Florida Condo & HOA Legal Blog : Florida Condo Lawyer & Attorney : Becker & Poliakoff Law Firm : Condominium & HOA Law Blog

Fannie Mae recently announced several changes to its standards and reintroduced its Project Eligibility Review Service (PERS).

Link to PDF: https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/condogls/pdf/projectreviewsummaryfaq.pdf

PERS review is required for new and newly converted condominiums in Florida, while optional in projects located elsewhere throughout the United States. Fannie Mae likewise announced an intention to publish a list of ineligible projects, which are those projects failing the PERS process.

It will be much more difficult for purchasers to obtain mortgage financing if the mortgage cannot be sold on the secondary market to Fannie Mae and the like. Its requirements include the following:

• At least seventy (70%) percent of the units must be pre-sold in a new condominium or a newly converted condominium. Waivers are available on a case-by-case basis.
   
•  In existing projects, the Association must have evidence of fidelity bonds or insurance (which is required pursuant to §718.111(13), Florida Statutes for all persons who control or disburse funds for a Condominium Association).
   
• A single person or entity cannot own more than ten (10%) percent of the project, although exceptions are available on a case-by-case basis.
   
• No more than fifteen (15%) percent of the total units in the project may be thirty (30) days or more behind in payments to the Association.
   
• Borrowers must purchase additional hazard insurance (unit owner coverage), regardless of the Master Policy.
   
• The project must budget for “adequate” reserves (generally defined as 10% of the annual budget but determined on a case-by-case basis).
   
• The lender cannot bear responsibility for payment of more than six (6) months’ of unpaid dues or charges.

Thus, changing §718.111(11), Florida Statutes to eliminate mandatory unit owner insurance coverage may not necessarily change the fact that more condominium unit owners (in Florida and elsewhere) will purchase said coverage. Lenders that want to offer financing compliant with Fannie Mae standards will require new purchasers to provide evidence of personal coverage (contents coverage, generally a HO-6 policy), much like the requirement for borrowers purchasing single family homes.

Moreover, efforts to change lender responsibility for condominium assessments and dues after mortgage foreclosure are likely to fail if those changes would preclude lenders from offering the attractive rates and down payments available for Fannie Mae backed mortgages.

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Many Associations have just completed their election season and find that a person or persons newly elected to the Board are involved in a case being defended or prosecuted by the Association. Now what? Clearly, a conflict of interest exists but participation in a lawsuit against the Association is not one of the factors that makes you ineligible to sit on the Board. Therefore, the person(s) can take their seat on the Board so long as every other aspect of the election process was valid.

The Board however still needs to take measures to ensure that the strategy and legal opinions obtained from counsel on behalf of the Association continue to be privileged. This can be accomplished in a few ways. One option is for the person(s) with the conflict to recuse themselves from participating in any meeting/vote regarding the lawsuit. Their fiduciary duty to the Association would be fulfilled but what if that means there is no quorum of the Board to make a decision? Also, they would have to know of the meeting in order to recuse themselves and this would tip them off that something was up?

The better alternative is to have an open Board meeting for the sole purpose of creating a committee of members of the Board who do not have the conflict of interest. This meeting would be open to all members of the Board and the Association. The persons with the conflict should be allowed to vote on the issue and their fiduciary duty should dictate that they vote in favor of such a committee. During this meeting the Board should also vest all powers necessary to allow settlement or resolution through appeal in the committee. Otherwise, if the committee continually had to return to the Board for more authority, the person(s) with the conflict would be able to deduce what was going on and the creation of the committee would be for naught.

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Question: Our board of directors has been talking about switching over to “pooled” reserves. Can you explain what this means? L.A. (via e-mail)

 Answer: The concept of funding condominium reserves through the “pooling” method, sometimes also known as the “cash flow” method, came into vogue about seven years ago.

The Florida Condominium Act requires an association to include as part of the annual budget, a reserve schedule. Reserves must be set aside for roof replacement, pavement resurfacing, building painting, and any other item of association responsibility with a replacement cost or deferred maintenance expense of $10,000.00 or more.

