Condominium living has
a lot of benefits. Many condominiums have socials and other
activities. Associations manage amenities that might not be
available in a single-family home. Someone else takes care
of painting, mowing, pool maintenance and the unit owner
only has to worry about the inside of the owner’s unit.
Rules governing condominium living make sense since people
are living in close proximity. There is a need for a bit
more structure. Most buyers try to make sure the rules of a
condominium “fit” the buyer. But an owner can later find the
association fails to follow its own rules. That is
particularly true when it comes to money.
The budget process is a real problem for some associations.
Florida statutes require any meeting at which a proposed
annual budget will be considered by the board or unit owners
be open to all unit owners. The board must deliver to each
owner notice of the budget meeting at least 14 days prior to
the meeting. If the proposed budget is adopted at a board
meeting, many boards simply provide a 3three-day posted
notice of the meeting required for routine board meetings.
Using the wrong notice is not the only mistake made in the
budget process by associations. Florida statutes require the
budget be adopted at least 14 days prior to start of the
association’s fiscal year. Many associations put off
adopting the budget until the annual meeting, which takes
place after start of the fiscal year. The budget must
include reserve accounts for capital expenditures and
deferred maintenance, even if the board proposes less than
fully funding the reserve accounts. The amount reserved must
be computed using a formula based upon the estimated
remaining useful life and estimated replacement cost of
deferred maintenance expense of each reserve item.
Although many condominium declarations give the board of
directors authority to adopt a budget, the board does not
have authority to waive or reduce reserves. The budget
adopted by the board must include fully funded reserves.
That is intended to provide unit owners the information they
need when voting on waiving or reducing reserves. In many
cases, the board of directors shortcuts to the budget it
wants and simply adopts or in some cases proposes that
budget to unit owners.
Florida statutes mandate that any funds in a reserve account
be utilized only for the item for which the account is
established. Unit owners can vote to apply funds from one
reserve account to another purpose, but many boards simply
dip into the reserve accounts when needed to pay a large
expense (such as the insurance bill) without the appropriate
owner vote.
Some associations make even more mistakes concerning
finances. The association budget is supposed to be a
zero-based budget with collected funds equal to expenses.
Nevertheless, some boards create a slush fund of sorts by
over budgeting every year. That results in a surplus which
is carried forward from year to year and, in some cases,
even placed into a contingency account that does not appear
as a budgeted item.
Insurance is a big expense for condominium associations. By
statute, each association must obtain casualty insurance
coverage for full insurable value, replacement cost, or
similar coverage based on replacement cost of the property
to be insured. Replacement cost must be determined by an
independent insurance appraisal or update of a prior
appraisal and must be determined at least once every 36
months. Many associations have never obtained an insurance
appraisal and even more fail to update replacement cost
every 36 months. As a result, many associations are
underinsured.
Almost every association charges a fee for approving a lease
or sale. Florida statutes state associations can only charge
a fee for approving a lease or sale if the governing
documents of the association provide for payment of that
fee. Many declarations do not have a provision authorizing
collection of a fee for approving a lease or sale. Yet,
those associations routinely charge a fee for approving
transfers.
Due to abuses by some associations, the legislature set the
maximum fee for approving a sale at $100 a few years ago.
The maximum was recently increased to $150. Many
associations have documents that limit their approval fee to
$100. Many of these associations are now charging $150.
Most associations hire a professional management company to
handle the day-to-day operation of the condominium. The
management company is usually authorized to deal with
association finances and given access to association
accounts. There is very little oversight exercised by the
boards in many of those associations. Some associations have
discovered that failure to maintain a close watch on the
finances after giving a management company access is costly.
Finances are not the only area in which associations make
mistakes, but it is one of the big ones. Most of the
mistakes made by associations are simply because board
members do not know the law or even their own declaration of
condominium.
The legislature tried to address that problem by mandating
new board members take an approved condominium education
course within one year before or 90 days after election or
appointment. But the statute allows newly elected directors
to avoid the course by filing a certification stating the
director has read the association’s governing documents and
policies, that the director will work to poll the documents
and policies to the best of the director’s abilities and
will faithfully discharge the director’s fiduciary
responsibility.
Reading a document does not mean the director understands it
and the educational course mandated as an alternative can be
taken in 90 minutes online. That goes a long way toward
explaining why association boards make mistakes and why
boards should retain experienced counsel to assist them.