Naples Daily News Q&A Column, June 10, 2018

By June 10, 2018News, Questions & Answers

Q: I am on the Board in my homeowners’ association and our financials require an annual audit, but we have very strong procedures and multiple professionals who constantly review the financials. Can we avoid the cost of an audit?

-PR, Naples

A: Yes, it is possible. In a homeowners’ association, an association with total annual revenues of $500,000 or more is required to prepare an audited financial statement every year. That being said, the statute later provides that the membership can vote to waive the audited financial statement in lieu of a lower level of financial reporting. The necessary voting threshold is a majority of the voting interest present at a meeting where a quorum is present.

Two things are important to note. First, the membership vote referenced above does not mandate that the Board forego the audit. There are many good reasons to obtain an audit and the Board can commission an audit even if the membership approves the waiver. Second, the condominium act (different statute) previously provided that a condominium could only waive the audit for 3 consecutive years before it was required to obtain the audit. In condominiums, that law has been stricken and was never in the statute governing homeowners associations, so the membership could theoretically vote to waive to audit year and year.

Q: We recently upgraded our video surveillance and caught a tenant on video vandalizing the clubhouse. We filed a police report and an arrest has been made. The damage is roughly $10,000. How do we recover this if the tenant is uncollectible?

-AD, Marco Island

A: The general rule is that the owner is liable for the acts of the tenants. This is a common provision in condominium documents and so the first recommendation is to have the governing documents reviewed by a licensed Florida attorney. This may provide a direct recovery from the owner, and the owner could then seek reimbursement from the tenant.

It is important to note that the Association should determine how it can recover the $10,000. If your governing documents are not strong here, you may be forced to pursue a lawsuit in County Court where the result is a judgment and the Association would then have to collect the judgment through traditional collections means such as wage garnishment, bank account garnishment, asset seizure, or possible foreclosure of real property depending on homestead issues. Well drafted documents today will provide that the $10,000 is attributable to the owner and the Association may collect the $10,000 through its lien power and with the same procedures and authority as a lien for assessments. If this is an option, then the owner has a direct and immediate threat of losing the unit, which will generally be powerful incentive to reimburse the Association for the damage.

Q: Our condominium association maintains reserves to repaint the buildings. For years, the Board has consistently told us that the reserves were “healthy”. We recently learned that the Board has been anticipating a painting cost of $100,000, but the actual replacement cost is likely $250,000. How is this possible?

-JT, Bonita Springs

A: The Florida Condominium Act requires condominium associations to maintain certain reserve accounts for deferred maintenance and replacement. Here, the statute expressly requires the Association to maintain a repainting reserve. This means that the Association must exercise business judgment to determine the cost to paint with an anticipation of remaining useful life, meaning that the Association is supposed to put enough money away each month so that there is enough money available to repaint when the useful life expires without the need for a special assessment.

At the onset, it is important to note that the condominium membership can authorize the Board to waive paint reserves or partially fund paint reserves. Thus, it is possible here that the Board was authorized to fund at $100,000 with full knowledge of the actual cost, but only if the membership voted annually to authorize the Board to partially fund the painting reserve.

Assuming that vote never occurred, or has not occurred every year, this budget is inadequate. We often see this when the Board is trying to suppress the reserve budget in conjunction with new or higher operating expenses, or when the Board assumes paint will last longer than it is intended to last.

The statute provides that the Board may annually adjust the reserve schedule to consider changes in useful life or replacement cost. This means the Board is required to exercise business judgment to determine the remining life of the paint. How can the Board accomplish this? First, the Board can commission a reserve study or an update of a prior reserve study. This is a relatively inexpensive engineering report where a licensed firm inspects the paint, roof, and other common elements and provides a playbook for reserve funding. The benefit of this report is that it is all-inclusive and the Board has a professional study to justify its funding decisions. A second option is to have a licensed paint contractor provide an analysis and estimate for replacement cost. Both of these options provide the Board with professional justification for funding decisions.

The simple reality here is that the Board will either need to revise the reserve budget to make up the difference in the remaining years. I am told paint generally lasts 7 years, so this probably means that you will need to make up a big different in a short period of time. Another option is to levy a one-time special assessment now to make up the difference and then adjust the budget to maintain current assessment requirements. A final option is to seek the membership’s approval to maintain a partially funded reserve account if the membership would prefer a special assessment when the buildings need to be repainted. Part of exercising business judgment is obtaining reliable opinions, and therefore the Board should be periodically engaging professionals to provide recommendations so that the reserve schedule is adequate to meet future replacement needs.