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

HB 319 is the primary condominium bill this session. It is neither anti-association nor pro-bank as some of its critics have said. In fact, it is one of the most pro-association bills we have seen in recent years. It protects associations from predatory collection agencies which are trying to take advantage of an association’s wish to be repaid fully once the foreclosure process is complete.  

Ask yourself one simple question to determine if HB 319 is pro or anti association: if the Legislature is going to increase a bank’s liability to an association, should the increased funds go to pay legal fees or go to reimburse the community for unpaid assessments?  In our view, any additional payments by made by banks MUST go back to the association.

Collection agency attorneys should not be incentivized to aggressively go after banks if the associations could be left with a large debt payable to the attorneys. We recently saw such a case where the collection attorney was demanding almost $14,000.00 to finalize the sale of a foreclosed unit.  The purchaser was left without any good choices. One option is to pay the fees (which is what the “aggressive” firms have counted on).  Another option is to go to court which can also be costly.  Another alternative is to simply cancel the deal – defeating the whole purpose.

Let's address the real problem by making the banks foreclose more quickly and pay the assessments due to the association, not by creating more financial opportunities for collection mill attorneys.

I have structured a Q&A below with the hope that it will better explain the real purpose of the bill and the problems that the bill is trying to fix.

Q:  What is the “safe harbor” provision?

A:  The “safe harbor” provision in the law means that when a bank takes title to a unit as a result of foreclosure, the bank is obligated to pay either 12 months of unpaid assessments or 1 percent of the original mortgage debt, whichever is less.  For example, if a condominium’s annual assessments are $3600, and the unit has a $250,000 mortgage, the bank will pay to the association $2,500.  The safe harbor provision has been in the law since 1992. Prior to 1992, a bank that took title to a unit through a foreclosure action paid the association ZERO in past due assessments. 

Q:  Do banks owe the association’s attorney’s fees and costs, in addition to the safe harbor amount?

A:  No.  There is no mention in the statute of other charges, such as attorney’s fees, becoming a bank liability after the foreclosure of the bank’s mortgage.  The vast majority of attorneys who practice community association law interpret the law to mean that the bank does not owe any additional amounts above the safe harbor amount.

Q: How does HB 319 affect the safe harbor provisions?

A:  HB 319 simply clarifies the law that has been in effect for 20 years so that it specifically states that the bank is responsible for 12 months past due assessments or 1% of the original mortgage debt, whichever is less, and does not have to pay unlimited attorney’s fees and costs above the safe harbor amount. 
 
Q:  Why is it necessary to clarify the safe harbor provisions?  Why not leave the law as is?

A:  There was never any uncertainty in the law until recently, when a cottage industry of collection agencies and collection lawyers, with no history of helping associations, came onto the scene and began to interpret the law differently.  This cottage industry (some refer to them as collection mills) claim that their interpretation of the statute is merely “aggressive” and they are willing to take liberties with their demands against first mortgagees that take title to condominium units.  So for example, if an association’s annual assessments total $3,600 and the amount of the loan was $250,000, rather than making a demand for $2,500, these firms and collection agencies have demanded outrageous sums of thousands of dollars, ten thousand dollars, fifteen thousand dollars and even more for routine mortgage foreclosure cases.   It is easy to see why these collection mills do not want HB 319 to clarify the safe harbor amount and are misleading the public into thinking that HB 319 is anti-association and pro-bank.  
 
Q:  Why not leave the law as is and let these collection mills try to get as much money as they can from the banks?

A:  Associations are being harmed, every day, by these predatory practices.  For example, when a lender does foreclose and looks for a new buyer for the home the parties must ask the association for an “estoppel letter”, which is a legally binding request for the association to state how much must be paid for the issuance of a clear title.  Although the bank has often already paid the safe harbor amount, the parties ready to close the deal (buyer, seller, lender, attorneys, realtors, and title companies) are all shocked to learn that demand is being made against them on behalf of an association for outrageous sums.  We recently saw one case where the collection attorney was demanding some $14,000.00.  When faced with a scenario like this, the choices are all bad.  One option is to pay the money, and that is what many of the “aggressive” firms have counted on.  Another option is to insist that the law be followed and go to court.  This is usually not a good economic choice for the parties.  Another alternative is to simply cancel the deal, which is happening more and more frequently.  In other cases, the lenders will pay, and then file lawsuits for refunds. 

Q:  What other problems are being caused by the “aggressive” interpretation of the law by the collection mills?

A:  Similar practices in Nevada led a subsidiary of Bank of America to file a class action lawsuit regarding collection practices in homeowners’ associations.  According to recent news reports, a couple of hundred Nevada associations have also recently been named as defendants in a new wave of class action lawsuits.  It is only a matter of time before a similar class action lawsuit is filed in Florida unless the Legislature acts to clarify the law.

Q:  Why not change the law so that banks have to pay the attorneys fees and costs, in addition to the safe harbor?

A:  We think the banks should be paying more, but if there is going to be a change in the law, it should be in the safe harbor amount (for example, 24 months or 2% instead of the current 12 months or 1%) so that we can be sure that the additional money paid by the banks is going to the associations and not to lawyers and collection agencies.  In addition, if the law is changed to require the banks to pay attorneys fees and costs in addition to the safe harbor amount, it would ignore the purpose of the original safe harbor law, which was so that a bank lending money would know upfront how much it would have to pay to the association if the borrower stopped paying his or her mortgage and the bank had to foreclose.   If the law was to be changed to say that the banks had to pay unlimited amounts of attorney’s fees and costs, the lending industry may decide to curtail borrowing in Florida or make it much more expensive to obtain a loan.

Q:  What is the Legislature doing to help associations?

A:  I believe that HB 319 helps associations by clarifying the safe harbor provision which will curtail the abuses explained in these Q&A’s.  In addition, there are a couple of bills pending in the Legislature (HB 213 and SB 1890) which will give associations more control over speeding up stalled foreclosure cases.  The greatest problem for associations is that the foreclosure actions drag on far too long.  Associations need to have these units sold, and a new owner holding title, so that the new owner can begin to pay assessments to the association.  Therefore, I would strongly urge you to contact your Legislator and ask them to support HB 319 and HB 213/SB 1890.

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Broward County is offering the Energy Sense Appliance Rebate Program to County residents to encourage replacement of an old appliance with a new more energy efficient appliance. Up to $400,000 is available in rebates to eligible participants. The County expects 1,200 to 2,000 rebates to be issued to residents and 100 to 450 rebates to businesses.

The program is part of a $1.24 million Energy Efficiency Conservation Block Grant awarded by the State and funded through the United States Department of Energy to help residents and businesses make the transition to more efficient appliances that will reduce overall energy consumption in the County while stimulating the economy and saving participants money on their utility bills.

Broward County distributed $230,000 in rebate checks to more than 1,100 residents/businesses that participated in the 2011 program. The benefits of the rebate program go beyond cost savings and increased awareness of how to save energy. The rebate program generated more than $1.1 million in economic stimulus and $64,000 in tax revenues in the South Florida economy.

These funds are exhausted quickly.  For more information about rebate programs offered by Florida Counties click one of the links provided below:

• Broward County - Energy Sense Appliance Rebate Program
• City of Fort Lauderdale - Smart Watts Rebate Program
• City of Longwood - Raising Energy Efficiency Rebate Program
• Lake County - Go Green Get Green Energy Efficiency Program
• Orange County - OCHEEP!
• Sarasota County - Get Energy Smart Retrofit Program

For more information about incentives, rebates and policies for renewables and efficiency upgrades visit DSIRE.

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Investing the Association's Funds?  If so you should be familiar with the Prudent Investor Rule.

Does your association have a written policy with regard to investment of association funds? If so, does the board of directors monitor the investment to ensure compliance with the policy, and, is the policy reviewed and updated from time to time? If not, is the board of directors exposing itself to needless liability under both common law and statutory obligations of prudent management?

Whether your association is a condominium association governed primarily by Chapter 718, Florida Statutes, or a Homeowners association governed primarily by Chapter 720, Florida Statutes, it is imperative that the governing body of the association invest association funds in a reasonably prudent manner. In serving as directors and/or officers of these corporations, individuals expose themselves to liability for mismanagement and, in many cases non-management, of association funds. Officers and directors sit in a position of trust and confidence, requiring that their actions be exercised in good faith and in the best interests of all unit owners. For example, since all budgets must include reserves for capital expenditures and deferred maintenance, unless waived in accordance with Section 718.112(2)(f), Florida Statutes, a primary responsibility of the board is the protection of, and hopefully the enhancement of, the association's reserve funds.

Boards of directors are faced with the delicate task of balancing their financial goals, needs, and obligations. On the one hand, the association wants a strong return or yield on its investment, sufficient to meet the ever-increasing costs of repair or replacement of common areas. On the other hand, it is necessary to maintain sufficient liquidity in the event of an emergency. The security or safety of the investment is equally important. Therefore, boards of directors are faced with legitimate and substantial questions, such as: whether or not to hire a professional money manager, what type of investment policy should be adopted, and how best to monitor the portfolio, once a policy is implemented.

Community Associations Institute (CAI) recommends associations invest only in savings accounts, FDIC-insured certificates of deposit, U.S. Treasuries and government agency bonds. Board members need to consider the goals and objectives of the association as well as regular income and its existing capital. Risky investments are not appropriate.  However, in this day and age when interest in savings accounts is practically zero, what other types of investments will suffice?

Keep these maxims in mind:

• While a director can delegate investment authority to fellow directors or third parties, they must continue to supervise and monitor these activities.  You can delegate authority, but cannot delegate responsibility.
• Appointing an investment committee is not a bad idea, but that doesn't mean the other directors can ignore the association's financial position. If there are committees, make sure they meet and conduct the business they are charged with in compliance with the statutes. Final decisions should be made or ratified at a meeting of the board and there should be minutes of committee meetings or recommendations.
• Some governing documents contain language hindering a well-thought out investment plan. You may need to amend to implement a suitable investment policy.

Take the advice from Sergeant Phil Esterhaus from Hill Street Blues and be careful out there. ...

 

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It is very likely that your management company charges a fee to delinquent owners if they send collection letters or take other action to collect a delinquent assessment. After all, they are doing extra work that wouldn’t be necessary if the owner paid on time.

There is no mention of these management collection fees in the statutes governing Florida community associations. The association is entitled to collect interest on the delinquency by statute – interest is specifically addressed. It can charge late fees (if allowed by the governing documents) to the owner. Late fees are specifically authorized by the statutes. It can pass along the attorney fees and costs too, as those fees and costs are specifically mentioned in the statutes.

If the associations have to ask their management firms to collect assessments, why doesn’t the statute specifically allow associations to pass through those fees on to owners?

We have tried to do exactly that for many years. If you look at the legislative history for the 2010 legislative session, there were attempts to get these management or collection agency fees added to SB 1196. However, it was only added to the Cooperative Act (Chapter 719). The law for cooperatives said:

"The association has a lien on each cooperative parcel for any unpaid rents and assessments, plus interest, any authorized administrative late fees, and any reasonable costs for collection services for which the association has contracted against the unit owner of the cooperative parcel."

If that highlighted language was included in the Condominium Act (Chapter 718) and the Homeowners’ Associations Act (Chapter 720), then associations would specifically have the right to add management fees to their liens against owners. Isn’t that fair?

Well, since it said ‘reasonable costs’, some organizations claimed management companies and collection agencies would abuse this statute and charge outrageous amounts to unit owners. The term "reasonable costs" is broad. Arguably there is room for abuse. In fact, we see this all the time when it comes to estoppel fees. The statute says the charge for an estoppel certificate must be “reasonable”. Some places have a $100 fee, some have a $200 fee, some have a $400 fee – all of which are claimed to be “reasonable”. I heard of one company charging more than $500 as an estoppel fee. Obviously, there is a lot of room when you use the term “reasonable”.

So in light of those arguments, language limiting the collection fee to $150 was proposed to be added to the shared ownership statutes. CALL supported that effort. A number of management companies supported that effort. But there was still opposition, so Sen. Fasano came up with alternative language in his companion bill, SB 530, to provide as follows:

468.439 Collection services.-Collection services expenses that are reasonably related to the collection of a delinquent account rendered by a community association manager or management firm on behalf of a community association governed by chapter 617, 718, 719, 720, 721, or 723 may be secured by the filing of a claim of lien on behalf of the community association if the collection services expense is specified by amount in a written agreement with that community association manager or management firm and payable to the community association manager or management firm as a liquidated sum.

If you look at the CS 3 version of SB 530, you will see this language in the bill. However, the Legislature passed HB 1195, and not SB 530. CALL advocated for adding this language to HB 1195 (which is now the 2011 statutes). The position of some of the members of the Legislature was that this was an additional "fee" and they were opposed to any new fees. Since the ability to collect these fees wasn’t added to HB 1195, we still don’t have any specific authority in the laws to charge and collect these fees from owners.

So fast forward to 2012, and CALL is still advocating for some language that will allow associations to add collection costs to the lien. We have always supported that, but the opposition remains to any type of new fee. One of the suggestions that has been made to address this issue involves allowing associations to collect an increased late fee in order to recoup the costs that the management companies charge for the collection services. Currently, the law allows associations to collect a late fee of the greater of $25 or 5% of each installment for each delinquent installment, but only if authorized by the declaration or bylaws. If this amount was increased and if all associations were allowed to collect this amount, it would appear to be sufficient to recoup the costs of collection. This is the approach favored by some members of the Legislature, including the sponsor of HB 319, and CALL assisted in drafting the language.

So, long story short, the issue of management collection fees being added to the association's lien is still being debated. We are advocating for something to be done. Otherwise, there will continue to be no authority in the statutes for these fees and unscrupulous management firms and collection agencies will continue to charge unlimited amounts.

So I ask you, community leaders, don’t you want the Legislature to address this issue and allow associations to recoup the cost of collection, as long as the amount is limited to prevent abuse?

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The burden is on the association to show that all required steps for adoption of assessments are completed – and documented.

Section 718.112(2), Florida Statutes, sets forth a list of provisions that condominium association bylaws must contain and states that if the bylaws do not contain the listed provisions, they shall be deemed to include them. With regard to procedures for adoption of non emergency special assessments, the statutory requirements set forth in Section 718.112(2)(c), Florida Statutes, are:

• Written notice incorporating an identification of agenda items mailed, delivered, or electronically transmitted to the unit owners (if owners have consented to electronic transmission and the documents so allow) and posted conspicuously on the condominium property not less than 14 days prior to the meeting;
• Evidence of compliance with the 14-day notice by an affidavit executed by the person providing the notice and filed among the official records of the association;
• The notice shall specifically state that assessments will be considered and advise the nature, estimated cost, and description of the purposes for such assessments; and
• Written notice of any special assessment levied by the association must be delivered to each unit owner, including a statement of the specific purpose or purposes of the assessment. (See Section 718.116(10), Florida Statutes).

Notice of meetings at which a proposed annual budget (a non-special assessment) will be considered by the board of directors or unit owners must also be delivered to each unit owner, mailed to each unit owner at the address last furnished to the association by the unit owner, or electronically transmitted to the location furnished by the unit owner for that purpose, and evidence of compliance with these requirements must be documented by an affidavit of the person providing the notice, with the affidavit being filed among the association’s official records. (See Section 718.112(2)(e), Florida Statutes).

Failure to comply with notice requirements in connection with the adoption of a budget or a special assessment, or failure to document compliance, can result in loss of ability to obtain enforcement of the collection of an assessment from a defaulting unit owner.

Evidence of compliance with the requirement of posting and delivery to all unit owners of timely notice of meetings at which association budgets or special assessments will be considered is typically not a problem. While seemingly simple and perfunctory, failure to comply with, and document compliance with these statutory requirements, can cost the association its ability to collect an assessment. It can also result in the expense of having to go through the entire process again in order to correct the procedural deficiency.
 

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In January of this year we asked whether mandatory foreclosure mediation was "Worthwhile or a Waste of Time".   

In late September the Supreme Court of Florida asked a select group of Judges and a Court Administrator to figure out whether the program worked.  Did it reduce the backlog of foreclosure cases?  What can we learn from the program data?  Should it continue or wind down?

The Workgroup received comments about the statewide program from attorneys for borrowers and lenders, lenders, judges, program managers, mediators and the general public.  It reviewed the data and concluded that each circuit should decide whether to continued a managed program or not.   Mediation isn't appropriate in every case, in fact the Palm Beach Post reported that only 14 percent of all eligible borrowers participated, so why continue with a mandate?

Loan servicers were criticized in the Report for refusing to consider anything other than a "narrow range of settlement options" and failing to send representatives that had authority to settle the cases.  After all, loan servicers have an economic incentive not to settle, even though government programs compensated them for successful loan modifications.  The Workgroup made several recommendations including the following:

• allow borrowers to "opt in" to mediation when served with the foreclosure lawsuit (that way lenders/servicers don't have to track down the borrower that won't ultimately participate);
• improve the quality/substance of the financial information supplied by borrowers;
• require the letter to identify the right contact person;
• improve document exchange compliance (with periodic updates);
• consider sanctions for noncompliance (by either party);
• reduce the fees (especially fees to cash-strapped borrowers);
• shorten the time frame to mediate; and
• create better reporting procedures (to evaluate the effectiveness of a voluntary program going forward).

Comments from attorneys that represented borrowers were far more favorable than many others. 

The Report doesn't mention input from community association leaders or managers.  I know from experience that many community associations regularly participated in the foreclosure mediation.  Quite often the community associations reached a favorable settlement with the homeowner when he or she was serious about saving their home, even if a loan modification failed to materialize.  On the other hand, many community associations did not participate in these mediations to avoid the additional expense and time commitment.  

I'd be interested in hearing comments from community leaders that participated in the program.  

 

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The Florida Community Association Journal has featured articles about the Communities of Excellence Award winners over the past year.  All of the finalists showed wonderful initiative.  Its really a pleasure to see community volunteers work side-by-side with management (and staff) to improve their situation and community life.  Many of the associations in the Financial Innovation category suffered major hardships - all of them had significant delinquencies and resulting budget shortfalls.  Improving collections and re-negotiating existing contracts were typical strategies employed by associations to increase revenue and reduce expenses.  The bulk of the finalists took advantage of the 2010 legislative changes that allowed community associations to collect rent directly from tenants when the owners failed to pay assessments.

Two winners stood out for thinking 'outside the box'.  

The Village Walk Homeowners Association in Sarasota investigated the costs of retrofitting/upgrading traditionally powered heating and cooling equipment.  The manager found the costs were comparable to a geothermal system after figuring in the government discount for employing renewable energy resources.  Installing geothermal heating for the two pools paid for itself in 18 months and now the association saves $65,000.00 annually.  The cooling system for the restaurant improved indoor air quality, maintained a far cooler temperature and saves the association 10% on energy costs each year.  The system is more powerful, works better and reduces operating costs all at the same time.

I was at the Communities of Excellence event and honored to present the Trendsetter Award to Central Park at Metrowest.  The board of directors took advantage of a great opportunity and created a "win-win" for the community and local residents.  The association's president learned about a federally funded Back to Work Grant Program.  The association applied to be an employer and was accepted into the program!  The association had the benefit of several employees for 13 weeks - unemployed local residents received a much needed paycheck while Central Park Metrowest received much needed clean up and maintenance work.  This program worked so well that the association participated in a federal summer youth program (also federally funded) the following year.  20 local teens got work experience while the association reduced its vendor expenses.