Traditionally, the reserve schedule accompanying the proposed budget has used the “straight line” method of calculating required reserves. For example, assume that the roof on a condominium building has a twenty year useful life, is ten years old, and will cost $100,000.00 to replace. Further assume that the current amount of money in the roof reserve is $50,000.00. The association will need to collect $5,000.00 per year, over the next ten years, to accumulate another $50,000.00 so as to “fully fund” the roof reserve. This is traditional, “straight line” funding of reserves.

Similar calculations are then made for all other required reserve items (building repainting, pavement resurfacing, and other items with a replacement cost or deferred maintenance expense in excess of $10,000.00), and the annual contribution required to “fully fund” the reserve account is thus arrived at.

If no vote of the unit owners is taken, the board of directors is obligated to collect “fully funded” reserves as part of the monthly or quarterly assessment.  The law does permit unit owners to vote to reduce the funding of required reserves, or waive funding of reserves altogether. The law was also amended in 2008 to require that any reserve reduction or waiver vote include bold-faced disclaimer language on the proxy and ballot.

It is important to understand that when reserves are funded on the straight line method, whether fully funded or partially funded, the law provides that reserve funds can only be used for their intended purposes. For example, money could not be taken out of the roof reserve account to pay for painting the building. However, the association can use reserve funds for non-scheduled purposes if approved in advance by a majority vote of the unit owners. 

The vote required to waive or reduce reserve funding and the vote to use reserves for non-scheduled purposes (which are technically, two separate votes), each require approval of a majority of the voting interests present, in person or by proxy, and voting at a duly noticed meeting of the association. As with the reserve reduction/waiver vote, a vote to use reserves for non-scheduled purposes must also be accompanied by bold-faced disclaimer language on the meeting proxy and ballot.

The concept of “cash flow” or “pooled” reserve funding is a bit different. Under pooled reserves, it is still necessary for the reserve schedule which accompanies the annual budget to set forth required reserve items (roofs, painting, paving, and other items with the replacement cost/deferred maintenance expense of more than $10,000.00). Further, the “cash flow” reserve schedule must still disclose estimated remaining useful life and replacement costs for each reserve component. The main difference in the cash flow presentation of reserves is that instead of each reserve line item having its own fund balance, there is a “pool” of money in the reserve fund, which is available for costs affiliated with any item in the reserve pool. For example, the painting and roof reserve monies are “pooled” into one fund, so a vote of unit owners is not required for expenditures from the fund, as would be the case in a straight-line reserve scenario where monies from one reserve account would be used for another reserve purpose. 

It is important to note that even with pooled reserves, a vote of the unit owners is still required to use reserve funds for operating purposes, or for any expenditure involving items that are not part of the “pool”.

The pooling method of reserve funding attempts to predict when a particular item will require replacement or deferred maintenance, and reserves are scheduled and funded so as to insure that a necessary amount of funds are on hand when the work needs to be done. Theoretically, monthly or quarterly reserve contributions can be lowered, while still avoiding special assessments.

Of course, what works in theory does not always work when placed in human hands. In addition to needing a crystal ball to predict exactly when a reserve expenditure will need to be made, reserve contributions may be substantially higher in certain years, such as when the fund is depleted for the replacement of a required item, and there is a short useful life for the next asset that needs to be replaced. Personally, I neither encourage or discourage association clients from switching from straight line funding of reserves to cash flow. There are pros and cons, and it ultimately boils down to a matter of choice. Clearly, straight line funding is the more conservative funding mechanism.

The law is not entirely clear as to how the switch from straight line funding to cash flow funding is supposed to occur. I believe it is the position of the Division of Florida Condominiums, Timeshares, and Mobile Homes that the board of directors has the authority to present pooled reserves, even when straight line reserve funding has typically been used in past years.

However, I also believe that it is the Division’s position (and I believe consistent with the law) that if funds that were previously deposited in straight line accounts are going to be put into the “pool”, then majority approval of the unit owners is required. Accordingly, as a practical matter, every association which switches from straight line funding of reserves to cash flow funding will need to take a vote, so that the existing money in the straight line accounts can be put into the “pool.”

