Hurricane Damage – Just Wait For The Special Assessment?

How About Reserve Funds?

An Opinion By Jan Bergemann 
Published Sunday, November 13, 2005

This year will bring a rude awakening for many owners living in associations.  Hurricane Wilma brought lots of devastation, not only for your property.  Wait for your wallet to get hit – real hard!

Many homeowners and condo unit owners will see lots of special assessments -- and huge ones!  If increases of your power bill and your insurance premium weren’t enough, here comes a real shocker:  Special Assessments!

Many owners don't realize that the association is responsible for hurricane damage to common areas.  Buildings like clubhouses are insured (minimum high deductibles), but insurance is not available for landscaping -- trees and bushes.  I know of communities where all the high-priced trees, which had been replanted after 2004’s hurricane, were wiped out again in 2005.  And I know a few association officials who are afraid to tell the homeowners of the final cost – meaning more special assessments!

Many homeowners are trying to cover the deductibles for damages to their own homes.  Add now special assessments levied by the associations, and we will see that many owners will suffer serious financial problems.

All the proponents of associations forget to add these liabilities in their dreams of “protecting property values,” the sales gimmick of the HOA service providers.   Please never forget one thing:  These associations create not only double-taxation, but as well a huge liability for the owner.  We will most likely see associations that have to charge special assessments of $10,000 and more PER PARCEL OR UNIT.   (Owners who live outside an association don’t have to pay assessments in addition to their property taxes.)  Figure out how much your property values have to go up in order to recover that?  When people buy into these associations, they are not being told that this can happen.

This brings us to the hotly debated issue of reserve funds. 

Debates over reserve funds have killed legislative bills and pitted neighbors against neighbors.  Proponents feel that only fully funded reserve funds will help for “rainy days.”  While everybody seems to agree that reserve funds benefit all owners, many oppose the creation of reserve funds for one simple reason.  Boards are known to circumvent the statutes, often encouraged by their attorneys and management companies, and spend the reserve funds for whatever they want, sometimes even financing their own little pet projects.  And as long as there are no real safeguards, these shenanigans will continue. 

As long as our laws grant nearly unlimited immunity from civil liability to the directors of the board, these violations will not stop.  The total lack of accountability even encourages directors to violate the existing statutes.

Last year we even saw a bill – Association emergency powers in catastrophic events (HB 1593) – that in the opinion of many opponents was an open invitation to “legalized looting.”   A wording like the following paragraph may be too tempting to resist for, even for many honest citizens!  "Actions by the board taken in good faith during a catastrophic emergency bind the association and create a rebuttable presumption of being reasonable and necessary.  Any officer, director, agent, or employee of the association who acts with a reasonable belief that such actions comply with this section is immune from civil liability for such actions, except in the case of willful misconduct."  

Try to prove “willful misconduct”!

Provisions like this written into law eliminate any accountability and create the necessary openings to allow kickbacks and similar shenanigans!

I think we need reserve funds -- like families need savings accounts.  If there are no reserve funds, especially people with low income or fixed income will have serious problems coming up with the money needed for special assessments.  The Condo Act even allows owners to vote down the requirement of reserve funds (FS 718.112(2)(f)(2).  And many do!

But in Spring 2005 when Representative Julio Robaina asked in his condo bill HB 1229 for fully funded reserves, many condo owners got upset – many because they were misinformed on purpose!

For example, owners from THE LAURELS AT MARGATE CONDOMINIUM ASSOCIATION, INC. wrote e-mails telling the legislators that they would lose their homes if this bill would pass.  Since they already claim to have problems paying the small monthly amounts to fund the reserve account, now imagine how these owners will ever come up with a high special assessment?  I don't think it’s possible!

Imagine the association has a reserve fund for the roof, a very expensive item.  It's insured, but with today's high premiums most likely with a very high deductible.  If the association has a well-funded roof reserve fund -- no special assessment needed.  But if not?

Look at all the unit owners in condos in Miami that are in the process of losing their homes.  Mismanagement -- no reserve funds -- and suddenly here comes the city and condemns the building, requiring fast repairs at high cost.  People have to move out, pay rent and mortgage and association dues.  This “house of cards” quickly collapses and creates more homeless people whose credit ratings are down the drain.  See Castle Beach Condos and others!  These people pay all their bills in time but are still in danger of losing their homes, even though they have done nothing wrong!

Problems in homeowners’ associations are different.  Owners have their own homeowners’ insurance policy -- but with a deductible.  That already eats up some of the family's savings!  But now comes the homeowners’ association!  Many associations don't have any reserve funds.  Especially gated communities will have problems, since the common property is private, but belongs to a corporation.  This is a major reason for FEMA to not get involved.  Nobody but the association cleans up the associations’ common properties -- like playgrounds, parks, etc.  -- all the amenities promoted as sales gimmicks.  And if cleaning up is not enough financial burden, here comes the county and demands replanting of trees and bushes, etc.  That will really hit the pocketbooks!  A homeowner from a North Miami Beach association said:  "Last year we paid $230,000 for debris removal and $850,000 for replanting.  This project was finished in July.  It ate all our reserve funds -- and then some.  Wilma wiped out all we had replanted -- and more.  Now there are no more reserve funds to pay for the new damage!"  He left what else he wanted to say unspoken.  I guess it speaks for itself!

We are seeing in the moment the structural damage, windows gone, roofs gone, trees down, etc.  This is the most obvious problem in the moment.  But what happens when all the bills come due to pay for the repair of all the damage to the common areas in the community?  

I think it will take minimum another 3-6 months before we can really talk about the actual damages and problems, but I think it will be a serious wake-up call for many families! Even if county governments are already saying that they will be patient with replanting -- it needs to get paid at one time!  Or maybe wait with replanting until next year's hurricanes?

Getting a loan is an option – but it can be a serious trap.  Never forget:  Loans need to be repaid – with interest and other costs – but what happens next time?  Loans are good as a quick fix – but are creating more problems in the long run!

Wilma was a huge disaster for all of us, but especially for owners in associations.  It was a rude wake-up call and taught us that we definitely need to better prepare to avoid future financial disasters. 

One thing is sure:  Wilma will not be the last strong hurricane paying an unwelcome visit to Florida!