By Lilliana Farinas-Sabogal, Esq. / Published 2021
To ensure the financial well-being of an association, boards and managers should focus on at least four factors: budget, reserves, insurance, and collection practices. While these are basic elements all associations must deal with, it is not a comprehensive list of every financial aspect requiring attention. It is recommended that you consult with your association attorney and accounting professionals to ensure you are doing all that you can to address these and any other financial facets of the association in the best way possible for your community.
Without sufficient funds, the association cannot carry out all the duties it is required to undertake pursuant to the Florida Statutes or its governing documents. The association obtains these funds from its members. Unfortunately, many associations tend to try to keep the budgets as lean as possible to keep the assessments as low as possible. While no one likes to pay high maintenance fees if that can be helped, no one is served well by an association maintaining an artificially low budget to keep the monthly assessments low, either.
The budget process should be an honest evaluation of the known and expected expenses the association will have in the coming year, and the ultimately adopted budget should reflect as much. A budget committee can be formed to help the board with the budgeting process. The Florida Condominium Act requires the proposed annual budget of estimated revenues and expenses to be detailed and to show the amounts budgeted by accounts and expense classifications. Rather than minimizing anticipated expenses in the hopes they won’t be needed after all or creating a budget on an expectation that certain expenses may be negotiated for a lower price in the future, the association should budget on what things are actually expected to cost. Thereafter, if the lower price is negotiated, the budget can be amended downward. Most owners will agree that an amendment to lower the budget is much more palatable than a surprise special assessment because the anticipated expense did not go down as previously hoped.
Properly budgeting the association is the first step in securing the financial well-being of the association.
The next step in ensuring the financial well-being of the association is to ensure the monies necessary will be available when expensive, but expected, repairs and maintenance are needed. This is the concept of reserve funding. Florida community association law requires associations to establish and collect “reserves” as part of their annual budgets. This means that an association must create a separate budget that will ensure it collects enough money every year so that when the estimated useful life of the component is expired, the association will have saved the amount necessary to replace the component without the need for a special assessment. For
example, condominium associations are required by law to collect reserve amounts for the roof, building painting, and pavement resurfacing, regardless of the amount of the replacement costs of these, and for any item for which replacement or deferred maintenance will exceed $10,000. The monies in these reserve accounts must be used for the purposes they were collected unless the owners vote to approve their use for alternative purposes. While associations must include full funding of statutory reserve accounts in each year’s budget, the statutes allow the owners to vote to waive full funding of reserves. In such a vote, or in a vote to use reserve monies for other purposes, the statutes require warning language to be printed on the voting documents to advise owners that voting to use reserve money for another purpose or waiving reserves altogether may lead to special assessments in the future.
Reserve funding should be part of the budgeting process. Maintaining proper reserves ensures the association’s ability to handle its expected needs effortlessly by saving for this over time.
In the case of the association’s financial well-being, two kinds of insurance are important. The most obvious may be the property and/or liability coverage that every association should have to cover damage to property or persons due to casualty or other unanticipated events. This kind of insurance is extremely important because, besides the fact that insurance is required by law and possibly the association’s governing documents, an association can suffer untold damage that could create substantial financial strain on its members if they must pay for the repairs or damages out of pocket because the association did not carry the proper insurance.
In addition, however, it is also very important to remember that among the numerous provisions in the Florida Condominium Act and the Florida Homeowners Association Act, there is a requirement that the association carry fidelity bonding/insurance. For example, Florida Statute §718.111(11)(h) states
The association shall maintain insurance or fidelity bonding of all persons who control or disburse funds of the association. The insurance policy or fidelity bond must cover the maximum funds that will be in the custody of the association or its management agent at any one time. As used in this paragraph, the term “persons who control or disburse funds of the association” includes, but is not limited to, those individuals authorized to sign checks on behalf of the association, and the president, secretary, and treasurer of the association. The association shall bear the cost of any such bonding.
These fidelity policies help protect the association against the financial loss in cases of defalcation of association funds.
The association should have fair but effective collection practices and policies in place. While associations often feel the need to give some owners time to catch up with payments, or delay “sending the file to the attorney” to “help out” the owner, this can create a number of unanticipated problems for the association’s finances. First, an uneven application of “giving an owner time” can lead to potential defenses to legal action by those who were not “given time.” Second, many boards woefully underestimate exactly how long collections and foreclosure processes can take from start to finish.
Prior to the 2021 legislative session, the statutes already required the association give notice to owners far in advance of the association filing a claim of lien and then again waiting a long time before proceeding to filing a complaint for foreclosure of the claim of lien. The 2021 statutory changes have further expanded the timelines. Now, associations must give an owner a 30-day notice before even sending the file to the association attorney for collections. Once the attorney receives the file, it must give the owner 45 days’ notice of the association’s intent to file a claim of lien for delinquent assessments. Thereafter, if the owner still has not paid the delinquent amounts, another 45-day notice must be sent to the owner advising of the association’s intent to foreclose the lien, prior to filing the complaint to foreclose. All told, a condominium association, for example, would have to wait at least 120 days after it decided to send the file to the attorney for collections before it would be able to even just file a complaint to foreclose a claim of lien for delinquent assessments.
Associations should consult with their legal and accounting professionals to ensure they have and consistently implement a collections policy to rein in delinquencies and send out the appropriate notices to owners as soon as possible to avoid even longer and more drawn-out collections of needed funds.
Again, this is not a complete list of considerations an association should take into account related to the association’s financial well-being. However, these issues do form the base for the association’s economy and should be top of mind for boards and managers.
Lilliana Farinas-Sabogal is a shareholder in Becker’s Community Association and Business Litigation practice groups. In addition to her experience in assisting community associations in their day-to-day business, management, and operational aspects of governing their communities, she assists boards of directors, unit owners, and community association managers in analyzing and resolving their often complex contractual and transactional disputes and issues. Ms. Farinas-Sabogal is also one of a select number of attorneys statewide who are Board Certified Specialists in Condominium and Planned Development Law. For more information, email LFarinas@beckerlawyers.com or call (305) 262-4433.