By Attorney Steven J. Adamczyk
Q: Our condominium has been reserving every year to repaint the buildings every seven years. We are now approaching seven years and it turns out the paint reserve fund was never on track to be fully funded and we are going to be short. Can we use money set aside for other projects or do we have other options?
B.F., Bonita Springs
A: This is a common situation. In Florida, the general rule applicable to condominiums is that reserves must be fully funded unless the membership votes to underfund or waive reserve funding altogether. This means that your board should have received a quote or reserve opinion seven years ago to repaint the buildings, subtract any leftover balance in the paint fund, and then divided the difference by seven so that you are equally putting money away each year. The board can also take interest, inflation, and annual changes in materials and labor into consideration when setting reserve amounts. In Florida, the default rule is also that you have straight line reserves, meaning you separately account for each reserve component and you can only use money in the paint fund, for example, on painting, and the membership must approve any other use.
One option available to you is to review your corporate history to see whether the association ever voted to approve a switch to pooled reserve funding. A pooled reserve is funded differently because it is based on cash flow, but the benefit in your situation is that you can use any dollar in the reserve account for any component in the pooled reserve. For example, a pooled reserve could have repainting, resurfacing, roof replacement, pool equipment, pool furniture, clubhouse windows, and pool deck paver components. With a pooled reserve system, you could use any balance set aside for the pool equipment to fund the paint shortfall. You obviously need to make up the difference over time so that you can replace the pool equipment when necessary, but there is a lot of flexibility. If you have not done this in the past, the threshold to switch to pooled reserve requires only a majority of the votes cast in person or by proxy at a meeting of the members and thus you could also schedule a meeting to approve this switch. This could provide the flexibility you are seeking.
If you have straight line reserves and you want to keep straight line reserves, another option is to seek the membership’s approval to use reserve dollars currently allocated to another component. The threshold is the same as the switch to pooled reserves, meaning you could, for example, schedule a special members’ meeting to seek approval to use dollars currently in the roof reserve account for the current paint shortfall.
Another option would be to fund the shortfall through your annual operating budget. If you know the shortfall is $250,000, for example, then you could add a line item to your annual budget for this year only for the $250,000 and fund the shortfall through normal assessment obligations. To accomplish this, I would first seek an opinion from your legal counsel to determine whether your specific condominium documents place any restrictions on whether your operating budget can accommodate this expense. Obviously, this may increase your assessments, but at least owners would be able to pay the shortfall quarterly or monthly depending on your assessment schedule.
The board could also levy a special assessment. This is the typical response to a shortfall in reserves because the reserve expenditure is typically a one-time expenditure and special assessments typically provide a lump sum influx of capital to meet the needs. Again, you would want to consult your legal counsel to determine whether your specific condominium documents have any self-imposed restrictions or procedural requirements that would impact the board’s ability or timing to levy a special assessment for this purpose.
Finally, the board could borrow. Credit is generally available for condominium associations and your board could consider drawing on a line of credit or obtain a term loan for this purpose. One of the benefits of borrowing is that it provides the association with instant liquidity to meet contractor payment schedules while allowing owners to repay over a longer period of time and possibly for the duration of the loan repayment. Once again, you would want to consult your legal counsel to determine whether your specific condominium documents have any self-imposed restrictions on borrowing or voting requirements to open a line of credit or draw on a line of credit. Depending on the amount of the loan and the lenders’ underwriting requirements, you may also need to levy a special assessment dedicated to repaying the loan, so you also need to consider whether you have any special requirements to levy a special assessment as described above.
Q: One of our owners did not pay his first quarter assessment and there is a tenant in the unit. We fear that this owner will stop paying altogether. Is a tenant responsible for assessments if they are using the amenities?
P.A., Marco Island
A: By default, no, the tenant does not become responsible for assessments. The contractual obligation to pay assessments is assumed by the unit owner under the covenants and although the tenant is subject to the rules and covenants as an occupant, the tenant would not be contractually obligated to pay the assessments under the covenants.
That being said, Florida law does provide some relief in this situation. About 10 years ago, the statutes for condominiums and homeowners’ associations (HOAs) were amended to provide an ability to effectively garnish rent payments when the owner becomes delinquent. In fact, the association can garnish rents when the owner is delinquent in any monetary obligation due to the association, which would include fines and other unpaid assessments, late fees, interest, and attorneys’ fees incident to debt collection. The statutes provide a mechanism to demand the tenant pay future rent payments to the association and the tenant is statutorily immune from eviction by the owner if the tenant complies with the association’s demand. The statute also provides that the association may evict the tenant for failing to pay rents to the association if the tenant is required to do so, so there is a strong incentive for the tenant to comply.
The collection of assessments is a case-by-case analysis and each situation is different. As you can see, a situation where the unit is rented is very different from a situation where the unit is abandoned and vacant. We recommend you consult with your legal counsel to determine how to best approach each situation.
Q: Our HOA is beginning the process of updating our covenants, conditions and restrictions and owners are confused on whether all property owners’ signatures must be notarized on their vote. What is the law on this?
A: As you would expect, the answer is that it depends. Your first step would be to find the specific amendment provision in each document being updated and determine if there are any self-imposed requirements. For example, some documents specifically provide that all votes to amend the covenants must be executed with the same formalities of a deed, which would require two witnesses and a notary. Other documents just say that amendments are passed by votes in person or by proxy at a meeting. Other bylaws also include a section on how to vote on all general matters which could control and provide something different.
In short, votes do not generally need to be notarized and it is not a default requirement, but you should consult a licensed Florida attorney to review each document being revised and determine whether the votes require additional formalities.