I think many people would be surprised how much effort it takes to turn a community association around.  Sure, its easy to lament about how 'upside down' you are with your mortgage or to complain about the lack of services and poor appearance of your community when its struggling to make ends meet.  Its much, much harder to pull up your sleeves, figure out what its going to take to improve the community and then implement those initiatives.  It takes dedication and tremendous perseverance to accomplish what these, and other communities, accomplished.  If you haven't participated in the Florida Communities of Excellence program, I highly recommend it - especially if you're thinking that there's no hope for your community.

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Struggling with mortgage payments?  If so, look for information from Fannie Mae before giving up.  The Fannie Mae "Know Your Options" campaign uses TV spots to reach struggling borrowers, encouraging them to visit KnowYourOptions.com and call a toll-free phone number. Fannie Mae volunteers will use the information provided by callers to document and route their cases to Fannie's Mortgage Help Centers or other resources for assistance.

The site contains useful information for homeowners whether you want to stay in your home or not. The site explains options regarding:

1. Refinance
2. Repayment Plan
3. Forbearance
4. Modification
5. Deed-for-LeaseTM
6. Military Forbearance
    

Short sales are addressed.  Fannie explains that a Short Sale is also known as a pre-foreclosure sale.  Selling 'short' means selling your home for less than the balance remaining on the mortgage.  Users can learn whether they qualify for the Home Affordable Foreclosure Alternatives Program (HAFA) which offers short sale and DIL options or other government programs.  Short sales are generally beneficial to community associations.  Past due payments add to association coffers and new homeowners bring life back in to the community.

The site also warns distressed homeowners about possible scams.  HUD-approved housing counseling agencies are available to help you negotiate with your lender or loan servicer. They do NOT charge a fee.  Users are encouraged to call 1-888-995-HOPE (4673) for free housing counseling before signing any documents, diverting mortgage payments or paying for credit counseling services.
 

Community associations suffer when their homeowners are struggling financially.  Not only do assessments fall by the wayside, but there are other impacts. Properties are usually not maintained as well i.e. the lawns grow taller and develop weeds, shrubs and plantings grow out of control (in some cases reducing visibility at intersections and creating 'dark' spots) and roofs become black with mold, all of which decrease property values and home enjoyment.   Hopefully your homeowners can take advantage of some of the options available to improve their financial situation and then pay their assessments!

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With the collection rate being what it is and bank foreclosures taking forever, I understand that Boards do not want to wait any longer than necessary to take action to collect overdue assessments.  Many Boards give management and their attorneys "marching orders" to proceed as quickly and as forcefully as possible and I agree - that is prudent in light of the current economic climate. 

 However, the desire to do something fast should never replace or outweigh the desire to do something right.  Management, legal counsel and the board all need to work as a team.  They need to figure out the best way to handle each situation for the benefit of the community - not run to the courthouse to file a lawsuit in every single case.

Moreover, the team has to do its homework as a team.  You all have to communicate.  The left hand needs to know what's happening with the right hand, especially when it comes to financial matters such as the application of payments made by owners, charges on owners' accounts, levying fines, bankruptcy filings and suspending use rights.

Being quick on the trigger worked against the Wellesley at Lake Clarke Shores Homeowners' Association when the case came under review by the appellate court.  In this case management sent the homeowner a demand letter claiming a certain amount was owed.  The owner responded saying she had canceled checks reflecting payment for that period of time.  The account was turned over to legal counsel which issued another demand letter saying that the first quarter regular assessment and 4 months of special assessment payments were late.  Counsel demanded payment for these assessments, late fees, interest and attorney's fees.  Canceled checks reflecting payment for the first quarter and those specific special assessment installments didn't make the association take a step back and look at the situation.  Instead it filed a claim of lien and foreclosed. 

The owner continued to claim she paid these assessments.  She even paid additional amounts for late fees.  Why did she still owe all this money?  It didn't make sense to her.

In the end it didn't make sense to the Court either.  The trial court calculated the amounts the association claimed were past due.  There was $20,485.08 in total past due assessments.  The owner's records proved she paid the total sum of $20,561.76 to the association for the relevant time period.  The trial court's judgment against the homeowner also included close to $2,000 in interest and late fees in addition to a little over $10,000 in attorney's fees and costs.  After delving into the history of payments and credits deeper, the Court found that this homeowner owed less than $1,000 before the lien was filed and the association didn't even explain how the amounts claimed due on the account were calculated.

The Court almost scolded the association, its management team and counsel by saying:

...the association and its accounting methods were woefully inadequate to correctly ascertain and give notice of the amounts claimed to be due.  Because of this imperfect record keeping, the association did not make a proper claim of lien, nor did it give sufficient notice in its complaint of its claim.  Had it done so, in all likelihood this case would not have even been filed. ...

What can we learn from this case?  Well, of course you must keep accurate records and send accurate disclosures.  There is another very important lesson - if the board took a step back and compared the proof of payments with the assessments due, it would have realized there were simple mistakes made and not escalated the dispute into a full fledged lawsuit. It could have saved money and maintained a better relationship with the owner by working it out before filing.

This case also reminds us to accept partial payments on account.  A previous case held that associations (management company or legal counsel for that matter) cannot refuse payments tendered by unit owners and then continue legal proceedings or foreclosure for the full amount due.

The point is that owners make mistakes from time to time, banks make mistakes from time to time & associations make mistakes from time to time.  Take a step back and think about the association's goals - the goal is to get paid what is owed.  If you can achieve that goal without adversarial action, all the better. 

The decision in this case was just issued on September 7th.  It is therefore subject to rehearing or appeal.

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Budget season for condo/HOA directors may not be as fun as rabbit season is for Elmer Fudd, but both must understand that preparation and regulatory compliance is key.  Elmer must comply with regulations if he wants to take that rabbit home - association directors must comply with budget requirements and procedures if they want the association to successfully collect assessments.

For condo directors:  Does your budget include all the required provisions?  Does it specify the beginning and end date?  Does the budget identify the assessment amount by unit type?  Has the board prepared a current reserve schedule and is that attached (and made part of) the budget?  What notice is required?  We know that Section 718.112(2)(e), Florida Statutes says 14 days notice is required, but do your community documents create additional obligations?  Do you have to give the members the opportunity to vote on the budget - that's not typical but some community documents leave that power to the members rather than the board.  How do you handle costs associated with limited common elements in the budget?

For HOA directors:  Are your budgets in the same exact format as condo association budgets?  Do you mail the proposed budget with notice of the budget meeting?  Do you send it out to the members afterwards?  What about reserve accounts - does your association have statutory reserves, non-statutory reserves and do you know the difference?  Does it contain the appropriate disclosures?

Association leaders also have to contend with year end financial reporting requirements as well.  Do you need an audit?  Are there enough funds in the budget to pay for an audit?  How can you make sure your financial reports will be produced in a timely manner?  How do you distribute the financial reports or do you have to at all (there are options in the statutes)?

The Division of Florida Condominiums, Timeshares and Mobile Homes publishes a very helpful manual.  While the manual is geared toward condominiums, HOA directors may find the information useful this budget season.  Click here for Budgets & Reserves Made Easy.

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One of the Federal housing programs benefiting low-income renters is commonly referred to as "Section 8" which is rental subsidy, limiting the monthly rent payment for the person qualifying for the program.   If someone qualifies for the program, the federal government pays for a portion of the rent and the tenant pays the rest.  The program coordinator evaluates whether the rental payment sought by the owner of the property is appropriate (fair market).  In most cases the bulk of the payment is made by the government entity (usually administered by a local housing authority) directly to the owner of the leased property.  Many types of properties house tenants that participate in the Section 8 program - condominiums and houses within homeowners associations are no exception. 

The Florida community association laws allow the association to demand rent paid by a tenant if the owner fails to pay assessments.  What if the actual tenant only pays a nominal sum since he or she participates in this rental subsidy program?  Does that mean the association can only collect a hundred dollars (+/-) when the rent may be closer to a thousand dollars?  Does the housing authority continue to pay the bulk of the rent to the delinquent owner? 

A homeowners association in Palm Beach County did not accept the nominal payment from the actual tenant at face value.  It obtained a Court Order directing the housing authority to divert the Section 8 rent subsidy payments from the owner to the association. Wptv (news channel 5) featured a story on this issue (below):

The owner of a property used in connection with a rental subsidy signs a contract with the local housing authority.  That Housing Assistance Payments Contract (HAP) imposes conditions on the owner - one of which is to maintain the property.  The housing authority is entitled to cancel or terminate the contract upon breach by the owner.  

Questions remain whether forcing the housing authority to divert rental payments to an association will result in termination of the contract.  However, this association certainly benefits from the immediate payments. Perhaps its time for HUD to modify the HAP and/or to promulgate rules allowing the housing authority to comply with the Florida community association laws, especially considering the fact that the tenant hasn't violated the terms or conditions of the program. 

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A case recently issued by the 3rd District Court of Appeal confirms unit owner obligations to pay validly adopted assessments. The Court in Coral Way Condominium Investments, Inc. v. 21/22 Condominium Association, Inc., recited two important statements, one of which was made by the Florida Supreme Court in 1994 in the Ocean Trail Unit Association, Inc. v. Mead, case. Unit owners must understand the following pronouncements:

Avoidance of the payment of a valid assessment, however, is not a remedy available to unit owners to cure unauthorized acts by officers or directors of an association.

A unit owner’s duty to pay assessments is conditional solely on whether the unit owner holds title to the condominium unit and whether the assessment conforms to the Declaration of Condominium and By-Laws of the Association, which are authorized by Chapter 718, Florida Statutes.

Coral Way owned several condominium units in the 21/22 Condominium. It challenged both the need and the validity of a special assessment levied by the Board of Directors. Coral Way claimed that it had evidence that the association paid for items that were not common expenses. It alleged that the association paid legal fees that were not incurred by the association. It also contended that the financial records did not reflect a lump sum payment made to the association in connection with a roof top lease. This unit owner took the position that a special assessment would not have been necessary and the association would have had the funds to accomplish the repairs identified if it accounted for the income associated with the rooftop lease or spent money for non-association expenses.

This issue comes up quite often. I mentioned in the Can Complaints about Association Operations Become a Defense Against Foreclosure post that owners often refuse to pay assessments when they feel the association neglects the property, manages ineffectively or wastes association funds. The case mentioned in that post concerned a set-off. While the facts that support a claim for set-off may be exactly the same as those in a claim for a Breach of Fiduciary Duty, the legal issues are quite different. The 4th District of Appeal made it perfectly clear that even if the Board of Directors breached their fiduciary duties, Coral Way still had to pay legally adopted assessments. Since the association followed the proper procedures and the assessment was to pay for a legitimate repair, Coral Way could not avoid its obligation to pay, even if it was later entitled to reimbursement as a result of wrongful use of association funds or accounting irregularities.

The bottom line result here is very important for unit owners to understand. The association’s obligation to maintain the property and otherwise fulfill its fiduciary duties is completely separate and independent of your obligation to pay validly adopted assessments (pursuant to a budget or a special assessment, as the case may be).
 

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We have discussed bankruptcy issues over the years.  Desperate association leaders sometimes come to a conclusion that going bankrupt is the only way to resolve outstanding debt while continuing to operate the property.  Please refer to the following posts - they explain pros and con's of bankruptcy as well as some of the mechanics of the process:

Bankruptcy An Option for Financially Distressed Condos and HOAs:  At Least Five Community Associations in Florida have filed for Bankruptcy Protection and Relief. Reorganization through Bankruptcy Allows Communities to Restructure Obligations and Reduce Debt.

Q&A: Condominium and Homeowners Association Bankruptcy:  The Maison Grande and other bankruptcy filings by community associations have spurred interest in reorganization of debt. Is bankruptcy an option for your cash strapped community? What issues do you need to consider?

The Spa at Sunset Isles Condominium Association, Inc. filed for bankruptcy protection in the summer of 2010.  The condominium was created by conversion of an existing property during the heyday of the real estate market.  Units sold in 2006 and 2007 for $250,000.

Not surprisingly, a few years later the association was not in a position to pay its expenses as a result of a number of delinquencies.  Close to half of the units were facing foreclosure by mortgagees and those owners weren't paying assessments.  The average mortgage debt associated with these units was over $200,000, but the units were only worth about $50,000 at that point.  Mortgage foreclosure cases seemed to be taking a long time to process - too long.  A good percentage of the cases were pending for close to 3 years and most of them were uncontested.  The lenders were authorized to continue these mortgage foreclosures by the bankruptcy court - so there should have only been a 2-3 month delay.  Were the lenders purposely dragging out the foreclosures in order to delay taking title to the properties?

If you're a regular reader of this blog you know that the association cannot force the lender to pay assessments until they acquire title as we explained in Association's Options to Push Bank Foreclosures Are Still Viable Despite Tadmore & Coral Key.   However, the rules change in bankruptcy.  Bankruptcy is federal law and this Court found that bankruptcy laws control over conflicting state laws.  That was good news to the association - it meant it could ask the Court to require the unit mortgagees to pay the association under a provision in the bankruptcy code that requires secured creditors to contribute to costs associated with preserving collateral.  Both units and common elements served as collateral for the mortgages.  Since association expenses were necessary and appropriate to preserve that collateral, the Court said it was appropriate to charge those lenders with expenses, regardless of the status of the mortgage foreclosure case. 

This is an interesting ruling but it doesn't mean that filing for bankruptcy protection is a good option for your association.  Bankruptcy is only appropriate in extreme cases and can only accomplish so much.  Read the links in this post to learn what considerations must be taken into account.  

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YES - says the Fourth District Court of Appeal.

The housing market crisis that led to the massive wave of foreclosures forced thousands and thousands of people to find a new profession or line of work.  Real estate agents and mortgage brokers were out of work and many had to re-position themselves in the new economic reality.  Attorneys did so as well.  Many attorneys lost their real estate and bank related business and therefore turned to other areas of the law. 

It takes less than a second to find about 18,600,000 results for "foreclosure defense attorney" on Google.  Many of these attorneys are excellent - discovering the 'robo-signers', false or forged documentation and other illegal or just bad practices on the part of lenders, mortgage servicers and/or certain law firms.   However, more is not always better when it comes to handling lawsuits, especially in the eyes of the overburdened Judges.

The Fourth District Court of Appeal recently upheld an award of attorney's fees, costs and sanctions against a law firm in an amount over thirty-eight thousand ($38,000.00) dollars.  The Court found Section 57.105, Florida Statutes applied to attorneys representing borrowers in foreclosure cases if 1. actions taken in the lawsuit were shown to be for the primary purpose of delaying the case (allowing the borrower to stay in the home without paying) and 2. the attorney knew or should have known those actions were not supported by the material facts of the case.

Here's what happened in this case - the bank filed a foreclosure lawsuit against the borrowers.  The borrowers hired an attorney/law firm to represent them in the case.  The attorney filed documentation with the Court claiming that the bank violated certain aspects of the Federal Truth in Lending Act.  The bank responded with proof it did comply with the Federal Truth in Lending Act, demanding a retraction.   The Judge was not happy about this situation obviously and, after various hearings, issued an order requiring payment of the bank's attorney's fees, costs and sanctions for the delay.  The appellate Court affirmed the ruling.

While this case involved a bank, the same issues often arise in cases filed by condominium or homeowners associations.  The Courts are awarding sanctions in favor of community associations when lenders or debtors use the system to delay a case when they know their position doesn't have merit. 

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Condominium and community association owners are apparently taking advantage of the old adage"the best defense is a good offense".

There seems to be a new trend - not a good one - where owners file lawsuits as a result of the amount claimed by the association as due on an estoppel certificate. Condo and HOA laws require the association to issue an estoppel certificate or statement indicating what is due and owing with respect to the property in connection with a sale or other transfer.  In most cases the new owner must pay for any delinquency accrued on the account.  The former & current owner are jointly and severally liable for the overdue balance.  However, the law does not prevent the new owner from seeking reimbursement from the seller/former owner. Consequently, in practically all voluntary sales (including short sales or distressed sales), the title company or other agent handling the transaction will request an estoppel certificate from the association and ensure those amounts are paid in connection with the closing. In some cases the buyer and seller negotiate for the buyer to take over installment payments of a special assessment, but most of the time the title insurer (and attorneys) will insist on payment of all outstanding obligations.

First mortgagees acquiring title as a result of foreclosure (or deed in lieu of foreclosure) are entitled to a “safe haven” – they are not responsible for all past due amounts, just the lesser of 12 months of assessments or 1% of the original mortgage amount, with limited exceptions.
Associations that acquire title were also subject to this joint and several liability but that has changed as a result of HB 1195 somewhat. The new law states:

An association, or its successor or assignee, that acquires title to a unit through foreclosure if its lien for assessments is not liable for any unpaid assessments, late fees, interest, or reasonable attorney’s fees and costs that came due before the association’s acquisition of title in favor if any other association … which holds a superior lien interest on the unit.
 

Over the past year or two I have learned about many lawsuits filed by new owners when the association tried to collect amounts it arguably wasn’t entitled to collect. In some of the cases first mortgagees were billed for late fees for the entire duration of the delinquency, attorney’s fees incurred by the association in connection with the bank's foreclosure and a host of other charges that became due before the Certificate of Title (in addition to the 12 months or 1%).  In other cases, buyers or mortgagees were billed for the entire delinquency on the account, even if the association was the previous owner.  Kate Berry, in an article for American Banker, explained that mortgage servicers typically will not front the funds to pay HOA/condo dues and expenses even though the Freddie Mac and Fannie Mae require the servicer to pay until the property is sold.

These lawsuits haven’t made their way through the appellate courts, so we don’t have precedent to rely upon yet. Nonetheless, it is my hope that this ‘trend’ will prompt association boards to have frank and open discussions with counsel regarding the appropriate amount to bill new owners for past-due balances, to minimize the risk of a lawsuit and avoid the time, expense and effort necessary to defend a lawsuit.
 

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Community leaders struggle with budget shortfalls every day.  What if there was something you could do when owners fall behind in maintenance payments, mortgages and other expenses?  Do you agree that a six month reprieve from mortgage payments can enable homeowners to bring their account with the association current?  If so, you need to learn about the financial assistance available.

The state received close to a billion dollars in federal funds to help struggling homeowners fend off foreclosure.  The program, administered by the Florida Housing Finance Corp., is designed to provide homeowners with some "breathing room" by giving them a temporary break on mortgage payments.  By raising awareness of the program and offering assistance to qualified applicants, community leaders can help improve residents' financial situations while improving the association's financial condition at the same time.

Eligibility Criteria:  Applicants must be eligible to receive assistance.  Help is limited to those Floridians that are unemployed or under-employed, not those suffering financial hardships as a result of divorce, disability or death of one of the borrowers.  An applicant ...

• Must be a Florida resident;
• Must occupy property as primary residence (the property cannot be vacant, abandoned or rented);
• Borrower/co-borrower must be unemployed or underemployed through no fault of his/her own, which makes the first mortgage unaffordable;
• Must have documented total household income at or below 140% of the area median income (AMI), adjusted for household size;
• Must have an active checking/savings account that can be debited by the ACH method of funds transfer;
• May not have unencumbered assets of $5,000 or more, or three times the current monthly mortgage payment (whichever is greater);
• Cannot have a bankruptcy that has not been discharged or dismissed; and
• Cannot have been convicted of a mortgage-related felony in the last 10 years.

Click HERE for frequently asked questions and answers about the Hardest-Hit Fund.  TheFlorida Housing Finance Agency hopes to assist close to 40,000 people with this program - wouldn't you like your owners to take advantage of this opportunity, especially if that will help them catch up on delinquent assessments?

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One of the principles I learned when I first became a member of this Law Firm has now been called into question, at least somewhat, by a new ruling issued by the Fourth District Court of Appeal. 