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Free Educational Forum

The Community Association Law Practice Group of Becker & Poliakoff is pleased to announce that the Firm will be holding its Annual Community Association Leadership Conferences beginning on January 16, 2009.

Becker & Poliakoff is well-known for its pioneering role in the creation of the law pertaining to the operation of common ownership housing in Florida. Our attorneys are recognized as individual leaders in the field through published works, public service, legislative activities and industry group leadership positions.

Join us to get the latest information on current topics impacting you and your community. Register today for this FREE conference at www.becker-poliakoff.com/events/ca/ for the event nearest you.

What you will Learn

How to implement important statutory changes enacted during the 2008 Legislative Session including:

• Board member rights and responsibilities;
• Licensure of management companies;
• Insurance and reconstruction-aftercasualty provisions;
• NEW provisions affecting elections and annual meetings;
• NEW collection and foreclosure procedures;
• NEW inspection requirements;
• NEW requirements on votes to waive reserves and financial statements.

Click here to download the PDF information packet.

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Question: I am a member of a homeowners’ association. Our board recently hired a new management company. The owner of the management company is also a resident/property owner in our community. Some of us feel that this creates a conflict of interest. What is your opinion on this? T.W. (via e-mail)

Answer: As long as the owner of the management company is not also a member of your association’s board of directors, I do not believe that conflict of interest concerns in the traditional legal sense are presented.

There is no legal prohibition against contracting with a property owner within your community. I have seen a few associations which have bylaw provisions which prohibit contracting with association members, but such provisions are certainly the exception.

There are a couple of different ways to look at this. Some may argue that because the owner of the management company also has an investment in your community, he or she will go “above and beyond” to ensure that the community’s needs are served, thus protecting their own investment and keeping their friends and neighbors happy. Others would argue that contracting with an association member is a bad idea, because friendships and internal community politics could obscure the objective viewpoint the board should have in dealing with contractors.

Whether contracting with a neighbor or a total stranger, I always recommend that contracts between community association management firms and associations contain a liberal termination clause, with or without clause, upon reasonable notice (such as thirty days).

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A.    Facts:
In this case, the Cypress Bend IV Condominium Association (“Association”) filed a petition for arbitration against unit owners Cheryl Pepper and Richard Frisbie (“Respondents”). The Association alleged that the Respondents violated Article XIII, Section E of the Declaration of Condominium (“Declaration”) and Federal Law by installing a satellite dish on the common element roof of the condominium building. As relief, the Association sought the removal of the satellite dish from the common element roof. The Respondents admit they have installed the satellite dish upon the common elements, however, they claim that the Association has allowed other unit owners to install satellite dish antennas on the roof. Thus, the Respondents assert several defenses, including the affirmative defenses of selective enforcement and estoppel. The Respondents also argued t hat the Association, in prohibiting the placement of the satellite dish upon the common element roof, frustrated the purpose and intent of the Federal Telecommunications Act of 1996. The Association denied that it has ever allowed satellite dish antennas to be placed upon the condominium roof and submitted photographs of the roof showing no such satellite dishes. The Respondents claimed that satellite dish antennas did previously exist but that the unit owners had removed them in response to the Association’s attorney’s demands for removal.

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There are various safety retrofits required in the State of Florida, many of them involving elevators and fire safety.  Every building in the State of Florida containing six or more stories is required to retrofit their elevators to allow operation in fire emergency situations with one master key.  Florida's Department of Financial Services publishes a map showing the seven (7) emergency response regions as well as a list of the vendors authorized to perform the installation and issue uniform keys. 

The installation must be complete and the property compliant no later than October 1, 2009.

Additionally, elevator inspections must be performed annually by a Certified Elevator Inspector or the State of Florida may contract with the County or Municipality for elevator inspection services.  Nonetheless, Section 399.02, Florida Statutes requires the building owner or operator to bear responsibility for obtaining the inspections, the safe operation of the elevator, the proper maintenance of the elevator and correction of any deficiencies noted in the annual inspection.   An elevator maintenance contract will not insulate the building owner or operator (including an Association) from liability for damages or personal injuries.  Elevator maintenance contracts are governed by Section 399.01, Florida Statutes and further requirements are found in the Florida Administrative Code. 

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