexpected financial needs” by their very nature indicate the association does not know about them in advance. However, this does not mean that the association cannot prepare for the possibility of unexpected financial needs in advance. It can, and it should. Prior to preparing the next year’s budget, community associations should meet with their accounting and legal professionals to discuss the benefits and detriments of the various options available to the association for funding unexpected financial needs and the approval or procedures required in order to use any one of them. While this article lists a few, there may be other options that the association’s professionals can help discuss. The association should then consider whether changes to its documents are desired or needed, and what it would take to make such changes. It can also decide whether it makes sense to seek approval as may be needed for credit in advance or take any other action to help it meet the unexpected head on. While one can never prepare for every possible eventuality, knowing where to find and how to use an umbrella can make walking in the “out of nowhere” summer rain much easier.