I initially learned that the obligation of the association to maintain and care for the property is completely independent of and not contingent upon the obligation on the part of the owners to pay assessments.  I also learned that, conversely, the obligation to pay assessments (pursuant to a properly levied budget or properly levied special assessment) was likewise independent of and not contingent upon claims that the Association failed to maintain the property or otherwise failed to meet expectations.

Associations have become embroiled in litigation over the past several years.  Many times the response to a foreclosure lawsuit comes in the form of an attack against the board. Nonpaying owners have tried to justify their actions due to claims of neglect of the property, inefficient management or wasteful spending.  In the past those claims were not considered a proper defense in the foreclosure case.  The owner may, in fact, have a viable claim against the association (however, in many cases there is a non-actionable difference of opinion) and those claims would need separate consideration by the Court, but those allegations would not serve as an excuse for non-payment.

Recently the appellate court overturned a summary judgment ruling in favor of an association.  The ruling in E. Qualcom Corp. v. Global Commerce Center Association, Inc. is not final yet.  If the ruling becomes final then associations may have to jump through another hoop and avoid another obstacle to collect delinquent assessments.

Qualcom owned a unit in a commercial condominium and stopped paying assessments.  One of its defenses to the association's foreclosure included a claim for set-off.  The owner alleged that the association's failure to fix the roof led to damages to its property and loss of revenue.  The owner claimed it should be entitled to a reduction (or set-off) in the amount owed based on its losses.  How many times have you heard something similar?

The appellate court found it was improper to grant a summary judgment for the association in light of these unrefuted allegations.  The court said the association should have been required to refute these allegations or to show that the defense was legally insufficient.  What is odd is that prior case law found those types of defenses (the lobby isn't clean, the pool is shut down, there is water leaking into my unit) legally insufficient.

I'm sure community leaders and managers would agree that associations already face too many obstacles.  Let's hope this case does not create an additional one.

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I promised an update on the Master Association Blocks Owners from Pool and Recreational Facilities post when a result became known.   A Palm Beach County Circuit Court Judge ruled yesterday that the Master Association governing the Quail Run community was not entitled to suspend use of the recreational facilities by all of the owners in one of the condominiums within the community.  The Court found that Section 718.303, Florida Statutes did not allow the Master Association to suspend the use rights of the compliant, paying owners, due to delinquencies on the part of a few.  Part of the Order says:

"The statute requires that each delinquent member be treated singularly as the Court finds that the statute does not provide that a member who is current in his or her obligations be penalized for payment failure of another member who is delinquent."

Since this is an interim Order in a Circuit Court case, it does not have precedential value, meaning it does not rule over other cases.  However, the ruling reflects one Judge's interpretation of the law.  Thus, community leaders are encouraged to discuss the authority to suspend use rights for an entire subdivision as well as the possible consequences of that action with counsel.

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Over 40% of the Home Loans Issued in Two Major Florida Cities in February are Government-Insured FHA Loans. 

The marketability of the homes in your community is highly dependent upon the availability of mortgage financing.  We've included several posts on this site regarding purchase money financing issues over the past 2 years, including reporting on the changes to federal underwriting guidelines. Since mortgage financing (or lack thereof) severely impacts community association operations, Community Associations Institute (CAI) announced it is "stepping up its Congressional and federal regulatory advocacy on behalf of American homeowners, home buyers and common-interest communities."   CAI issued a statement on behalf of its 30,000 members that included the following quote:

"The stakes for homeowners, home buyers and communities are enormous,” says CAI Chief Executive Officer Thomas M. Skiba, CAE. “Rules being developed today may likely govern mortgages for the next several decades. If you live in an association or work in the community association industry, you need to understand the magnitude of these issues, keep abreast of the latest developments and weigh in when such opportunities are available.”  

You can learn more about CAI's new initiative at Mortgage Matters.

The mortgage crisis is also evident by comparing the percentages of FHA backed home loans.  FHA project approval has proven to be a significant factor in home sales. DataQuick Information Systems reports the following increases in Florida:

The future of GSE (Government Sponsored Enterprise) financing is also up-in-the air.  However, Fannie Mae announced an incentive program it says will help stabilize communities.  Purchasers of Fannie-Mae owned HomePath properties are eligible for financial assistance to help pay up to 3.5% of the closing costs.  Fannie Mae-owned HomePath properties are listed on HomePath.com and most listings include detailed property descriptions, photographs, information about local schools and more.

Proactive community leaders have taken steps to ensure their communities are approved for favorable purchase financing.  You may want to discuss project approval or certification with your community association attorney.

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Most community association leaders are familiar with the fact that they have to hold off on collection activities (such as sending further demand letters, filing a lien or prosecuting the association's foreclosure case) when an owner files for bankruptcy protection. 

One important protection offered by the bankruptcy law gives the debtor "time to catch his/her breath" by stopping any and all actions by creditors against that debtor.  This "time out" is known as the automatic stay.  Creditors (whether secured or unsecured) cannot initiate or continue any actions designed to collect the debt included in the bankruptcy petition.  The creditor cannot begin or continue action with respect to:

1. lawsuits,
2. efforts to gain control of the debtor's property, 
3. perfecting or enforcing a lien, or
4. efforts to set-off the debt.

2010 changes to the condominium and homeowners' association acts gave boards of directors additional enforcement tools, including the right to suspend use of recreational facilities when the owner's debt is more than ninety (90) days past due.  The association can suspend use rights by corporate action in compliance with the procedures set forth in the applicable statute,  without filing any pleading or lawsuit in court, filing a petition for arbitration with the state or filing a Claim of Lien securing debt. 

So, the question becomes: can the association suspend use rights if the owner filed bankruptcy?  At least one bankruptcy Court said "no". 

An association in Miami suspended an owner's internet service and deactivated the key fob (or other entry device) for recreational amenities at the condominium pursuant to Section 718.303, Florida Statutes.  The owner immediately filed an Emergency Motion for Contempt in the bankruptcy court, claiming this action violated the automatic stay.  The Court agreed.  It held that suspension of privileges to use common areas was "in effect an act of coercion to compel the debtors to pay the past due association assessments".  The Court ordered the association to reinstate all privileges forthwith.

Associations need to consult with counsel to protect their rights as creditors in bankruptcy cases.  The association can participate in the bankruptcy proceeding to ensure the amounts claimed are correct and in some cases ask the court for permission to proceed with collection activities, especially if the debtor does not reside in the property. 

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Mediation is an effective way to resolve disputes. Florida Courts require the parties to a lawsuit to attempt to settle the dispute at mediation before the trial starts.  There are many benefits to mediation - it is private, the proceedings are confidential, if successful it reduces the costs to each side of the case and enables the parties to "think outside the box".  The mediator is a neutral third party (in Florida they must be licensed) that facilitates the discussion and helps the parties explore alternative ways of resolving their dispute.   In short, mediation has a lot of benefits and I highly recommend it for the vast majority of cases.

The Florida Supreme Court mandated mediation for all circuit court residential mortgage foreclosure cases involving homestead property.  The Florida Supreme Court initiated a task force review of foreclosure cases in 2009 and the findings were not surprising, at least not to community association board members dealing with delinquencies.  The task force recommended mediation to manage "the massive volume of residential mortgage foreclosure cases".   

Mediation increases costs for the mortgagee (at least $750 for the program plus attorney's fees), delays the process and may actually work against the borrower that participates in the program in the long run.

First, the program coordinator must contact the borrower.  The borrowers typically don't respond, so a second notice is sent and sometimes even a third notice is sent.  That all takes time.  Once contact is established the borrower must meet with an approved mortgage foreclosure counselor, that takes more time.  Then the borrower must assemble and provide certain financial information to the mediation program coordinator before mediation will be scheduled. 

"Pro-se" borrowers (borrowers without legal counsel) often are not aware they may request documents from the mortgagee, such as:

• Evidence it owns and holds the note and mortgage sued upon;
• An account history showing the application of all payments by the borrower during the life of the loan;
• The mortgagee's determination of present net value of the mortgage loan; and
• The most current appraisal of the property.

A reporter for the Palm Beach Post found foreclosure mediation only had a 6% success rate.  The article quotes a report indicating program coordinators established contact with less than half of the borrowers that qualified for the program.  Less than half of those borrowers actually participated in mediation.  All of this must take place before the Court will act on any notice for trial, motion for default final judgment, or motion for summary judgment filed in the case. 

Fannie Mae recently announced its plan for pre-litigation mediation in Florida.  Fannie Mae requires mortgage servicers to refer delinquent mortgage loans to one of its approved attorneys along with contact information for a primary liaison/team that can make decisions regarding loan modifications or other avenues for resolution of the delinquency.  If the circumstances meet Fannie Mae's mediation requirements, the servicer must offer mediation to the borrower.  It can fine servicers for failing to comply with the program.

Will pre-litigation mediation speed up the foreclosure process or produce even longer delays?  Its hard to predict, but borrowers that have encountered difficulties contacting anyone at the lender or mortgage servicer now at least have another chance to save their home or negotiate a solution.

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By Adam Cervera

Almost every association has been through it. A deadbeat unit owner has stopped paying their mortgage and the lender brings a foreclosure action against them to enforce the note and mortgage. Not surprisingly, this same owner stops paying his maintenance fees to the association and the association finds itself stuck between a rock and a hard place: bring its own foreclosure action and attempt to obtain title, knowing that ultimately the lender will recapture this title from association as a superior lien holder, or wait for the bank to finish its foreclosure action and hope the new owner begins to pay all future maintenance fees.

For those associations opting for the latter option, a great deal of frustration arises when they see just how long it takes for the average bank foreclosure lawsuit to reach its resolution. While under the Tadmore decision an association can no longer force a lender to pay monthly maintenance fees while its case is pending, since they are not the “legal” owner of the property, all hope is not lost.

Associations have rights when mortgagees foreclose. Don’t let these mortgage foreclosures drag on and on and on ….

Ask for a Case Management Conference. This gives the association’s attorney the opportunity to request hard deadlines in the case. Judges can enter Orders requiring summary judgment motions filed and hearings set within a short period of time, generally 30 days or less. Summary judgment is key because once this is granted, the case is essentially over and all that is left to be done is to sell the property.

With the order on the case management conference in hand, the association now has a powerful tool in its arsenal that can only lead to positive results. If the lender’s attorney complies with the order, the final judgment clears the way for the property to be sold. If not, the door is wide open for the association to seek and recover sanctions against the lender for the delay.

Bank attorneys are often unable (or possibly unwilling?) to comply with scheduling orders. Judges hate when parties do not follow their orders and are often very quick to sanction or fine those plaintiffs. Sanctions can range from a one-time lump sum payment all the way up to daily fines that accrue every day until they take action. In short, associations can finally have the upper hand when a bank drags its feet in violation of a court order.

In Miami-Dade County alone, Becker & Poliakoff has collected several thousands of dollars in sanctions for associations who have filed motions against dilatory lenders and their slow moving counsel.

This is crucial - if an association finds itself in a situation where a lender’s case is in a standstill, set a case management conference as soon as possible. It is important to authorize counsel to act fast once the initial case management conference order deadline expires. Judges around the state are becoming more sympathetic to associations that get caught in the middle of lender foreclosure cases that go on forever. 

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Community Leaders Can Reduce Condo & HOA  Budgets by Taking Advantage of Rebate and Incentive Programs. 

We have included various money-saving tips for associations on this blog over the past two years.  The case studies show how some associations trimmed up to $100,000 annually as a result of changed practices - especially through use of Florida Friendly Landscaping and irrigation changes.  This month's Florida Community Association Journal contains several examples of money-saving initiatives on the part of community associations.   Madeira Beach Yacht Club saved close to $20,000 per year on waste removal as a result of its recycling program.  The La Playa Condominium on Longboat Key installed solar panels to heat the pool.  It will "make back" the initial cost of installation in the first two years.  The owners in the Tower Residences in Coconut Grove save approximately 18% per month on electric bills by replacing lighting.  All of these communities are saving money and yours can too if the Board takes the right steps.  Many utility companies offer evaluations, rebates and incentives.  Here are a few:

Florida Power and Light (FPL) offers the following opportunities:

•Free Business Energy Evaluations provide comprehensive analysis of facility energy use and recommendations for cost-effective energy efficiency improvements.

•Building Envelope rebates include window treatments ($0.50-$1.00 per sf), ceiling insulation ($0.10-$0.15 per sf) and reflective roof measures ($0.45 per sq. ft.). Projects must be approved in advance in order to qualify for incentives.

•FPL's Interior Building programs provide incentives for efficient lighting (e.g., rebates of 65 cents to $4 for each linear fluorescent lamp), a variety of HVAC and chiller equipment, thermal energy storage, refrigeration and water heating equipment. Installations must be approved in advance.

Progress Energy offers financial incentives and services for a wide variety of energy efficiency measures and equipment upgrades in existing buildings and new construction including HVAC, motors, lighting, cool roofs, green roofs, roof, thermal energy storage, and window films. The utility also provides cost-shared services for existing buildings including ceiling insulation upgrades, duct check and repair, rooftop air conditioner recommissioning and PTAC/PTHP coil steam-cleaning when walk-through audits suggest these measures.

Through its Energy for Life program, Florida Public Utilities offers free energy audits and project design assistance as well as financial incentives for indoor lighting efficiency retrofits ($100 per kW reduced).

Tampa Electric Company (TECO) offers financial incentives for a range of energy-efficient equipment from lighting and air conditioning (including chillers) to heat pump water heaters and motors, as well as for envelope improvements such as duct repair, insulation and window film. TECO also offers free basic energy audits and very low-cost comprehensive energy audits (for facilities of greater than 100,000 sf or with peak demand over 500 kW) to evaluate facility energy use and opportunities for energy efficiency improvements.

There are so many options for associations to trim expenses by reducing energy use and conserving water its impossible to list them all.  I encourage you to discuss your particular situation with counsel - you may be surprised by what you hear.

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A Ruling in Favor of the Matanzas Shores Owners Association Will Help Your Community Push Mortgage Foreclosure Cases to Sale.  Do Not Allow the Lender to Stall the Sale in Order to Avoid Paying Assessments and Maintaining the Property.

LR5A-JV v. Little House LLC, Fifth District Court of Appeal, Case No. 5D09-3857

The lender named Matanzas Shores as a defendant in order to foreclose the Association's liens.  The Association's lien is subordinate to a first mortgage - with the exception of the 'safe harbor' payments required by the Condominium and Homeowners' Associations Acts (which is also referred to a the 'super-lien' provision).  The Court entered Final Judgment of foreclosure against the property in 2008. 

The Association didn't want to wait around for lender to act - so its counsel filed a Motion to Schedule the Sale.  The lender objected - claiming it was entitled to set the sale and if it wanted to wait that was its choice.  This is the issue that went up on appeal. 

The Association argued:

1. The Court has the authority to schedule the sale pursuant to §45.031, Florida Statutes;
2. Since foreclosure cases involve the equity jurisdiction of the Court, the Court should consider the interests of all of the parties to the case when setting the sale date; and
3. Since the Supreme Court's Task Force on Residential Foreclosures recognized that Associations suffer when foreclosures take longer than they should, the Court can and should facilitate prompt resolution of these cases when possible.

The Lender objected - still claiming it, as the plaintiff in the case, had control over the process.  The Lender also argued that even if the Court did have authority to schedule the sale, doing so at the Association's request was an abuse of discretion.  The Appellate Court completely rejected the lender's arguments.

The Task Force report prompted the Supreme Court of Florida to Issue New Foreclosure Rules.  One of those rules created a new procedure and form for use to change the sale date initially set by the clerk.  This new form is called the Motion to Cancel and Reschedule Foreclosure Sale.   Associations need the property to be sold to start collecting assessments from the new owner going forward.  This new form requires the lender to explain why it wants to cancel the sale.  It also directs the Court to set a new sale date, rather than keeping properties in an "extended limbo between final judgment and sale". [Quote from Task Force]

What Will the Lender Pay?

Counsel for the Association fears that the dispute between the lender and the Association is far from over.  The statutes require the lender to pay assessments upon acquisition of title.  Well, here the Court said that the sale should have taken place in 2008.  Should the Association be penalized for the gap between the initial sale date and the date the sale actually occurs?  Should the lender pay assessments for the two plus years it took to appeal?  We may hear more about this case in the future.

This ruling brings welcome relief to many Associations throughout the state.  If your community is waiting for the Court to re-schedule a sale or waiting for a lender to ask the Court to schedule a sale, wait no longer.  Speak to your counsel about filing a Motion to Set the Sale.  Along those lines, if your community is waiting for a lender to set its summary judgment hearing or re-schedule its summary judgment hearing - speak to counsel.  You have options to push these cases to conclusion - take advantage of them!

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Conflicts of interest, or at least claims of conflict of Interest are in the news lately.  The Sun-Sentinel ran an article entitled "Property Managers Make Money Off Condo's Insurance" on Sunday.  It says some of the property management companies are affiliated with insurance agencies that procure property insurance.  If the board of directors selects the products or insurance package recommended by the management company, in some cases the agency will share the commission.  Commissions can run into the tens of thousands of dollars per policy.  Critics argue that this financial incentive skews management's recommendations.  Community association board members often look to and rely upon the expertise of their managers/management companies when making significant decisions.   

The Department of Financial Services, Division of Agent and Agency Services is considering rules prohibiting "unlawful inducements" in connection with property insurance.  The rule, if adopted, would prohibit:

• Paying, crediting, allowing, or giving, or offering to pay, credit, allow, or give, directly or indirectly, an inducement to the purchase of insurance.
• Facilitating any discount, reduction, credit, or paying any portion of any premium, fee or cost of underwriting, policy fee, or claim cost.
• Facilitating any discount, reduction, credit, or paying any fee or portion of the cost of an inspection, inspection report, appraisal, or survey, including wind inspection. 
• Bringing about any discount, reduction, credit, or paying any portion of the premium or any portion of the cost of premium financing.
• Making possible any lowered, credited, or discounted commission.
•  Providing membership in any organization, society, association, guild, union, alliance or club at a discount, reduced rate, or at no cost.
•  Making or offering to make a charitable or other tax-deductible contribution on behalf of the purchaser.
•  Providing or offering stocks, bonds, securities, property, or any dividend or profit accruing or to accrue thereon.
•  Providing or offering employment in exchange for the purchase of insurance.

Some of these are obviously problematic, but "business as usual" in many industries. 

Is it wrong to contribute to charities or non-profit organizations when your client supports those efforts?  Is it wrong to obtain discounts on behalf of your clients?  Isn't that one of the factors that plays a part in deciding which agent (or any service provider for that matter) to use?  If the agent has access to discounts that are not available to other agents, doesn't that benefit the association?  Same with reducing the commission - the premium goes down if the agent will agree to accept less of a commission from the insurance carrier.  How does that harm the association?

On the other hand, do the board members (and unit or home owners) know of this financial incentive?  Are they able to compare 'apples to apples' quotes for products and services?  Do they know they have options when it comes to financing insurance premiums?  Is the association getting the best rate for the financing?

Disclosure here is key.  Board members need to ask those tough questions and carefully review different proposals.  Insurance is a major part of an association's budget.  If the board is not sure, hiring a consultant to compare packages and prices is well worth the expense  - it could even save your association money in the long run if there are changes in coverage necessary or appropriate under the circumstances.

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Squatters Occupying Abandoned Homes May Have Claim Against Owners While Authorities Charge Adverse Possession Filers With Fraud.

