Editor’s note:Attorneys at Goede, Adamczyk, DeBoest & Cross respond to questions about Florida community association law. With offices in Naples, Fort Myers, Coral Gables and Boca Raton, the firm represents community associations throughout Florida and focuses on condominium and homeowner association law, real estate law, litigation, estate planning and business law.
Q:Our condominium board is adopting a budget next month and they claim reserves are fully funded, but there is clearly not enough funds in some of the categories to replace the component.What does “fully funded” mean?
B.A., Naples
A:A reserve account is considered fully funded if there is enough money added to the reserve component every year so that there will be enough money to replace the component or perform the deferred maintenance when dictated by the reserve schedule.In other words, if the roof has 10more years of useful life, of course there will not be enough money in the roof replacement fund today because there is still 10more years to chip away at the roof replacement fund with every assessment payment.
Associations generally follow the recommendations of an engineering reserve study or other reliable report that reflects the remaining useful life and replacement cost of each item.The statutes provide that the condominium can annually reassess these figures so that the board is not locked into reserving for more than is necessary if, for example, the cost of labor and materials is going down.
The default rule is that reserves must be fully funded, but the membership can authorize the board to underfund or waive reserves altogether.This implies a preference to keep assessments low and increase the likelihood of periodic special assessments, but it is lawful to annually waive or approve a reduced level of reserve funding.If the membership has not voted to waive or reduce reserves, the board must adopt a budget with fully funded reserves.
Q:Our homeowners association (HOA) has used the same landscape maintenance vendor for 10years and I am not aware that the board has ever sought other bids.The board is claiming that the contract just automatically renews every year at a favorable rate.Does the board need to obtain bids?
C.U., Bonita Springs
A:There are two issues here.First, does the landscape contract in general require bids? Second, what is the effect of an auto renewal provision in a contract?
First, Florida Statutes section 720.3055 requires the HOA to obtain competitive bids for any contract for the provision of services requiring payment that exceeds 10 percent of the total annual budget of the HOA, including reserves.There are a number of exceptions to this requirement, but landscaping maintenance agreements would not be an exception and most landscape maintenance contracts exceed 10 percent of the total HOA budget.Thus, yes, the association needs to obtain bids assuming the cost exceeds 10 percent of the budget.
Second, the same statute referenced above provides that “if a contract was awarded under the competitive bid procedures of this section, any renewal of that contract is not subject to such competitive bid requirements if the contract contains a provision that allows the board to cancel the contract on 30 days’ notice.”Thus, if the contract provides a termination provision, where the board can terminate the agreement with 30 days’ notice, the board may be acting properly by allowing the contract to automatically renew.If the contract does not provide for this automatic termination, the board needs to obtain competitive bids.
Finally, it is worth noting that just because the board may be able to avoid bids for 10 years does not necessarily indicate that it constitutes best practices.
Q:The clubhouse and pool in our HOA are outdated and need to be modernized to keep up with neighboring amenities and maintain home values.We do not have enough liquidity to pay for this expenditure and a lump sum special assessment is not an option.What can we do?
W.Y., Marco Island
A:Financing may be a viable option.There are many banks that are eager to lend money to community associations because the default rate is very low and the banks generally have a mechanism to compel repayment if a default did occur.First, you would need to determine whether the board requires membership approval to borrow and provide a security interest for the loan.If the board does not require membership approval, the board could contact various banks for loan terms and options.If the board does require membership approval, the board would need to call a membership meeting and obtain the approval threshold required by the governing documents.
Another important issue is repayment options.If the repayment amounts are low enough, the board could consider adding the loan repayment as a line item in its regular budget and simply collect through quarterly assessments and pay the bank as required from the general operating account.That being said, if the payments are relatively low, it is likely because the repayment term is lengthy and you may find many of your members and directors have a strong aversion to paying interest.Thus, the board should consider an accelerated repayment method which generally involves a special assessment with multiple options.
For those owners who have the financial means to pay the entire special assessment at once, those owners may pay upfront.For those owners, who prefer to pay the special assessment over time, those owners may choose that option.Obviously, it is important to know how many owners would consider paying in lump sum because that would decrease the amountneeded to be borrowed in order to meet the modernization expenses.Florida law further provides the incentive that the board could elect to charge the interest and financing expenses against only those owners who elect to pay over time — meaning that there can be an extra incentive to paying the entire assessment in a lump sum.
Attorney John C. Goede is a shareholder at the law firm of Goede, Adamczyk, DeBoest & Cross.Visit the website atwww.gadclaw.comor ask questions about your issues for future columns by sending an inquiry to:info@gadclaw.com.Goede, Adamczyk, DeBoest & Cross is a full-service law firm with a focus on condominium and homeowner association law, real estate law, litigation, estate planning and business law. With offices in Naples, Fort Myers, Coral Gables and Boca Raton, the firm represents community associations throughout Florida. The information provided herein is for informational purposes only and should not be construed as legal advice. The publication of this article does not create an attorney-client relationship between the reader and Goede, Adamczyk, DeBoest & Cross or any of our attorneys. Readers should not act or refrain from acting based upon the information contained in this article without first contacting an attorney, if you have questions about any of the issues raised herein. The hiring of an attorney is a decision that should not be based solely on advertisem*nts or this column.