A company called Helping Hands Properties, Inc. claimed 48 properties in Broward, including a $1 million house in Coral Springs.   Another, Saving Florida Homes, Inc. filed notice in official county records that it was taking possession of 100 homes in Broward and three in Palm Beach County - up to 10 properties were claimed in just one day.   The company owners say that taking possession of dilapidated properties improve the neighborhood.  Authorities say they are just trespassing and stealing.  Are these companies just manipulating the system for their own benefit or are they performing a public service?  What can you do if this happens in your neighborhood?

Adverse Possession - What is it?

Florida statutes address adverse possession - a process to obtain title without buying a property.  To acquire title by adverse possession, such possession must be adverse, hostile, open or notorious, exclusive and uninterrupted, for seven years.

There are two types of adverse possession. Adverse possession under "color of law" (§95.16, Florida Statutes) means the possessor’s ownership claim is based upon a written document in the county public records. Adverse possession without "color of law"(§95.18, Florida Statutes) means there is no recorded document purportedly creating ownership.

To claim adverse possession under color of law, the document (deed, etc.) does not have to be valid. However, the possessor must have accepted the instrument in the honest belief that it conveyed ownership. Possession means that the property has actually been used or enclosed. 

Adverse possession without color of law is not based on any recorded document, but mere use of the property is not enough to claim ownership or entitlement. The possessor must pay the property taxes and installments of all special improvement liens levied against the property by the state, county and city. The additional requirement of tax payments not only evidences the possessor claims ownership, but places the record owner on notice that property taxes are being paid by someone else. That gives the record owner an opportunity to investigate and take action.

Remember - possession must be open, notorious and hostile to claim adverse possession. Permissive use, like when you allow kids to play soccer, use motorbikes or camp on the property, means the possession is not adverse.  

In a New York Times article, one of the company owners explained he allowed tenants to fix up the property instead of paying rent.  Strategic defaults create plenty of opportunities to seize abandoned homes.  Letters sent to property owners and banks notifying them of the plan to take over the home were reportedly ignored.  He now faces up to 15 years in prison.

This tactic can pose problems for community associations.  More and more community associations have acquired title to homes as a result of foreclosures.  Those associations must monitor the use of the property and file eviction actions to remove unauthorized occupants to avoid claims of adverse possession.  The same is true for bank-owned properties.  A lender may not be aware of the actual use or condition of the home, especially if its not actively marketed for sale.  The association needs to remain cognizant of the actual use and take action to verify whether that use complies with the governing documents.  Ignoring use violations creates even further problems, especially when the association tries to take action much, much later.

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SB 1196 made significant changes to the statutes regarding year-end financial reporting requirements for condominium and homeowners' associations. 

Condominium Associations

Condominium associations must provide their members with a year-end financial report (or notice that a report is available, free of charge) within 120 days of the end of the fiscal year. The level of required financial report depends upon the association’s annual revenues.

• Associations with revenues of more than $400,000.00 must produce an audit.
• Associations with revenues of $200,000.00 to $400,000.00 must produce a review.
• Associations with revenues of $100,000.00 to $200,000.00 must produce a compilation.
• Associations with revenues of less than $100,000.00 must produce a report of cash receipts and expenditures. 

However, if the condominium has less than 75 units, the law merely requires a report of cash receipts and expenditures, regardless of the association's annual revenue.  While the unit owners may vote to reduce the level of financial reporting, it is worthwhile to discuss the benefits of each level of review with your accountant.

Section 718.111(13), Florida Statutes directs the Division of Florida Condominiums, Timeshares and Mobile Homes to adopt rules setting forth uniform accounting principles and standards.  The 2010 changes require those rules to set standards for reporting a summary of association reserves.  Communities that reserve on a line-item basis (straight line method) will need to include a good faith estimate disclosing the annual amount of reserve funds that would be necessary for full funding once the Division adopts rules.  Condominium associations should therefore engage in some due diligence when preparing reserve schedules.  A reserve study is always a good idea as it not only provides the basis for the annual reserve schedule, but will also identify the projects requiring priority attention.

Homeowners' Associations

Section 720.303(6), Florida Statutes, part of the Florida Homeowners’ Association Act,  has been amended regarding budgets and reserves, but those changes likewise impact the year-end financial reports.   The 2010 changes distinguish between "statutory" and "non-statutory" reserves.  There are different disclosures required, depending on the type of reserves established.

HOAs that do not include "statutory"  reserve schedules and funding for those reserves in their annual budgets must include the following disclosure in the year-end financial statements:

THE BUDGET OF THE ASSOCIATION DOES NOT PROVIDE FOR RESERVE ACCOUNTS FOR CAPITAL EXPENDITURES AND DEFERRED MAINTENANCE THAT MAY RESULT IN SPECIAL ASSESSMENTS. OWNERS MAY ELECT TO PROVIDE FOR RESERVE ACCOUNTS PURSUANT TO SECTION 720.303(6), FLORIDA STATUTES, UPON OBTAINING THE APPROVAL OF A MAJORITY OF THE TOTAL VOTING INTERESTS OF THE ASSOCIATION BY VOTE OF THE MEMBERS AT A MEETING OR BY WRITTEN CONSENT.

HOAs that include "non-statutory" reserve funding in their annual budgets must include the following disclosure in the year-end financial statements:

THE BUDGET OF THE ASSOCIATION PROVIDES FOR LIMITED VOLUNTARY DEFERRED EXPENDITURE ACCOUNTS, INCLUDING CAPITAL EXPENDITURES AND DEFERRED MAINTENANCE, SUBJECT TO LIMITS ON FUNDING CONTAINED IN OUR GOVERNING DOCUMENTS. BECAUSE THE OWNERS HAVE NOT ELECTED TO PROVIDE FOR RESERVE ACCOUNTS PURSUANT TO SECTION 720.303(6), FLORIDA STATUTES, THESE FUNDS ARE NOT SUBJECT TO THE RESTRICTIONS ON USE OF SUCH FUNDS SET FORTH IN THAT STATUTE, NOR ARE RESERVES CALCULATED IN ACCORDANCE WITH THAT STATUTE.

Confused yet?  Well, if you are you'll be interested in the Community Association Officers Forum.  Broward, Miami-Dade and Palm Beach Colleges, in a partnership with Edison State College, is providing free board member training to address these and other issues. Four three-hour sessions include topics of interest to new and experienced board members and, as a bonus, each session has one hour of the newly state-mandated training.
 

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In nearly every case where a first mortgage of record exists on a property, the association's lien is subordinate or inferior to that mortgage. This means if an association elects to foreclose its lien and takes title to the property, it will take title subject to the right of the first mortgagee to foreclose its mortgage.  Associations in the past were reluctant to foreclose when the mortgagee already commenced its own foreclosure action or when the value of the property did not exceed the amount of debt secured by the first mortgage.  That's changing now.  
 
Associations are now making the decision to foreclose more often under these circumstances. The primary reason for this is serious delay in the prosecution of the mortgagee's foreclosure case. These delays are brought on by a variety of factors including the sheer volume of cases handled by the mortgagee's law firm, protracted efforts to work with the borrower either to short sale the property or modify the loan, problems associated with serving necessary parties with the foreclosure complaint or locating original documents that are to be filed with the court, back log in the courts and even strategic decisions by mortgagees to slow down the process.
 
In some cases, associations can obtain favorable results when foreclosing, even against properties that have fair market values below their mortgaged amount.  Sometimes the homeowner has the means to pay the association but  has elected to spend money on other concerns.  Because foreclosure results in the owner losing title to the property, if the owner has the means to pay and does not desire to walk away, they pay rather than lose title.  Foreclsoure can be a powerful deterrent for owners who have the means to pay but elect not to or to pay late because they hear others doing the same.  Another option is the association's right to rent the property once it takes title, if permitted by the association's governing documents.  For some associations, the rental market is favorable and significant income can be recovered before the mortgagee forecloses and takes title.   
 
Many times the owner cannot or will not pay and rental is not a viable option. However, associations still make the decision to foreclose for any number of reasons. Because so many mortgage foreclosures are being contested by owners raising defenses unique to the mortgage foreclosure action, and thus stalling the mortgage foreclosure case for months or even years, the association can effectively render those defenses moot as they relate to the mortgagee's foreclosure by foreclosing the association's lien.  When the owner is divested of title by the association, the owner will drop or lose the fight against the lender in the mortgage foreclosure action, thus paving the way for the lender to take title and begin paying assessments.  Another option for associations taking title is negotiating a short sale with the lender or tendering a deed in lieu of foreclosure to the lender.  I have also filed motions in mortgage foreclosure actions notifying the court that the association has taken title and does not contest the mortgagee's foreclosure, therefore, speeding up the lender's acquisition of title.  These associations understand the key is getting a paying owner into the property sooner rather than later.  That way, more in terms of future assessments are recovered rather than lost while a mortgage foreclosure lingers on for years and no one pays the assessments.
 
What every association should consider is each case is different and the association is well served if it carefully considers all of its options and selects a strategy that works best in any given case.  In this ever changing environment, there is no one size fits all approach.

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In the wake of Attorney General investigations, self-imposed lender moratoriums on foreclosures and a mounting back up of pending mortgage foreclosure cases, community associations are searching for alternatives to waiting out the storm. It was once the norm that associations would take a wait and see approach when an owner delinquent in the payment of assessments was also facing a mortgage foreclosure. Particularly, in this economy when the amount due on the mortgage exceeds the fair market value of the property. However, now it is too often that associations are left withering on the vine while the mortgage foreclosure action goes on for months or even years.

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You may have heard that several major lending institutions, including Bank of America, GMAC and JP Morgan Chase, are putting foreclosures on hold in Florida. Our Attorney General joined other states to investigate mortgage foreclosures throughout the country. We expect other lenders and mortgage servicing companies to make similar announcements in the near future.
 
Why? Well recent news reports that the people signing thousands of affidavits in court proceedings did so without verifying ownership of the loan and the amounts due. They reportedly did not review original documentation or have any personal knowledge of the facts alleged in the affidavits. Some representatives have reportedly signed 8,000 to 10,000 affidavits a month. The lenders and/or mortgage servicers need to review and assess whether these foreclosures and filings comply with state laws.
 
Although it is uncertain how much delay these current reviews will add to the foreclosure process, most experts believe it is only delaying the inevitable. We believe it will take thirty to sixty days for the companies to perform an internal review. This is not good news for Florida's community associations. Various research outlets currently list the average length of the foreclosure process in Florida between 14 and 17 months. Some foreclosures are taking much longer.
 
Community associations must recognize their rights as a party in these actions. Community leaders cannot sit back and wait for the banks to figure out what they are going to do next. The Florida Rules of Civil Procedure govern these cases in litigation - the banks (and bank attorneys) have to follow the rules and if they do not, they can be made to suffer the consequences. Courts have imposed significant sanctions against banks and their law firms for failing to abide by court orders regarding the prosecution of foreclosure cases.

Certainly, the overwhelming number of foreclosures filed in Florida is challenging the resources of the courts, but boards that wait and simply ride out the storm can lose out on valuable rights (and dollars) for their communities. There are alternatives to simply waiting out the bank foreclosure which, if successful, can help move the process along.  However, these alternatives must evaluated on a case by case basis and in consultation with your association's counsel.

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Has Your Cable Provider Offered to Pay a Lump-Sum Fee for Exclusive Marketing or Access Rights? 

Many of my clients have been approached by cable operators with a request for an access agreement or marketing agreement.  Many times these are exclusive agreements, although in my recent experience the provider has limited the exclusivity portions to on-site marketing to residents.  Many times these agreements contain references to voice, video and data services or simply broadband services, without a specific explanation of what those services entail.  Clients are thrilled with the up front lump-sum payment.  

Other types of service providers are also offering community associations, especially large community associations, lump-sum "loyalty" payments in connection with a renewal or extension of the contract.

Those payments can mean tens of thousands of dollars added to the association's coffer to pay past-due bills, maintenance projects and other community expenditures.  Wow - doesn't that sound wonderful?  Who wouldn't want to take advantage of these opportunities?  Money, when you were going to renew a contract anyway?  Money, just for allowing a company to access your community or to hand out flyers every now and then? 

We can thank Milton Friedman for reminding us "there is no such thing as a free lunch".   The money isn't free - there are corresponding obligations of the association in these agreements which, if violated or not performed, subject the association to liability for damages.

Here are just a sampling of the issues to consider:

1. Term/Length of Agreement:  Will this technology change?  Will your community be stuck with a provider for what seems like forever when dozens of new companies have entered the market and those have better services for better prices?   
2. Easement vs. License:  An easement is generally a non-revocable interest in land - it is a valuable property right.  A license, on the other hand, is revocable and allows use without conveyance of property rights.  Does your community have the authority to grant an easement?  Over what property exactly?
3. Exclusivity:  The association is prohibited by law from entering into certain kinds of exclusive contracts.
4. Marketing Rights:  What exactly does the Association have to do to comply?  Does it have to distribute flyers door-to-door by hand?  Who's going to do that?  Do you have to allow the company to go door-to-door?  What about your non-solicitation rules?  What about your security?  
5. Prohibit Unauthorized Use:  Most of the bulk-contracts contain a provision requiring the association to prohibit unauthorized use of the service.  Let's take cable for example - is the association going to inspect each unit or home and turn on every t.v. to determine whether the resident has access to channels outside his/her subscription agreement?  Is the association even permitted to undertake this action?

These and other factors must be taken into consideration before entering into any agreement.  If your community is approached with this offer, please consult your attorney.

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• Can your association collect rent from tenants? 
• Can your association disable a key fob or entry device if an owner doesn't pay?
• High-rise building owners - are you familiar with changes to the fire sprinkler retrofit laws?
• Do your community documents give mortgagees a free ride after foreclosure?

We will answer these questions and more at Ironstone Bank on Tuesday, October 5, 2010 from 5:00 to 7:00 P.M. where I will discuss the 2010 Legislative Changes Impacting Condominium and Homeowners' Associations.

• Have you neglected major projects because of the economy?
• Do your common areas need updating?
• Would your residents enjoy new amenities?

 The presentation will also cover Capital Improvement Loans for Long Term Savings.  Interest rates have never been lower and many contractors are idle  - now just may be the perfect time to tackle that unsightly parking lot and entrance, update amenities and other projects.

The presentation is free and refreshments will be served.  To RSVP contact Rachael Chao at 954-771-6948 or rachael.chao@ironstone.com.

 Location:  Ironstone Bank, 6555 North Federal Highway, Fort Lauderdale

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Is your Association Leaving Money on the Table?

Bank foreclosures continue to be an impediment to collection of unpaid assessments in many communities.  Sure, after the 2010 legislation became effective, community associations are entitled to collect either 1% of the original mortgage debt or 12 months worth of assessments from the mortgagee (whichever is less), but what about the rest of the balance?  Does it disappear into thin air?

Because a bank foreclosure will usually directly impact the ability to successfully lien and foreclose, communities must be aware of other alternatives to collect unpaid assessments.

Strategic Defaults - According to Wikipedia:

A strategic default is the decision by a borrower to stop making payments (i.e. default) on a debt despite having the financial ability to make the payments.

While many owners who lose their units in foreclosure cannot pay, it is important to remember that a unit owner is personally liable for all unpaid assessments that are left when a bank forecloses.  The Association may seek to collect the balance on the account from the former owner.  More and more, people who do have assets make choices to abandon properties because there is no equity.  If there is a possibility that an owner has assets to satisfy a judgment, a community should consider taking action against a former member to collect those unpaid assessments.

Many associations are thinking short-term instead of long-term when they decide to forgo pursuing a money judgment for the balance between what a lender pays if it takes title as a result of foreclosure and the outstanding obligations on the account. Yes, there are costs involved. If the association doesn't have a lawsuit pending, it needs to file a lawsuit. There are attorneys fees, filing fees, costs associated with service of process, etc. If the association already has its lawsuit pending, most of those costs have already been absorbed - so why not wait for the bank to foreclose (and pay its statutory obligation), then continue to pursue the balance against the former owner? A judgment is recorded in the county and with the State's registry; it is initially valid for 10 years and can be renewed for another 10 years. During that time if the debtor desires to buy another property, obtain financing for purchase of a vehicle, college, etc., the judgment will appear.

While the debtor/former owner may not have sufficient cash-flow right now, who knows what the future will bring? If the debtor has significant assets in another state, the association can even take the extra step of domesticating the judgment in another state and pursue collection efforts there.

Asset Searches Can Be Helpful in the Decision Making Process

An asset search may help discover assets. It is more difficult (sometimes almost impossible) to collect from a corporate unit owner or a foreign person.  Nonetheless, your community should consider its options after a bank foreclosure - you may be leaving money on the table.

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Community Leaders Can Challenge Property Tax Assessments With Board Resolution.

Hasn't the real estate market changed in the last few years?  Owners and Board Members long for the days of escalating prices when everyone paid maintenance fees and even if they didn't, there was plenty of equity in the property to satisfy delinquencies after or in connection with a foreclosure. 

That has all changed.  Revenue is down and so are property values.  Shouldn't you pay less?  Of course you should and probably do - property appraisers have been adjusting values, but are the new numbers realistic?  Both the multi-family and single family home values fell dramatically - now is the time to establish a lower base assessment for yourselves and your owners.

How?  Pursuant to Section 194.011(3), Florida Statutes, condominium, cooperative and homeowners associations can file a joint petition.   The relevant portion of the statute says:

A condominium association, cooperative association, or any homeowners' association as defined in s. 723.075, with approval of its board of administration or directors, may file with the value adjustment board a single joint petition on behalf of any association members who own parcels of property which the property appraiser determines are substantially similar with respect to location, proximity to amenities, number of rooms, living area, and condition. The condominium association, cooperative association, or homeowners' association as defined in s. 723.075 shall provide the unit owners with notice of its intent to petition the value adjustment board and shall provide at least 20 days for a unit owner to elect, in writing, that his or her unit not be included in the petition.
 

Thus, once the Board of Directors passes a resolution it may file the tax appeal petition with the Value Adjustment Board.  The Value Adjustment Board will appoint a Special Magistrate to conduct a hearing to determine whether the market value of the property set forth on the TRIM notice was higher than the actual market value on January 1 of this year.

The collective power of the association is useful in the appeals process.  First, the per property fee for filing is less.  The fee may be paid by the Association, in fact §718.111(3), Florida Statutes and §720.303(1), Florida Statutes specifically authorizes the association to protest ad valorem taxes for the common facilities.  The common elements and facilities are nominally valued for tax purposes, since the actual value is included in the value of the homes/units. 

Factors to Consider in a Protest:

• Part of the property may qualify for an exemption
• Foreclosure & delinquency rates
• Structural or storm damage / construction work limiting use of the property
• Changes in the surrounding area i.e. blocked views from new construction
• Increased property insurance costs
• Changes in use - chinese drywall & other limitations on use

Each unit or home owner is given the opportunity to opt-out of the appeal if they want to pursue an appeal on their own or just don't want to participate.

Use professionals to assist in the tax appeal process.  A professional should know how to craft the appeal, can determine whether any exemptions apply and understands the process - all to present your case in the most favorable light. 

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Community leaders should understand the financial wherewithal of the associations they lead.  Unit and Home Owners also have rights to review financial records.  It seems like we hear about theft of association funds more and more these days.  Simply leaving finances in the hands of a manager, bookkeeper or treasurer is not enough.  For some practical ideas how to stay "in the know", please see the following article published by HOAleader:

Five Questions to Ask Your Manager about Your Homeowner Association's Finances

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SB 1196 Includes New Remedies for Collecting Money Owed to Associations.

Community leaders and managers have complained for years about investor owner delinquencies.  Why should the owner continue to collect rent from his or her tenant without paying maintenance fees and/or assessments?  Sure, both the Condominium and Homeowners Acts allowed the association to apply to the Court to request the appointment of a rent-receiver, but to take advantage of that provision it had to file the foreclosure lawsuit.  The law requires notices to the delinquent owner, preparation and recording of the claim of lien, filing and serving the foreclosure lawsuit - all before the association could ask the Judge for authorization to collect rent.  It could take several months to obtain the appropriate Court Order - all while the account remains delinquent. In some cases the tenant moves out before the association has the chance to collect any rent.  Of course there are costs and expenses involved with that whole process. 

Recently (as reported on this blog in Condo Receiver Helps Collect Assessments; Q&A: Condo Receivers; Collecting Rent from Tenants; Q&A: Collecting Rent from Tenants (revisited) ) the Courts have extended the law to allow 'blanket receiverships' for all units subject to foreclosure - and even more recently some Orders were entered authorizing the receiver to collect rent from tenants occupying units even before the association filed for foreclosure.

Well, in response to those cries for help the legislature included a 'self-help' procedure for associations.  The first paragraph of this portion of the new law says:

If the unit is occupied by a tenant and the unit owner is delinquent in paying any monetary obligation due to the association, the association may make a written demand that the tenant pay the future monetary obligations related to the condominium unit to the association, and the tenant must make such payment. The demand is continuing in nature and, upon demand, the tenant must pay the monetary obligations to the association until the association releases the tenant or the tenant discontinues tenancy in the unit. The association must mail written notice to the unit owner of the association’s demand that the tenant make payments to the association. The association shall, upon request, provide the tenant with written receipts for payments made. A tenant who acts in good faith in response to a written demand from an association is immune from any claim from the unit owner.
 

 The Association must follow a specific procedure to collect rent from tenants.  There are some pitfalls to avoid.  Its a good idea to discuss these issues with counsel or allow counsel to send the demands on your behalf. 

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A number of bills CALL tracked this session were sent to Governor Crist recently.  He has until June 1, 2010 to act (veto or sign) on the following bills:

• SB 1196, Relating to Community Associations
• HB 663, Relating to Building Safety
• HB 713, Relating to Department of Business and Professional Regulation
• HB 1035, Relating to Elevator Safety
• HB 1411, Relating to Timeshare Foreclosures

We've included bullet point summaries of SB 1196 on this blog, but refer you to the actual text of the bill for more complete information.  Community Update will outline the impact of important bills on community associations - Becker & Poliakoff''s association clients will receive the electronic version shortly.

The Governor's office is in the process of reviewing SB 1964.  We've included concerns about this bill before in Condos/HOAs Have a Lot to Lose if Design Professional Protection Bills Become Law.  In 1999, the Florida Supreme Court codified a long standing principle that design professionals should be held accountable for economic loss damages that they cause just like other professionals in Florida. Board certified construction law attorney Steve Lesser said the following:

[Design professionals] have an obligation to design to meet code and protect the health, life & safety concerns of consumers.  An error in design judgment can be devastating to a unit owner and homeowners that cause damages and in fact- economic damages.  An elevator that fails to operate at the appropriate speeds and breaks down results in loss of use which is an economic loss.  Imagine how this could impact elderly unit owners.  A parking garage that is not properly shored up based on engineering calculations can result in economic loss.  These consumers are largely lay persons that often sign agreements (presented by the professional) that contain limitation of liability clauses. 
 

Please contact the Governor's office to express your support or opposition to 2010 legislation.  Make your voices heard in Tallahassee. 

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Today is Earth Day - so I'm re-posting some information about energy efficiency, waste and water reduction improvements or techniques that have saved building owners money as well as information about the $1.7 million in savings Fannie Mae enjoyed by employing "green" practices.

Condominium Associations can reduce their energy consumption costs by installing renewable energy devices and are in a position to possibly create a new revenue stream. Condominium Associations are uniquely positioned to take advantage of these rebates, cost saving techniques and possible new revenue streams as a result of Section 718.113(8), Florida Statues, which provides:

"Notwithstanding the provisions of this section or the governing documents of a condominium or a multicondominium association, the board of administration may, without any requirement for approval of the unit owners, install upon or within the common elements or association property solar collectors, clotheslines, or other energy-efficient devices based on renewable resources for the benefit of the unit owners."

HOAs have many options available to reduce annual budgets.  There are plenty of examples of the “business case” for simple retrofits and changes in practices.

FBI Field Office, Chicago, Illinois:

Total improvements and modifications lowered operating costs by more than $400,000.00 annually. How many of us would reject a 400% return on an investment?

USAA Realty Company: 
Spending $140,000 resulted in $71,000 annual savings.

Adobe Towers / Multiple Hi-Rise Buildings:
Major improvements cost initially over $1 million, but rebates reduced those costs by approximately $300,000 (net cost $700,000) and the annual savings of $900,000 increased the value of the building by over $10 million!

Can your community afford not to reduce its future expenses? 

 Fannie Mae's data center saves an average of $340,000 per year in operating expenses as a result of the use of energy efficient systems and sustainable landscaping practices.

Can your community benefit from some changes?  Some changes are easy and very affordable.  Please let us know if your community is interested in an evaluation of the property for this purpose and please share what your community has done to reduce its expenses.

We will post more information concerning Florida-friendly landscaping and water conservation methods to continue examples of how community associations can save money by embracing new ideas. 

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Fourth District Court of Appeal Rules that Lender Cannot be Compelled to Pay Assessments Prior to Acquisition of Title.

Deutsche Bank National Trust v. Coral Key Condominium Association (at Carolina), Inc. and Luna, Opinion April 14, 2010.

An earlier post discussed the Third District's appellate ruling in the U.S. Bank National Ass'n v. Tadmore case which held that the Court cannot require a lender to pay condominium assessments before its completes its foreclosure case and obtains a Certificate of Title or otherwise acquires title to the unit.  The Fourth District ruled the same way in a case involving the Coral Key Condominium Association.  The ruling is hot off the press, so its not final yet.  If anything changes we will report it on this site.

Do these rulings mean the Association is powerless when a bank is foreclosing against a property within the community?  No - not at all.

The Motion to Compel filed in both cases asked the Court to require the lender to pay assessments immediately, reportedly since the mortgage foreclosure cases were taking so long.  The Associations supported their request for relief upon notions of equity and fairness.  Sure, it is unfair.  The Association has to insure the property, pay for common utilities, pay for maintenance and repair of the property, etc. all while the unit owner isn't paying assessments.  The lender derives a benefit from the Association's actions - its collateral is preserved and insured at the expense of all the paying unit owners. But, as my Dad used to say, life just isn't fair sometimes.

That doesn't mean Association's are without options when a bank is foreclosing against a property in the community, especially when there is a feeling that the bank is 'dragging its feet'.  The Florida Rules of Civil Procedure allow the Courts to establish deadlines or schedules for certain actions to take place.  Any party is entitled to request a case management conference at which the judge may (among other things):

• Set deadlines for service of motions, pleadings or other papers;
• Limit, schedule, order or expedite discovery;
• Require preliminary stipulations to narrow the issues; and
• Set a date for trial.

Any party to the case can advise the Court that the case is ready for trial.  Basically, once the pleadings are closed (all motions concerning the pleadings have been resolved or withdrawn or 20 days after the last pleading is served), the case is eligible for placement on the Court's trial calendar.   

The Court has the power to award sanctions against a party that fails to comply with its scheduling orders and our Firm has had success showing that the lack of action on the part of the bank (and/or its counsel) justified sanctions.  

That is not to imply that every bank in every case has done something wrong, even if the case takes what seems to be an extraordinarily long time. There are legitimate reasons that a foreclosure case can be on 'hold'  Owners/borrowers may be trying to modify their mortgages, there may be an offer for a short sale on the property, and/or a bankruptcy filing may prevent the bank from moving forward, etc.   You know, there is a pretty big load on the Courts right now as well.

Nonetheless, we have learned that some lenders deliberately allow some foreclosure cases to linger for various reasons.  Those are the cases that Associations should address - first with the lender (actually, lender's counsel) and then with the Court.  It is important to discuss your options in each of the cases involving property in your community with counsel.  The board can't be expected to make reasonable strategy decisions unless it is fully advised.

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Lenders Cannot Ignore Foreclosure Cases With Impunity. 

Becker & Poliakoff Attorney Scott Petersen obtains second court ruling requiring a lender and its attorneys to pay an association for failure to proceed with its foreclosure action and failure to obey Court Orders.

The Manatee Observer published an article yesterday notifying its readers that action on the part of a community association can achieve good results in bank foreclosure cases.  The Bank of New York was recently ordered to pay a condominium association over Thirteen Thousand ($13,000) Dollars in sanctions, representing assessments that accrued during the stalled foreclosure case.

In the most recent case, Mr. Petersen filed a Motion to Compel after six (6) months of little or no activity in a bank foreclosure case.  The Court granted the Motion and entered an Order requiring the bank to proceed.  Later on the Court found that the bank did not show 'good cause' why it disobeyed the earlier ruling.  The association incurred attorney's fees and costs for attendance at hearings, writing several letters demanding compliance and additional motions, including the Motion for Contempt - all sent without any response from the bank or its counsel.  It took almost four (4) months for the bank's attorney to acknowledge the motions, letters and rulings.  Another three (3) months went by before the bank filed any responses with the Court.

The responses were apparently too little too late.  The Court granted the association's Motion for Contempt and awarded attorney's fees to the association.

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Court Rules in Favor of Condominium Association After Lender Fails to Move Foreclosure Proceedings Along or Comply With Court Orders.   

On Feb. 8, 2007, the Bank of New York filed a mortgage foreclosure lawsuit against a unit owner, naming the Moorings at Edgewater Condominium Association, Inc. as an additional defendant in the case.  The defaulting unit owner filed for bankruptcy on May 1, 2007, which resulted in an automatic stay of the foreclosure lawsuit.  The unit owner surrendered the property and was discharged from bankruptcy several months later.  The lender waited almost a year from the bankruptcy discharge to file its Motion for Summary Judgment, but never set that Motion for hearing, leaving the association in limbo.

Becoming quite frustrated as a result of the delay, the association hired Attorney Scott Petersen of Becker & Poliakoff's Sarasota office, who filed a Motion to Compel as a result of the delay.  The Court granted the association's Motion and Ordered the bank to move its mortgage foreclosure case along on or before June 29, 2009.  Remember, the unit owner surrendered the property, did not reside in the unit and did not contest the mortgage foreclosure action. 

After Bank failed to obey the Court’s Order, Attorney Peterson scheduled a hearing on an Order to Show Cause for September 24, 2009.  The lender attempted to file a Notice of Voluntary Dismissal to avoid the Show Cause hearing.  The Court ultimately granted the Order to Show Cause, ruling that the bank must pay regular and special assessments as a result of the inordinate delay.

After two months of non-payment, Attorney Petersen filed a Motion for Contempt when the Bank's attorney did not respond to correspondence.  The Bank argued the following as justification for its delay:

1. Owner’s bankruptcy;
2. Difficulties in service of process;
3. Countrywide’s Consent Judgment - implying the parties (owner and lender) were engaged in the loss mitigation process;  and
4. the Court’s Order of May 29, 2009 was illegal pursuant to F.S. 718.116 and the U.S. Bank v. Tadmore case.

The association countered with the following arguments:

1. The Owner’s bankruptcy case was discharged in 2007 and did not cause a 3-year delay;
2. The Affidavits of Service showed that service was attempted during an 8-day stretch from March 1-8, 2007 and then again on April 23, 2007, all of which were unsuccessful. The next attempt at service was June 12, 2008, which was successful, but there was no explanation for the intervening delay;
3. Countrywide’s Consent Judgment was filed Nov. 10, 2008, more than a year after the property was surrendered in bankruptcy and didn't even apply since the borrower (unit owner) abandoned the property; and (among other things)
4. The facts of this case were so egregious that sanctions were appropriate.

This victory for the association shows community leaders cannot sit back and wait for the bank to foreclose.  Moreover, there are many steps that proactive leaders can take now to guard against future delinquencies and to improve the association's position.

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Representative Bogdanoff Explains Amendments in CS/CS/HB 561 at Becker & Poliakoff's Leadership Seminar.  Representative Sachs announces she will "continue to fight for fairness in foreclosures". 

Over 450 volunteer board members, professional community association managers and industry representatives listened intently to Representative Bogdanoff on Saturday at the Kravis Center during the Becker & Poliakoff Leadership Seminar.  They were pleased to hear that CS/CS/HB 561 includes provisions that would:

• delay enforcement of code mandated elevator improvements (specifically ASME 17.1 and 17.3) in condominiums or cooperatives where the Certificate of Occupancy was issued on or prior to July 1, 2008, for five (5) years or until the elevator is replaced or requires major modification (whichever happens first);
• eliminate any requirement for condominiums or cooperatives that are less than four (4) stories and has exterior corridors to install a manual fire alarm as required by §9.6 of the Life Safety Code (as adopted by the Florida Fire Prevention Code);
• clarify that in a condominium association with more than 10 units, co-owners of a unit cannot serve on the board together unless they own more than one unit and are not co-occupants of a unit;
• require board members to certify (in writing) that they have read the laws and governing documents, will work to uphold the documents and policies and faithfully discharge their fiduciary responsibilities (or submit a certificate of satisfactory completion of approved educational curriculum), failing which they are automatically disqualified from service;
• allow high-rise condominium and cooperative associations to vote to completely avoid any obligation to retrofit the buildings with a fire sprinkler system or engineered life safety system and extend the deadline for others to 2019; and
• authorize bulk contracts for communication services, information services or internet services.

Stay tuned for more legislative updates direct from Tallahassee as these (and other) changes are likely to substantially impact community association operations.

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A reader recently posed the following inquiry:

I am interested in your thoughts about Fee Simple Communities foreclosing on properties and working with the banks to accept a short sale. As President of a small community (65 units) HOA, we have foreclosed on 3 units and soon to be 5. All but one have a mortgage and all 4 mortgages are above the value of the property. The banks are not accepting short sale offers without involvement from the mortgagor which in cases in close to impossible. Three of the banks are in foreclosure with the longest process exceeding 3 years. Motions to compel are denied and we are looking for creative ways to speed this process and begin to collect from a new homeowner or at least get my 1%/12.

This situation is becoming more and more prevalent throughout the State. Attorney Kevin Miller provides the following comments:

A motion for case management conference can be a useful tool on behalf of any association involved in a mortgage foreclosure action. In this motion, the association's counsel asks the court to establish reasonable deadlines to bring the case to conclusion, ultimately resulting in a foreclosure sale whereby either the mortgagee or another party will take title to the property. In instances where the association has already foreclosed and taken title to the property, and the mortgagee has filed its own foreclosure, the association may be able to simply consent and stipulate to a judgment and either bring about a sale or transfer of title much sooner. Particularly when the foreclosing party plaintiff is the mortgagee and the defendant owner is the association, and there are no other parties to the action. 
 

What about the 'short sale' option?  

The U.S. Treasury announced new federal guidelines that give lenders a 10-day limit in which to respond to short sale purchase offers. These rules may provide much needed relief, as the Sun-Sentinel reported approximately 40% of South Florida homeowners owe more than the property is worth.  The rules also provide financial incentives for both sellers and lenders.

Is the Association really entitled to any payment from a first mortgagee when the it forecloses its mortgage after the Association has foreclosed its claim of lien?

Remember, the statutes provide for joint and several liability with the previous owner (with the exception of the safe harbor provisions for first mortgagees).  Thus, once the Association takes title to a unit or home after completing a lien foreclosure case, it technically becomes liable for the debt of the previous owner and cannot necessarily seek to collect that debt from a subsequent owner, even if the subsequent owner is a mortgagee.  Any subsequent owner (mortgagee or otherwise) bears responsibility for payment of all assessments from and after the date title is acquired.

We will address additional options in further posts, including the benefits and detriments to renting the properties acquired as a result of foreclosure.  Stay tuned.
 

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Amendments to the Florida Rules of Civil Procedure Largely Derived From Recommendations of the Task Force on Residential Mortgage Foreclosure Cases.

Some of the changes are as follows:

Verification of Mortgage Foreclosure Complaints:  This requires the Plaintiff (lender) to attest to the truthfulness of the allegations in the complaint.  It is intended to minimize erroneous filings, conserve judicial resources by reducing the number of cases with "lost note" issues and provide the court with greater authority to sanction lenders that make false allegations.

Changes the Affidavit of Diligent Search:  When the defendants cannot be served personally, the law allows the foreclosure case to proceed after publication of a notice.  This new form requires the person that conducted the search to sign the Affidavit (instead of the lender) and to provide more information about the search.

New Form - Motion to Cancel and Reschedule Foreclosure Sale:  Associations wait and wait for a lender to foreclose and then wait for the sale to bill the new owner (whether lender or third party) for the appropriate amount.  More importantly, Associations need the property to be sold to start collecting assessments from the new owner going forward.  The number of sales canceled at the last minute seems to be on the rise.  This new form requires the lender to explain why they want to cancel the sale.  It also directs the Court to set a new sale date, rather than keeping properties in an "extended limbo between final judgment and sale". [Quote from Task Force]

There are some slight changes to the Final Judgment of Foreclosure that weren't published before so interested persons have sixty (60) days to comment before they become final.  All of the other changes are final and in effect.

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First, a quick note of introduction. As stated above, my name is Travis Moore and for the last number of years I have had the privilege of advocating for the interests of CALL members before Florida's policy makers. This includes the Governor's Office and Executive Branch Agencies such as the Department of Business and Regulation which is charged with condominium oversight and the state Legislature. While decisions are being made in Tallahassee and around the state, it is vitally important the voice of each CALL member is heard by those holding sway over the deliberations. I am pleased to be a part of your team by pointing your megaphone in the most effective direction and being your eyes and ears as the debate affecting our community takes place.

Probably THE hot button issue facing community associations in Florida is mortgage foreclosures and the statutory limit of lender liability for assessments. The association is left maintaining the asset  - the burden on the backs of the units not in foreclosure, but many sliding that way. This added burden is just buttering the slope.

Up until recently, the lending lobby has offered no workable solutions. Now, they are circulating draft legislation creating a non-judicial foreclosure process. To date, no bill has been filed but we suspect it will and CALL will quickly analyze it and get it circulated for your input. Already, we are reviewing the draft so be looking for a CALL Alert soon.

As in any proposal to address this true crisis for associations, there are certain criteria which we will insist on. Obviously it must address the associations' ability to have owners and lenders meet their financial obligations to the association. What is rightfully owed to the association for maintaining the real estate must be paid.  It must be paid as quickly as possible. One of the main issues currently being faced by associations is the length of time it is taking for the property to be foreclosed, while the hard cap of 6 months (COA) and 12 months (HOA) is keeping the lenders' liability unreasonably low. 

It is imperative that any foreclosure process, including a non-judicial one, not put the entire process and timetable under the control of the lender.  The lenders have the most to gain by delay...a cap and avoidance of paying full assessments upon taking title...while leaving associations even further at their "mercy."

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Bankruptcy Court Finds "the Unit Owners are Not a Bottomless Well, From which Water May be Drawn Eternally With No Consequences" and Grants Maison Grande's Motion to Reject Unexpired Lease.

 As I mentioned in July in Bankruptcy An Option for Finally Distressed Condos & HOAs, the 99 year lease for certain recreational and parking facilities placed the most stress on Maison Grande Condominium Association's finances.   Owners of the 502 units in the oceanfront condominium enjoyed the use of the pool, the pool deck and the parking spots leased to the association, but simply could not keep up with the increasing rent, taxes, insurance and maintenance of these amenities.

Rent for the leased parcel in 1971 was $20,160 per month ($241,920 per year).  Now the association is required to pay $112,241 per month ($1,346,903 per year), regardless of whether all owners pay assessments on a timely basis.  The association reported that as much as 25% of its members were delinquent in payment of assessments and since many lacked equity in the units, they were also subject to mortgage foreclosure proceedings.

The bankruptcy court found that the decision to pursue bankruptcy and reject the lease was a "sound exercise of the Debtor's business judgment".   The decision contains a very comprehensive explanation of the business judgment rule, along with appropriate citations.

This is not the first time a Condominium Association pursued relief in the bankruptcy court.  In 1984 the court approved rejection of a 99-year lease, indicating that "the Court will not second guess the business judgment of [the] ... Board of Directors unless there is a showing that their judgment is clearly erroneous".  In re Condo. Ass'n of Plaza Towers South, Inc., 43 B.R. 18,22 (Bankr. S.D. Fla. 1984). 

The Order is apparently being appealed.  The parties in the case are expected to submit written argument and a hearing is scheduled for March 16th.

Is bankruptcy an option for your struggling association?  For more information please refer to the Questions & Answers previously posted on this site.

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Fannie Mae will Evaluate Whether Hundreds of Condominiums Throughout the State of Florida Qualify for Financing Despite Published Guidelines.

It has been harder and harder to obtain loans to purchase condominiums in the past two years.  Fannie Mae, Freddie Mac and FHA all published eligibility guidelines basically precluding borrowers from obtaining favorable loans to purchase condominiums if:

1. More than 15% of a condo project units are more than 30 days delinquent on HOA dues. This was an existing guideline that is now being applied to new condo projects.
2. Fidelity insurance, ensuring that homeowner association funds are protected, must be in place in adequate amounts. 
3. The  borrower didn't obtain a condo-owners insurance policy unless the master policy provides interior unit coverage; coverage may not be less than 20% of the assessed value. A condo-owners policy, known as an HO-6 policy, covers personal property, personal liability, and the physical unit from the studs and in. Many policies also include special assessment coverage or the option to include a special assessment coverage rider.
4. More than 10% of a project is owned by a single entity.
5. More than 20% of a project consists of non-residential space; or
6. The association didn't have at least 10% of its budgeted income designated for replacement reserves and adequate funds budgeted for the insurance deductible.

However, on January 7, 2010, Fannie Mae announced it has appointed a team of employees to determine whether hundreds of condominium projects in Florida are entitled to relief from these guidelines.

Want to learn more about this new development and what steps your community can take to improve mortgage options?  Then attend the CAI-SEFL Annual Day of Education and Exposition being held on January 30 at the Signature Grand in Davie, Florida where Fannie Mae's Senior Risk Manager, Joseph L. Minnich III, will deliver the keynote address.  For the past six months Mr. Minnich has been working with the Florida Project team to develop a program to provide stability and liquidity to Florida Condominium Projects.  He will explain the process and be available to answer questions.  Don't miss it.

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Appellate Court Reverses Order Requiring Lender to Pay Assessments to Condominium Association.

In U.S. Bank National Association as Trustee for the Benefit of Harborview 2005-10 Trust Fund v. Tadmore, 2009 WL 4281301, 34 FLW D2505 (Fla. 3rd DCA 2009), the Third District Court of Appeal (Miami-Dade and Monroe Counties included) rejected the idea that equity and fairness supports rulings requiring lenders to pay association fees while a foreclosure case is still pending against the unit owner.

Lenders are required to pay up to 1% of the original mortgage debt or 6/12 months worth of assessments to an association after they acquire title to the unit via foreclosure or deed in lieu of foreclosure. Many believe lenders don't want title as they don't want to have the inventory on the books, do not want to absorb the costs of ownership (such as payment of maintenance fees, taxes, insurance, etc.) and do not want the administrative hassles of cleaning/restoring damaged units, marketing the units for sale, etc.  In this case, the unit owner reportedly owed the association close to $100,000 for outstanding maintenance fees and costs. 

In the best cases foreclosures are taking a year to 18 months, when in the past a simple foreclosure could be completed in approximately 9 months.  In some cases the lenders cancel the sale last minute, arguably to prolong the process. To combat these delays and to mitigate losses in revenue, Associations have been asking the Courts for extraordinary relief by filing Motions to Compel and other Motions asking the Court to force the lender to move forward within a certain time frame, failing which, requiring the lender to pay assessments (maintenance fees).  In this case, the condominium association filed its Motion to Compel after the foreclosure case was pending for about a year.  The trial Court granted the Association's motion, ordering the bank to diligently proceed within thirty (30) days or pay monthly maintenance fees.
 

The appellate Court treated the obligation to pay assessments as a sanction and criticized the association for failing to take more traditional means to address delay, such as filing Notices for Trial or to Show Cause, before asking the Court for extraordinary relief.  Finding no basis to require payment, the Court reversed the Order.

Associations still have options available to move mortgage foreclosure cases along though and cannot sit back and wait for lenders to do their part.   There are several legislative proposals filed for consideration in 2010 that address lender liability - we will include information about those proposals on this site in the near future. 

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Appellate Court Allows Owner to Seek Injunctive Relief and Reverses Award of Attorney's Fees and Costs.

In Mitchell v. Beach Club of Hallandale Condominium Association, Inc., 17 So.3d 1265 (Fla. 4th DCA 2009), the Fourth District Court of Appeal ruled that a condominium owner has the right to proceed with a lawsuit aimed at preventing the association from collecting a special assessment.

The association levied an assessment for close to $1.3 million and sought to collect $4,194 from each unit owner.  One of the unit owners objected to the process and filed a lawsuit to prevent the association from collecting the assessment.  The association's attorney filed a motion to dismiss the case and ultimately convinced the trial court to rule in its favor.  The trial court later awarded the association attorney's fees and costs as the 'prevailing party' in the lawsuit.

The appellate court totally disagreed and reversed the trial court ruling.  It found:

1. Mandatory non-binding arbitration pursuant to Section 718.1255, Florida Statutes was not necessary, as the statute itself excludes any disputes relating to the imposition or collection of an assessment;
2. The Court had jurisdiction to address the claim even though the amount of the assessment against this particular owner was less than $5,000, since the owner sought injunctive relief, not any monetary relief; and
3. Injunctive relief was appropriate to prevent or to challenge a violation of the Condominium Act pursuant to Section 718.303, Florida Statutes.

The complaint filed by the owner alleged that the association failed to give proper notice of the meeting, failed to obtain a quorum and it used expired proxies.  Since the special assessment would be invalid if those claims were true, the complaint was sufficient "to warrant a permanent injunction".

This case shows that every association needs to maintain the records necessary to prove it adopted assessments (whether special or annual) properly.  Otherwise it may lose the ability to collect those assessments and create expensive, time consuming and acrimonious legal disputes if some owners pay and others do not.  Thus, records indicating which and how many owners participated in a meeting (in person or by proxy) are important, as is a verifiable registration procedure.  All voting documents, ballots, proxies and sign-in sheets must be retained for at least one (1) year and notices, affidavits or proof of mailing and the minutes of those meetings retained for seven (7) years. 

Please contact us if your association needs assistance creating a records retention policy or procedures governing unit owner inspection and photocopying of official records.

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As promised in my last post, today we are continuing our discussion on borrowing money with a focus on things to look out for and the types of documents involved.

First, the Association should never pledge its real property as security for the loan. It should also not use its reserves to collateralize the loan. It can however secure the loan with the Association’s regular assessments and only in limited circumstances by special assessments. Again, limitations in the governing documents may apply such that involvement of the Association’s counsel is highly recommended to ensure all elements of the loan are within those guidelines.

Second, there are two primary documents involved in the borrowing of money by an Association, an Agreement and a Promissory Note. The Agreement provides the definitions which apply to the loan including language regarding assessments and collateral. It may also discuss:

• how the proceeds are to be used;
• provides insurance requirements;
• requires declarations regarding litigation (actual and/or threatened suits whether or not filed by the Association);
• sets forth requirements for the Association’s financial statements (these may differ from the Association’s applicable Statute or governing documents);
• sets forth whether a depository relationship is to be created/continued with the lender;
• sets forth requirements for inspection and access to Association records;
• sets limitations regarding the indebtedness of the Association;
• sets parameters and relief should the Association default on the loan; and
• addresses UCC-1 filings

The Promissory Note addresses issues of importance regarding guarantors and attorneys fees in addition to serving as the actual instrument from which the funds are borrowed.

To some degree terms within the Agreement and Promissory Note are negotiable. The key is to ensure that certain impermissible terms are not hidden within these documents which would inappropriately bind among other things, the Association’s reserves, assets, or lien rights.

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What does an Association do if it has an unexpected repair or improvement and does not have sufficient money in its budget to fund the work? What if the Association had the money to fund the repairs through its reserves but now needs to replenish the account.

There are two options available to the Association. The first option is a straight forward special assessment. The problem is there may be limitations in the governing documents as to the extent of a special assessment which can be approved by the Board versus one which must be placed before the membership for approval. Also, in this economy passing a special assessment does not necessarily mean the Association will receive those funds. Additionally, efforts to foreclose to recover the special assessments result in Associations taking title to properties which have no equity and are subject to a first mortgagee. This leads the Association to its second option, borrowing the money.

If the Association is successful in negotiating its loan, it would permit ready access to the funds needed. More importantly it could result in only a minimal increase to the regular assessments making the payments easier for owners to make. The key to ensuring a loan offers these benefits is to have the Association’s counsel involved in the process from the start.

Basic Steps to Obtaining a Loan
1. Confirm the Association has the authority to borrow money. This requires an analysis of both Florida Statutes and the governing documents of the Association.

2. During duly noticed Board meetings the Board must decide to borrow money, approve the loan terms and approve the loan documents.

Loan Types
There are three primary types of loans an Association can obtain:
1. Line of Credit - The Association borrows a specific amount of money but only draws on the funds as needed. As such, the Association only has to repay the amount used and interest is only determined based on the outstanding balance.

2. Term Loan - The entire loan amount is funded to the Association at the time of the loan closing. The Association is then required to pay the loan back over a specific period of time (a/k/a term).

3. Combination (line of credit + term loan)

Upcoming Post Preview
My next post will briefly discuss things to avoid and the types of documentation involved in a loan.

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You Tell Us !

As seen today on the Sun-Sentinel Condo Blog, legislators and government officials need to know exactly how community associations are struggling in order to promote meaningful change.

Take the Survey Issued by the Community Association Leadership Lobby (CALL) to demonstrate the magnitude of the financial crisis on Associations and to influence the decisions made by legislative, regulatory, business and community leaders across Florida. 

Please spend a few minutes taking the Survey.  The responses are completely confidential - neither you nor your community’s name will be identified in the aggregate responses reported.

The deadline for completing the CALL Survey on Community Association Financial Stability is October 25th, so please take a few minutes now to provide your responses and help us achieve a deeper and more accurate understanding of the financial impact that the mortgage foreclosure crisis and economic downturn has had on your community.

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In a previous post I addressed whether an association could cut off cable or shut down water.

 An association in Hillsborough County amended its documents to ostensibly allow it to take these actions if any of the homeowners failed to pay assessments.  Remember, HOA's have the authority to suspend use of common areas and facilities if the governing documents contain appropriate language. 

The Court found that the association went to far and on Wednesday, September 16, 2009, it Ordered the association to restore water service to the townhome of the delinquent owner. 

A Fox News video relating to this story shows conditions associated with the property. 

Many communities are struggling to make ends meet.  If water/sewer is paid for as a common expense because there is only one meter, it may be advisable to investigate whether sub-metering is an option.  Of course, there are legal issues that need to be addressed and therefore please consult with your community association attorney before making any changes to the property or utility services.

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The Maison Grande and other bankruptcy filings by community associations have spurred interest in reorganization of debt.  Is bankruptcy an option for your cash strapped community?  What issues do you need to consider?   Bankruptcy Attorney Aleida Martinez Molina answers the following questions for community associations struggling with bills and bad debt.

CAN CONDOMINIUM OR HOMEOWNERS ASSOCIATIONS FILE FOR BANKRUPTCY?  Yes. Under certain circumstances, condominium associations have successfully reorganized under Chapter 11 of title 11 of the United States Code, 11 U.S.C. sections 101, et seq. (“Chapter 11” and “the Code,” respectively). This phenomenon is not unique to Florida – there have been successful condominium association reorganizations throughout the United States.

WHAT IS A BANKRUPTCY IN THE CONTEXT OF A COMMUNITY ASSOCIATION? The first point to understand is that Chapter 11 is a reorganization process – not liquidation under Chapter 7 of the Code. As such, it can provide associations the protections of the automatic stay and other relevant Code provisions while allowing them to formulate a plan of reorganization to extricate themselves from the particular financial situation.

UNDER WHAT CIRCUMSTANCES DOES IT MAKE SENSE TO REORGANIZE? The Code has unique provisions which in essence give associations a more level playing field to negotiate with creditors. A number of associations find themselves with daunting contracts or leases which they might renegotiate or simply reject if able to do so. A reorganization could, under the appropriate circumstances, accomplish this goal. Another example is filing for bankruptcy protection in order to prevent a judgment creditor from seizing or garnishing bank accounts. An association with a judgment or upcoming trial could turn to a reorganization as a way to automatically stay the lawsuit/collection of the judgment and permit a realistic settlement. Finally, associations finding themselves threatened with the shut-off of service by utilities or other providers can, under certain circumstances, resort to reorganizations to temporarily prevent this drastic action.

WHAT IS REQUIRED FOR AN ASSOCIATION TO REORGANIZE? Proper authority from the Board and appropriate attorney fees and costs. In addition, an association should file a reorganization with a clear understanding of its exit strategy (i.e., a plan of reorganization).

COSTS ASSOCIATED WITH A REORGANIZATION: Reorganizations are not inexpensive and simple matters – filing fees to the bankruptcy court alone exceed $1,000. The debtors also need to pay quarterly fees to the United States Trustee while the reorganization is pending. Any debtor (association or otherwise) needs to contact competent counsel in time to prepare budgets and plan accordingly. It can and is done – even in dire situations where utility services are about to be interrupted. Counsel can advise how to properly prepare the necessary documents, authority and budget to reorganize under the Code.

WHAT HAPPENS TO ASSOCIATION RESIDENTS WHEN A COMMUNITY ASSOCIATION REORGANIZES? Ideally, nothing directly. If the association files with appropriate board authority and a reasonable game plan, the association should be able to function and provide the necessary services to the association property and residents.

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Associations struggling with bad debt pushing the envelope trying to make up for deficits.

Earlier this week news reports showed homeowners living without water service to their homes.  The association shut down the water service because the homeowner didn't pay maintenance fees for several months. The homeowners' attorney claims that the Board acted illegally.  The Board, on the other hand, wants to put as much pressure on the owners to pay maintenance fees. 

In an earlier post I described actions prohibited by Florida's consumer protection laws.  I received quite a few comments indicating that associations regularly publish debtor lists to embarrass or harass the delinquent owners and associations have shut down cable or other television programming, restricted access to recreational facilities, deactivated entry devices for security gates to the property (forcing owners to use the guest gate) and stopped other services.  But can an association in Florida shut down services when an owner doesn't pay?

Condominium Associations cannot prohibit owners' access or use of the common elements.  Section 718.106, Florida Statutes guarantees every owner's right to use the common elements, which would include the recreational facilities (if part of the condominium), regardless whether they have fulfilled their responsibility to pay maintenance fees.  However, in response to cries from community leaders throughout the State, legislation was proposed during the 2009 session to permit condominium boards to suspend certain rights of use as a result of non-payment.  We are likely to see proposals in the 2010 session addressing this issue as well.  Community leaders and managers can stay up-to-date with respect to legislative activities by participating in the Community Association Leadership Lobby (CALL), which is a Statewide not-for-profit advocacy effort that not only monitors, but participates in drafting legislation designed to improve association operations.

Homeowners' Associations do have support to suspend use of "common areas and facilities" if the governing documents are written in a certain way.  Section 720.305, Florida Statutes contains the following provisions:

If the governing documents so provide, an association may suspend, for a reasonable period of time, the rights of a member or a member's tenants, guests, or invitees, or both, to use common areas and facilities and may levy reasonable fines, not to exceed $100 per violation, against any member or any tenant, guest, or invitee. A fine may be levied on the basis of each day of a continuing violation, with a single notice and opportunity for hearing, except that no such fine shall exceed $1,000 in the aggregate unless otherwise provided in the governing documents. A fine shall not become a lien against a parcel. In any action to recover a fine, the prevailing party is entitled to collect its reasonable attorney's fees and costs from the nonprevailing party as determined by the court.

A fine or suspension may not be imposed without notice of at least 14 days to the person sought to be fined or suspended and an opportunity for a hearing before a committee of at least three members appointed by the board who are not officers, directors, or employees of the association, or the spouse, parent, child, brother, or sister of an officer, director, or employee. If the committee, by majority vote, does not approve a proposed fine or suspension, it may not be imposed.

The requirements of this subsection do not apply to the imposition of suspensions or fines upon any member because of the failure of the member to pay assessments or other charges when due if such action is authorized by the governing documents.

The term 'common areas' is defined in the Homeowners' Association Act, but the term 'common facilities' is not described.  The governing documents may define the term 'common area' more specifically and may even include (generally by an amendment) a definition of 'common facilities', but is the cable service either?  What about water service?  Are the pipes carrying the water or the wires carrying the television programming owned and/or maintained by the Association?  What if the television programming is through a satellite system and you don't even have any wires in the common areas?

These questions have yet to be answered by an appellate court.  An adverse ruling with respect to either of these types of actions exposes community associations (and their leaders under certain circumstances) to liability, so it is very important to consult with counsel before trying to shut off any type of service.

It is also important to note that the statutes specifically prohibits restricting access to the individual home.  It says:

Suspension of common-area-use rights shall not impair the right of an owner or tenant of a parcel to have vehicular and pedestrian ingress to and egress from the parcel, including, but not limited to, the right to park.
 

Community leaders can and should be proactive when it comes to collecting assessments and maintenance fees, but they need to be concerned with liability issues.  Therefore, I encourage you to consult with counsel to determine what, if any, changes to the governing documents will improve your position, as no association can operate without its primary (and generally only) source of revenue.

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On August 17, 2009, the Task Force On Residential Mortgage Foreclosure, created by the Florida Supreme Court, issued its final report on the "foreclosure crisis" affecting condominium and homeowners' associations throughout the state.

The full report can be viewed at http://www.floridasupremecourt.org/pub_info/documents/Filed_08-17-2009_Foreclosure_Final_Report.pdf

The following quote, taken directly from the report, succinctly sums up what community associations are presently dealing with. Here is what the Task Force said:  

 

Picture this: the biggest road out of town. Now imagine it is rush hour. In a thunderstorm. Add that it also a hurricane evacuation. A lane is closed due to construction delayed by budget impacts. Imagine the traffic jam.

The clearest description of the impact of the foreclosure crisis and the following recession on Florida's courts can be summarized by that picture. Imagine every car a case. The General Jurisdiction Courts of our State have a certain amount of judicial infrastructure, just like there is a certain amount of room on the road. There is a certain capacity of judges, of court staff, of clerks, of filing space, of hearing time, or courtrooms, even of hours in the day. Year in, year out, that capacity flexes with the caseload traffic to afford reasonable, prompt, efficient and fair justice.

The enormous increase in foreclosure filings has overwhelmed those resources in many circuits and represents a traffic jam that the infrastructure cannot meet in a timely and efficient manner without support and traffic management.

I would add to the above quote that at a time when the evacuation route is jam-packed with cars, imagine further that more and more roads are continuing to be closed as the traffic jam gets worse. Unfortunately, that's the scenario facing our courts when the Legislature insists on cutting funding of the courts. The largest expense of the court system is in personnel, so in a time of burgeoning foreclosure caseloads, the courts are actually being forced to lay off staff. Too many foreclosure cases and not enough people to handle them. Indeed, we hear the daily mantra from frustrated clients asking what is taking so long with these cases? Well, truly, this is a "perfect storm." The storm has caused a huge backlog in the court system which significantly delays the time it takes to complete a foreclosure lawsuit.

All is not lost, however. Associations need not sit idle on the sidelines once a mortgage foreclosure action is filed and seems to stall. Directors need to monitor these cases and can often, with the assistance of counsel, file motions with the court to force banks to either foreclose or pay assessments, ask for case management conferences where the court can set some deadlines for action, or the association might even notice the case for trial, which will force the bank to move forward. In fact, this tactic is working. Several judges in districts throughout the state have entered Orders requiring banks to take some action with their foreclosure cases and in some instances, pay assessments to the association during the pendency of the foreclosure.

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Many readers have posted questions regarding the ability to collect rent from tenants.

It is important to remember that in all of the cases reported previously on this blog, the Court only appointed a blanket receiver to collect rent after the Association filed an action to foreclose its Claim of Lien.  Thus, the Association must pursue the collection procedures set forth in the Condominium Act (Chapter 718, Florida Statutes) or Homeowners' Association Act (Chapter 720, Florida Statutes).  It must send written notice of the delinquency to the Owner, file its Claim of Lien, notify the owner in writing of the intent to foreclose and then file its lawsuit, all before it can ask the Court to allow it to collect rental income. 

Here is an issue that comes up frequently:

  Assume the following:
- A bank has commenced foreclosure proceedings against a unit Owner but not taken possession of the unit
- The Condo association has liened the Owner for past due assessments
-The condo Owner has declared bankruptcy
-The Condo Owner has a renter in the unit & is collecting rent

Can the Condo association obtain a receiver to collect the rent to pay the association assessment?

A bankruptcy filing results in what is known as an "automatic stay".  This essentially stops all collection activity against the debtor. In Senate Report No. 95-989, the Judiciary noted:

The automatic stay is one of the fundamental debtor protections provided by the bankruptcy laws. It gives the debtor a breathing spell from his creditors, stopping all collection efforts, all harassment, and all foreclosure actions. It permits the debtor to attempt a repayment or reorganization plan, or simply to be relieved of the financial pressures that drove him into bankruptcy.

Generally when there is a foreclosure pending against a debtor in bankruptcy, the Court will require payment of post-petition obligations (assessment fees or mortgage payments).  If the debtor files under Chapter 11 of the Bankruptcy Code (reorganization), creditors (including the Association and/or the Lender) are prohibited from taking any action to collect past-due amounts.  However, these creditors may file a Motion for Relief from Stay in the event the debtor fails to keep ongoing obligations current.  While the automatic stay is in effect, the Association cannot take further action to collect any past due assessments or charges.  It cannot collect rent directly from the tenant (even if the governing documents provide that type of relief) and any rent collected may be deemed to be property of the bankruptcy estate.  Violations of the automatic stay are not taken lightly by bankruptcy judges.

Some communities have amended their governing documents to include an automatic "assignment of rent" when an owner falls into delinquency status.  The communities that are most successful not only amend the governing documents, but likewise require (through amendment or as part of the approval procedures) a tri-party lease addendum that includes this assignment.  The tri-party lease addendum creates a contractual relationship between the owner, the tenant and the association which is helpful in the event assessment payments from the owner fall behind schedule.  This document generally gives additional rights to the Association in the event the owner fails to control the conduct of the tenant (or the tenant's guests) as well.

All of these actions must be considered in light of the existing governing documents and in conjunction with analysis of the laws governing debt collection (especially when bankruptcy is involved).

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Developers Often Use Community Development Districts (CDD) to Fund Community Infrastructure and Amenities.

Newspapers are filled with advertisements for homes in neighborhoods that have wonderful community amenities.  The streets are lined with sidewalks, beautiful trees tower above medians, there are neighborhood parks and tot-lots, lakes, maybe even a clubhouse with an exercise facility and meeting rooms.  At the sales office you learn that these facilities are solely for the use of the owners within the community.  It is not unreasonable to think that all of these features were built by the developer, at its expense, in order to justify the price of the homes and to encourage sales. 

Well, the latter may be true, but if the property is located within a Community Development District purchasing a home is likely to include a long-term obligation to fund the initial construction of those amenities.

Community Development Districts (CDD) are not new in Florida but use of this mechanism to fund infrastructure and recreational amenities has increased exponentially in recent times.  A CDD is a special-purpose unit created primarily for the purpose of financing and then operating and maintaining community-wide improvements in new communities.  A landowner (usually a developer) petitions the local government to create a CDD with broad powers that enables the CDD to generate revenue.  Bonds are typically issued and payable by the land-owners (purchasers of homes and other properties) in the district over a period of time - up to thirty (30) years.  Additional revenue is generated through special assessments and other fees paid by the property owners in the district.

It is not unusual for a developer, through the use of a CDD, to fund development and construction of the roads, the surface water management systems, parks, clubhouses and other community facilities such as entry features and the like with the initial lump-sum of revenue obtained from the issuance of bonds.  The CDD maintains, operates and administers the property and improvements subject to its control and establishes the fees or other financial obligations of the land owners.

Chapter 190, Florida Statutes became effective in 1980, but CDD's were not very popular in the early years.  Approximately 100 CDDs were created in Florida during the 1990s and then over 200 new CDDs came into existence between 2000 and 2005.  There are currently close to 600 CDDs active in Florida at the present time according to the website maintained by the Department of Community Affairs.

While the Board of Supervisors for each CDD is elected by the landowners, the exercise of the powers and duties of the district, as well as the use of revenue produced by the special assessments and fees, has often come into question.  The developer of the Cory Lake Isles community in Hillsborough County reportedly controlled CDD operations for 18 years.  Residents complained that the developer mismanaged the district's finances and spent CDD money on the developer's personal projects.  When CDD meetings became tumultuous, it hired off-duty police officers to keep the peace, as a CDD expense.   Residents in Cory Lakes have had to pay higher fees, but now have control of the District.

Defaults associated with CDDs have increased, presumably as a result of the downturn in the housing market.  An Orlando based Firm indicated that more than 10% of the CDDs in Florida did not fulfill their obligations.   Defaults may mean even more of the costs will be passed on to homeowners.

Home buyers need to read the 'fine print' before purchasing a home in a Community Development District.

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Customers Able to 'Sell'  Energy Produced by Solar Panels back to Gainesville Regional Utilities for next Twenty Years.   Expansion of program into other areas could create revenue stream for Community Associations struggling with foreclosures and bad debt. 

Installing renewable energy improvements, such as solar panels, generally involves a large up-front cost.  To encourage the use of renewable energy, many countries institute a "feed-in" tariff system.  Feed-in tariffs (FITs) basically guarantee that homeowners and small business owners who generate more electricity than they use are able to sell that electricity back into the system and receive long-term payments for each kilowatt-hour produced.  As a further incentive, the rates set for each unit of electricity produced from a renewable resource are often much higher than what the market would ordinarily pay.

TheGainesville City Commission was the first in the nation to approve a feed-in tariff for solar PV energy production.   Owners of solar panels will be paid 32 cents per kilowatt hour sold back into the system.  Compare that to the average rates charged throughout Florida and you will see what a wise and sustainable investment this program creates.  According to FPL's website and other sources, residential customers generally pay approximately 9-12 cents per kilowatt hour of energy.  With tax credits and low-cost renewable energy loans, owners are predicting the systems will pay for themselves in as little as six (6) years and thereafter expect returns that make a profit in an amount of up to 20%. The Gainesville program was so popular that it fulfilled its 2009 goals in just three weeks.

There are plenty of opportunities to take advantage of rebate and incentive programs in Florida.  Community associations struggling to make ends meet can reduce their costs for energy usage with retrofits and changes in practices.  Expansion of this feed-in tariff system to other portions of Florida provides community associations with not only the opportunity to save money, but to create an additional revenue stream, reducing the financial burdens to homeowners.

This type of program would certainly benefit the Sarasota County rancher that spent a half million dollars to install solar systems on her property.  Since the panels aren't connected to multiple meters, the extra energy generated by the panels is 'sold' back to FPL at a discount rate which is approximately half of the retail rate paid for electricity used at the site.

Foreclosures and bad debt plague Florida's community associations.  Governmental programs designed to help Floridians reduce their energy expenses are sorely needed and there is a likelihood that property values in associations with lower expenses (and lower maintenance fees) will rise faster than other similar properties.

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Subscribers recently posed interesting questions concerning the information in Condo Receivers Help Collect Assessments  such as the following:

 Does the Blank receivership work for HOA's as well?

How would the association/manager/board find out if tenants live in a specific unit and the association docs does not include the screening approval procedure for renters?

The Condominium Act specifically permits the Association to ask the Court to appoint a receiver to collect rental income when the unit owner fails to pay assessments.  Section 718.116, Florida Statutes, provides, in relevant part, as follows:

If the unit owner remains in possession of the unit after a foreclosure judgment has been entered, the court, in its discretion, may require the unit owner to pay a reasonable rental for the unit. If the unit is rented or leased during the pendency of the foreclosure action, the association is entitled to the appointment of a receiver to collect the rent. The expenses of the receiver shall be paid by the party which does not prevail in the foreclosure action.

The Homeowners' Act and specifically Section 720.3085, Florida Statutes contains language identical to the above.  Thus, an Association with several tenant-occupied homes in foreclosure may petition the court for similar relief.

The receiver appointed in the cases mentioned, Seth Heller, advises he uses a number of different tactics to determine whether units/homes are occupied by tenants, including knocking on doors and requesting information at the guard gate.  Surprisingly, many tenants are willing to share information, especially if they have a better chance of avoiding being displaced from the foreclosure.

Another reader posted the following question & comment:

I'm not clear on whether the ruling allows associations
which are not in receivership (lacking a properly elected
BOD) to collect rents directly. Or am I misinterpreting
the term 'receiver'?

Thanks again for providing important information to
those of us who are interested enough to want to learn...
now if we could only find a way to educate those who don't.
 

The receivership explained in the previous post is not a full receivership contemplated by the Statutes in the event there not enough people willing to volunteer for the board.  This program is referred to as a 'mini-receivership' where the Order is specifically tailored to apply to units occupied by tenants, when the owners are facing foreclosure.  Thus, the Board of Directors retains complete control of Association operations and the receiver (often along with the help of management, staff or independent contractors) administers rental payments that would be paid to owners if the Order were not in place.  A 'blanket' order saves the Association thousands of dollars in attorneys fees, since the Association only has to file the Motion/Petition and attend the hearing once, instead of in every foreclosure case filed.  A Court Order is required, but the role of the receiver is limited.

Please let us know about your experiences (good or bad) with this program or other efforts employed to collect assessments.

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Court Rules in Favor of Use Blanket Receiver to Collect Rental Income When Investment Owners Fail to Satisfy Financial Obligations to Association.

The Miami Herald and Sun-Sentinel both reported that the Third District Court of Appeal denied a challenge to an Order appointing a 'blanket' receiver to collect rental income from tenants when the unit's owner failed to pay assessments.  The owner challenging the Order owns several units, most or all of which are in delinquency status.  The appellate Court denied a request for a Writ of Prohibition, allowing the Association to continue enforcement of the blanket order requiring rent to be paid to the receiver to satisfy outstanding assessments and other sums due.

This 'mini-receiver' program has been very successful in South Florida.  The Order entered in the Verabella Falls Condominium Association case specifically requires the receiver to collect all rents and monies from tenants due to unit owners when the unit's owner is subject to a foreclosure action for the failure to pay past due assessments.  It also permits the receiver to engage a property manager to offer unoccupied units for lease or rent when the unit's owner is a defendant in foreclosure proceedings filed by the Association. 

Seminars will be held throughout the State to explain the success of these programs to community leaders.   Please check this site for more information regarding those seminars and other educational events.

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Community Association Boards of Directors Must Safeguard Association Funds.

Recent Arrests and Reported Losses Demonstrate Lack of Financial Oversight.

Community Associations simply cannot function without adequate cash flow.  Community leaders have a fiduciary obligation to monitor and protect the Association's funds.  Handling the finances of the Association can be a daunting task, especially if the volunteer leaders do not have any background in accounting or finance.  There are many state and federal laws governing budgeting, financial reporting, taxation and the like and a lack of sufficient oversight exposes the Association to loss from theft.

Community leaders cannot abrogate their responsibilities solely by hiring management or contracting with a bookkeeping service. Recently it appears there has been an increase in Associations that have been victimized by these professionals.  The Sun-Sentinel reported some Associations lost hundreds of thousands of dollars as a result of alleged theft by an employee of the management company.  One Association found out there were problems with its account when checks bounced.  The management company had the authority to write checks, balance the books and make deposits.  The directors of each of the Associations involved apparently did not review all the source documents to verify that payments were made and the balances on each of the accounts.

A similar situation occurred in Collier County, Florida.  Authorities arrested a bookkeeper working for a management company for 21 counts of grand theft.  The Naples Daily News reported that the bookkeeper made fraudulent bank transfers from the Associations' accounts into her personal accounts.

Communities comprised of older residents are especially susceptible to fraud schemes.  The Charlotte Square condominiums in Port Charlotte, Florida reported over $1 million in losses. 

Community leaders are encouraged to:

• Store blank and canceled checks in a secure location;
• Notify the bank/financial institution when officers change immediately and keep control of bank signature cards;
• Create precautions for Internet banking and bill paying;
• Review source documents (invoices, bank statements, deposit slips) with management reports and consider having the bank send duplicate statements;
• Avoid master vendor accounts and place low limits on credit and/or store charge cards; and
• Obtain adequate fidelity bonding and employee dishonesty coverage for all persons authorized to sign checks or drafts.

Always be alert to new or different spending patterns.  While the volunteer leaders are not expected to become experts, they must have a basic understanding of the Association's finances, its expenditures and obligations, as well as seek out the relevant information to make informed decisions.

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At Least Five Community Associations in Florida have filed for Bankruptcy Protection and Relief.

Reorganization through Bankruptcy Allows Communities to Restructure Obligations and Reduce Debt.

On July 8, the Daily Business Review reported about the Maison Grande Bankruptcy filing.  Maison Grande condominium owners are obligated to pay the developer over $100,000 per month for a 99-year lease of the pool and some other improvements.

Bankruptcy Attorney Aleida Martinez Molina of Becker & Poliakoff indicated that the bankruptcy code contains unique provisions which, in essence, give associations the upper hand in dealing with creditors.   According to the Daily Business Review, Maison Grande owes the developer almost $700,000, but the lawsuit filed by the developer is on hold while the bankruptcy court has jurisdiction.

There a various benefits to reorganization through bankruptcy proceedings:

• If the Association is facing lawsuits from several creditors in different venues, the bankruptcy court may have the power to shift the jurisdiction to streamline addressing each claim.
• The Bankruptcy Code includes provisions allowing debtors to assume or reject executory or unexpired leases, providing opportunities to renegotiate onerous provisions.
• A Bankruptcy filing will delay, and in some cases prevent, a creditor from seizing or garnishing bank accounts and will also delay cancellation or shut-down of utility services.

Many community associations are obligated under contracts initially entered into by the developer.  The Legacy Park Community filed for bankruptcy protection when it could not pay a cable bill in excess of $100,000, especially since it reported over $250,000 in lost (unpaid) HOA assessment fees not paid by the owners that lost homes due to foreclosure.

Presidential Golf Maintenance Association also recently filed for relief under Chapter 11 allegedly due to the fact that in can no longer maintain approximately 97.8 contiguous acres because they do not have sufficient funds. They filed to “restructure and evaluate other strategic alternatives.”

Attorney Molina strongly encourages any Association desiring to take advantage of relief that may be available through bankruptcy proceedings to only file with a clear understanding of its plan for reorganization.   

Judge Mark dismissed a  bankruptcy filing on the behalf of View West Condo Association.  View West had controversy with roofer who supplied services to the condominium regarding payment, quantity and quality of work performed and warranty of work.  The Court found:

There does not appear to be any purpose for filing a Chapter 11 plan nor any reason for the Debtor to stay in Chapter 11 other than Debtor’s counsel’s suggestion that this Court would be a more expeditious forum for litigating claims against third parties. That reason is insufficient if the litigation solely involves state law issues.

As a result of current economic conditions, bankruptcy filings may become more prevalent for community associations.  Please contact us if your community would like to discuss whether bankruptcy is a viable option.

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The Florida Consumer Collection Practices Act Prohibits Associations From Posting Delinquency Lists and Taking Other Actions to Collect Assessments and Maintenance Fees.

 There have been a number of newspaper articles explaining actions taken by community association boards and managers to collect delinquent assessments.  The Miami Herald reported that some associations post lists of the names of the owners behind on their fees and others deny security access devices to tenants of delinquent owners.  

The Wall Street Journal reported that some associations were taking control of the unoccupied units and renting them on a short term basis until the bank foreclosed.  

While we are all familiar with the idiom "drastic times call for drastic measures",  community leaders and property managers should understand that Florida law prohibits unfair or abusive tactics with regard to debt collection, including the collection of assessments.   Although the prohibitions in the Federal Fair Debt Collection Practices Act do not apply to the person or entity owed the debt (the 'creditor', which in this case is the Association), both community associations and their managing agents are responsible for compliance with the Florida Laws.

Among other practices, Section 559.72, Florida Statutes, prohibits the following:

• Use of profane, obscene, vulgar, or willfully abusive language in communicating with a debtor or any member of his or her family;
   
• Communication with a debtor under the guise of an attorney by using the stationary of an attorney or forms or instruments which only attorneys are authorized to prepare;
   
• Orally communicating with a debtor in such a manner as to give the false impression or appearance that such person is associated with an attorney;
   
• Publishing or posting, threatening to publish or post, or causing to be published or posted before the general public individual names or any list of names of debtors, commonly know as a deadbeat list, for the purpose of enforcing or attempting to enforce collection of consumer debts;
   
• Mailing any communication to a debtor in an envelope or postcard with words typed, written, or printed n the outside of the envelope or postcard calculated to embarrass the debtor. An example of this would be an envelope addressed to “Deadbeat, Jane Doe” or “Deadbeat, John Doe”;
   
• Communicating with the debtor between the hours of 9 p.m. and 8 a.m. without the prior written consent of the debtor.

While every association must be diligent with its collection efforts, those efforts must be in compliance with legal and ethical standards.

On the other hand, the Florida Courts are cognizant of the problem and have allowed Associations to have receivers appointed for the purposes of collecting rent from tenants when the owners of those units are facing foreclosure as a result of non-payment of assessments.  Remember to check this site in the future for more information about proactive methods to collect assessments.

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SB 714 Designed to Clarify Insurance Requirements & Provide Relief to Homeowners by Delaying Fire Sprinkler Retrofit.

Condominium Unit Owners Required to Maintain Insurance Coverage.

Governor Charlie Crist vetoed SB 714.  Too bad - SB 714 would have relieved Condominium Unit Owners from maintaining individual property insurance and likewise relieved Associations from the burden of requesting insurance certificates. 

Governor Crist expressed his concerns regarding the fire sprinkler retrofitting extension in his veto letter, citing safety risks. This means that condominium associations throughout Florida will have to retrofit their buildings, or  partially retrofit (if authorized by membership vote as set forth in Section 718.112(2)(l), Florida Statutes) by December 31, 2014, something that struggling condominium associations cannot afford at this time.

 Read Governor Crist's veto letter (click here).

Gary A. Poliakoff explained the negative impact of the veto in correspondence to the Governor (click here to read that letter) highlighting how significantly condominium and community associations have been hurt by the mortgage foreclosure crisis.

Consequently, the following insurance requirements, largely resulting from 2008 legislation, are still in effect:

1. Unit Owner coverage is still mandatory. 
2. Unit Owner insurance coverage must contain $2,000 "special assessment" coverage.  SB 714 would have corrected the language to "loss assessment" coverage. 
3. The Association is still required to be named an additional insured and loss payee on insurance policies issued to Unit Owners.
4. Association boards must set the master policy insurance deductible at an open board meeting - the notice of the meeting must contain the amount of the proposed deductible, available funds and cite the assessment authority as well as estimate potential assessments against each unit for possible casualty costs that are not funded by insurance coverage.
5. Unit Owners are still required to insure "improvements and additions" that benefit fewer than all the owners.  This is problematic from a number of perspectives, especially in light of the fact that the term "improvements and additions" is not defined.  This provision in Section 718.111(11)(g)(1), Florida Statutes may be interpreted to mean that Unit Owners bear responsibility for portions of the property traditionally insured by the master policy, such as balconies, vehicle enclosures such as carports (if the coverage is available), storage spaces and the like. 

 A press conference is being held today, June 4, at the South County Civic Center located at 16700 Carter Road, Delray Beach, Florida at 1 P.M.  Senator Deutch and Representative Kelly Skidmore will address legislative issues, foreclosures and ways to confront association financial losses.  CALL urged Senator Deutch to ask the Speaker of the House and the President of the Senate to call a special session to address these important problems. 

Community leaders are encouraged to contact their elected representatives and express their concerns.

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Florida Attorney General Issues Advisory Legal Opinion Indicating that Golf Courses located within platted residential subdivisions are not subject to separate taxation.

Impact of AGO 2009-23 may save Community Associations thousands of dollars in property taxes.

Florida Attorney General Bill McCollum recently issued AGO 2009-23 answering two questions posed by Seminole County's Property Appraiser.

Section 193.0235, Florida Statutes, generally provides that the common elements (as defined) within a subdivision are nominally valued for property tax purposes, since the value of those amenities is included as part of the valuation of the homes themselves.  It provides, in relevant part:

Ad valorem taxes and non-ad valorem assessments shall be assessed against the lots within a platted residential subdivision and not upon the subdivision property as a whole. An ad valorem tax or non-ad valorem assessment, including a tax or assessment imposed by a county, municipality, special district, or water management district, may not be assessed separately against common elements utilized exclusively for the benefit of lot owners within the subdivision, regardless of ownership. The value of each parcel of land that is or has been part of a platted subdivision and that is designated on the plat or the approved site plan as a common element for the exclusive benefit of lot owners shall, regardless of ownership, be prorated by the property appraiser and included in the assessment of all the lots within the subdivision which constitute inventory for the developer and are intended to be conveyed or have been conveyed into private ownership for the exclusive benefit of lot owners within the subdivision.
 

Seminole County's Property Appraiser inquired whether there should be a distinction between property actually held in the name of the Community Association or property held in the name of the Developer (or subsequent developer), as there were a number of golf courses that had yet to transition from developer to association control.  Property taxes for common areas of community associations are generally passed on to the owners of the properties within the subdivision.  Thus, golf courses in communities that were no longer subject to developer control or ownership were nominally valued (meaning no taxes due), but if the developer retained ownership of the golf course in another community, taxes were imposed and generally passed on to the Association members.

The Attorney General said that regardless of ownership, a golf course designated on a plat or approved site plan as a common element for the exclusive benefit of the lot owners that is subdivision property (not included in the developer's inventory) should be nominally valued.

Community Associations are urged to review the tax bills for all common areas or common elements within their subdivisions as they may not only be entitled to substantial savings, but refunds as well.

Please check back for future updates with regard to taxation of common areas.

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State of Florida’s Division of Administrative Hearings finds that Industry Bulletins and Technical Advisories issued by Bureau of Elevator Safety are not improperly adopted rules.

Retrofits required for Universal Elevator Keys, Automatic Fire Alarm Initiating Devices and Replacement of Single Wall Hydraulic Cylinders.

A state or municipality may require building owners or occupants to make improvements essential to life safety. The public has a right to the safest method of protection and the government generally has the duty to provide such protection. Accordingly, a local government may require reasonable changes in buildings previously built in order to comply with new codes and standards for the protection of health and safety, notwithstanding the fact that the buildings and improvements, at the time of construction, complied with the regulations then in effect.

A factor to be considered when analyzing the validity of regulations requiring changes in existing buildings, is whether the public welfare demands retroactive application, and whether the property owners are unreasonably burdened vis-à-vis the public benefit. The question then is whether the burden upon the property owner is so great compared to the public benefit that the ordinance must be held invalid. Courts have found that there are "no hard and fast rules" in these cases.

A court will analyze the application of the ordinance or code from a cost-benefit perspective and determine whether the ordinance is reasonable as applied to existing buildings or whether the ordinance deprives the owners of their property rights without due process. As you might imagine, on life safety issues, the courts will ordinarily be inclined to rule in favor of the exercise of the government police power.

Government agencies themselves are often at odds with each other with regard to enforcement of codes and retroactive application of building safety requirements. Recently the City of Miami Beach was at odds with the Department of Business and Professional Regulation, Division of Hotels and Restaurants over enforcement of Industry Bulletins and Technical Advisories issued by the Bureau of Elevator Safety requiring compliance with standards published by the American Society of Mechanical Engineers.

The Department of Professional Regulation indicated that it specifically intended to “require the single wall hydraulic cylinder safety provision of the ASME A17.1, 2000 Code [Section 8.6.5.8] to be enforced as part of the annual elevator inspection.” It indicated that this provision was “so important to life safety that corrective action is required for all existing single wall hydraulic cylinder elevators.”

Extensions and variances are available under certain, but limited, circumstances. Please contact us if your community needs advice how to handle an adverse Elevator Inspection Report.

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As you have probably seen on T.V. or read in the newspapers, this is Earth Week.  That may, or may not, matter to you as an individual, as a community leader or as a property manager.

Regardless of your individual feelings about environmental concerns such as climate change or energy policies, smart decision making mandates consideration of comprehensive planning and utilization of techniques to glean cost savings associated with improving energy efficiency while reducing energy, waste and water consumption costs.  Thus, every community leader, member of a Board of Directors, and property manager should become aware of the laws, programs and opportunities available to reduce expenses of the community, especially in light of budget shortfalls.

While there may be a mind-set that believes it is too expensive to be “green”, that is not necessarily the case and, in fact, the opposite may be true. Community Associations may not be able to afford not to be “green” in light of the long-term cost saving opportunities.

H.B. 7135, creating the 2008 Florida Energy and Economic Development Act, received unanimous approval from the legislature last year. Goals of the legislation include stimulating the economy, reducing pollution and increasing energy efficiency (of course) in an effort to propel use of alternate energy and create “green” industry jobs. The legislation specifically imposes efficiency requirements for state buildings and directs the state to purchase fuel-efficient vehicles. It also continues state programs for solar energy rebates and creates funds for renewable energy grants. The State of Florida allocated $5 million in rebates to property owners that purchased and installed solar energy systems in 2007 & 2008. Changes to the Florida Administrative Code reduce connection costs associated with solar and other renewable energy systems as well as credit (offset) costs for creating power. Condominium Associations, therefore, may not only reduce their energy consumption costs by installing renewable energy devices, but actually may create a new revenue stream from energy credits. Condominium Associations are uniquely positioned to take advantage of these rebates, cost saving techniques and possible new revenue streams as a result of Section 718.113(8), Florida Statues, which provides:

Notwithstanding the provisions of this section or the governing documents of a condominium or a multicondominium association, the board of administration may, without any requirement for approval of the unit owners, install upon or within the common elements or association property solar collectors, clotheslines, or other energy-efficient devices based on renewable resources for the benefit of the unit owners. 

There are plenty of examples of the “business case” for simple retrofits and changes in practices. Building maintenance and repair is an ongoing process and long-term considerations have proven highly beneficial. Some low cost improvements have a remarkably high return and implementation of “sustainable strategies” when tackling major renovation/repair projects are likely to increase the value of the property in addition to lowering operating costs. Some examples include:

FBI Field Office, Chicago, Illinios:

Total improvements and modifications lowered operating costs by more than $400,000.00 annually. Minor changes, including replacing exit signs and sealing connections for a cost of less than $10,000 resulted in annual savings of more than $25,000. The property owner was “paid back” for that investment in 4 months. An energy audit and resulting changes to the HVAC system at a cost of approximately $15,000 results in an annual savings of over $50,000! Simple landscape changes resulted in lowering water bills by $12,000 annually. How many of us would reject a 400% return on an investment?

USAA Realty Company: 
Lighting retrofits, installation of motion sensors instead of timers, installation of LED exit signs and window tinting at a cost of approximately $140,000 resulted in $71,000 annual savings. The property owner was “paid back” for the costs of the improvements in less than two years and now enjoys those savings perpetually.

Adobe Towers / Multiple Hi-Rise Office Buildings:
Major improvements cost initially over $1 million, but rebates reduced those costs by approximately $300,000 and the annual savings of $900,000 increased the value of the building by over $10 million!

Can your community afford not to reduce its future expenses?

I encourage you to share experiences regarding efforts on your part or the part of your association to improve energy efficiency, reduce waste and reduce water consumption, both positive and negative. Please check back for further information, tips and resources or contact us for guidance.

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Amendment to SB 880  approved by Community Affairs Committee intends to encourage purchase of remaining inventory by limiting liability.

Last week the Community Affairs Committee advanced SB 880 with a significant amendment entitled the “Distressed Condominium Relief Act”.

If the bill becomes law, new Section 718.702, Florida Statutes sets forth the legislative intent for the protections afforded to “bulk assignees” and “bulk buyers” of condominium units.

“Bulk assignees” are defined as purchasers of more than 7 units who receive an assignment of some or all of the rights of the developer of the project. “Bulk buyers” are also defined as purchasers of more than 7 units, but have not obtained an assignment (other than rights to conduct sales, leasing and marketing activities within the condominium).

Bulk assignees are not responsible for implied warranties, the obligation to fund converter reserves for units owned by others or honor conversion warranties. Bulk assignees will not have to provide the Association with a full transition audit and will not have to fund developer guarantees or assessment obligations, unless they receive an assignment of the right to guarantee assessment levels and therefore take on the obligation to fund budget deficits.

This section of the proposed bill provides for three distinct methods of assignment of development rights, to wit:

• By the Developer;
• By a previous Bulk Assignee; or
• By a Court.

While bulk assignees are required to deliver any of the documents identified in Section 718.301(4), Florida Statutes in their possession or control to the association upon transition, they are not liable for production or delivery of documents and other materials normally required as part of the transition process, if they cannot obtain them after a “good faith” effort.

Both bulk buyers and bulk assignees need to update the prospectus, the Frequently Asked Questions and Answers Sheet, the required form of escrow agreement (if applicable) and financial information pertaining to the Association.  Disclosure statements, identifying the rights assigned and warranty limitations, are also required.

The legislative history suggests these provisions are necessary to encourage the purchase of remaining inventory in failed projects. 

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Proposed SB 1012 would require rules to impose increased fees for submerged land leases.

SB 1012, filed by Senator Constantine along with the Committee on General Government Appropriations and the Committee on Environmental Preservation and Conservation seeks the imposition of new rules governing submerged sovereign land leases.  If passed by the legislature, the Board of Trustees of the Internal Improvement Trust Fund would adopt rules that, among other things:

• Create a "standard" lease term of at least 10 years;
• Create extended lease terms of up to 25 years under certain circumstances;
• Create fees for new leases, expansions of existing leases and modification of uses permitted pursuant to existing leases;
• Change existing rates for leases allowing for designated slip (where boat slips are assigned) use to $.30 per square foot, if the property is not located within an aquatic preserve;
• Change existing rates for leases allowing designated slip use (assigned slips) to $.60 per square foot if the property is located within an aquatic preserve;
• Provide for automatic adjustments of up to ten (10%) percent in fees paid to the State every five (5) years based upon the Consumer Price Index (CPI); and
• Provide for late fees.

Some community associations are justifiably concerned about the possible increased rates, especially considering the current economic climate.  The President of a condominium in Tierra Verde indicated fees payable to the State would increase by more than 400% for her community.

We encourage community leaders to evaluate the impact of passage of this bill upon their communities.  In this day and age of budget shortfalls, every increase in expenses impacts Association operations.  It is also important to determine whether fee increases may be passed on to dock users or must be absorbed as a common expense.

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As naïve as it sounds, foreclosure is business, not personal. There are some fundamental questions that need to be asked to curb the passion and focus the decisions on the economics of business.  In truth, the Association does not want the foreclosure but rather what results from it, the sale. So we need both the foreclosure and the sale for the Association to be able to get the money it is owed.

Let’s talk a bit about whether the Association should foreclose. Given the past history of property values the foreclosure decision was simple. The difference in the amount of the market value and mortgaged value left significant excess available to settle the assessments from the foreclosure action at the sale. In the current environment of depressed market values, significant portions of the properties in arrears on assessments also have significant mortgages, putting the Association in a disadvantaged position. The disadvantage is lack of equity to foreclose against; making recovery of assessments a bit more complicated and sometimes even fruitless.

The above has to be balanced against the fact that the assessments are the lifeblood of the community to maintain, beautify, and provide the amenities to the members.  All members are required to support the community through the payments of assessments. Non-paying members should not be allowed to draw down the community. Therefore, respect for the paying members must be maintained by utilizing the tools available to enforce payment of delinquent assessments from the non-paying members. 

The normal process of collections requires a demand letter, a notification of intent to lien, the lien letter and the lien itself. Once the lien is recorded a Condo has up to a year to foreclose, while the Home Owners Association has 5 years. This provides for a unique position for the Association to work with the Unit Owner and to consider owner payment plan options before spending more money which it may have difficulty recovering. If this fails then the only recourse left is to file a lawsuit to foreclose the lien and ultimately sell the property.

My next series of posts will go into greater detail regarding payment plans and the actual foreclosure process.

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A survey conducted by Community Association Leadership Lobby (CALL) confirms problems with community operations and lack of maintenance as a result of foreclosures.

Averaged out, over 100 people per day responded to the 2nd Annual Foreclosure Survey conducted by the Community Association Leadership Lobby (CALL). Over ninety (90%) percent of them say first mortgagees should pay more after they obtain title through foreclosures and more than half of them complain about the amount of vacant homes in their communities.

Foreclosures have a significant impact on association budgets. From the Community Association’s perspective, lenders are insulated from falling home prices while bills for insurance, property maintenance, management and other expenses must be paid. The leader of the Community Association Practice Group of Becker & Poliakoff, P.A. has been quoted saying lenders must pay for the maintenance and protection of the collateral. Associations need effective ways to secure this contribution and continuing to subsidize the administrative and physical needs of the property taxes some homeowners beyond their means.

The Federal Housing Finance Agency House Price Index (HPI) shows home values from the 3rd quarter of 2007 to the present time dropped by close to $3 trillion dollars. The agency’s director, James B. Lockhart, III, offered statistics at a presentation in Washington, D.C. on February 19, 2009. Fannie Mae, Freddie Mac and FHA loans represented just over thirty (30%) percent of those labeled “seriously delinquent” and private sector loans (which include jumbo and sub-prime mortgages) account for more than sixty (60%) percent of the seriously delinquent loans.

While the Homeowner Affordability and Stability Plan provides incentives to lenders to modify mortgages, relief cannot come soon enough for Florida’s community leaders. One respondent to the CALL survey lamented about community associations receiving “the short end of the stick” while elected officials “give in to the demands of the lobby groups of the banking industry”. It appears a mandate has been issued to the elected officials in Florida to create a legislative solution to this crisis.
 

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There are several programs available to homeowners that will avoid the loss of their homes through foreclosure such as repayment plans, forbearance plans and loan modifications.  “Short Sales” have also become a popular solution to avoid foreclosure but “Short-Pay” solutions are emerging as the best option available to help families keep their homes, lower their mortgage payments, and avoid foreclosure even when the homeowner owes more than their homes are worth! 

What is a Short-Pay?
A Short-Pay, or also known as a short-refinance, is a transaction, where a current lender agrees to accept less than the full amount owed to them.  This process is similar to a short sale but, instead of selling the home to a third party, the homeowner keeps their home by refinancing with a new lender with a new loan based on the current market value of the home.  The Short-Pay allows the homeowner to keep their home, and avoids a foreclosure or possible bankruptcy.

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This is a question I am asked seemingly on a daily basis. It has some variations in format; perhaps involving a burst pipe, toilet/shower leak, or air-conditioner drip pan overflow but the theme is always the same. That is, something involving the unexpected flow of water happens within a unit which causes damage to other units, typically the unit(s) located directly below the water event, and to the common elements. Who is responsible to repair the damage? Who is responsible to pay for the repairs? 

 Water intrusion events like these are usually considered casualties. A casualty is something that happens unexpectedly, through no fault of anybody. Hurricanes, tornadoes, strong storms and other Acts of God are easy examples of casualty events. A burst pipe within the ceiling, floor or wall is also, most often than not, a casualty because no one can accurately predict when a pipe will fail. Of course, this will change where, for example, a unit owner or the association is aware of an existing pipe leak and does nothing to fix it. Similarly, where a condominium association has a rule requiring owners to replace their hot water heaters at least once every 10 years, the 11 year-old hot water heater that bursts will probably not be a casualty event.

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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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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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Question: I live in a development that is governed by a homeowners’ association. More and more, we are seeing owners “walk away” from properties they can no longer afford due to the poor economy.

This leaves a void as to who is to care for their properties in their absence. Many times, the properties fall into disrepair, which causes potential buyers to think twice about purchasing in our community. Other owners are generally careful to maintain their properties, but it is those few abandoned properties that are scaring away potential buyers, and as a result, property values within our community have plummeted. Our association is considering taking on the task of fixing some of these abandoned properties to preserve property values and to make the community more attractive to potential buyers. Can we do that? M.D. (via e-mail)

Answer: You indicate that your community is a homeowners’ association, presumably governed by Chapter 720 of the Florida Statutes, also commonly (although not officially) referred to as the Florida Homeowners’ Association Act. If that is the case, then the answer to your question will depend on what your governing documents say.

Unlike the Florida Condominium Act, Chapter 718 of the Florida Statutes, which grants a condominium association the irrevocable right of access to each unit during reasonable hours for maintenance purposes, the Florida Homeowners’ Association Act does not expressly authorize a homeowners association to access an owner’s lot, let alone to make repairs where the owner fails to do so. Thus, the authority to do so must be contained in the governing documents.

Especially with more modern, well drafted documents, you will often find a clause in your documents which says that when the homeowners fail to maintain their property, the association is authorized to enter the premises and make repairs at the owner’s expense, after reasonable notice has been provided to the owner. Of course, what is “reasonable” will depend on the circumstances.

Unfortunately, your situation is far from unique in today’s economic climate. Owners in dire financial straits often do not make their mortgage payments. The bank will eventually initiate foreclosure proceedings. Under these circumstances, the owner may feel there is no way to salvage their interest in the property, or it is just not worth it for them, and they simply “disappear.”

In many cases, it is difficult for the association to ascertain the whereabouts of owners who have abandoned their properties, and thus notify the owner of the association’s intent to access the property and make repairs. Still, the association must make a reasonable effort to fulfill the notice requirement.

Where there is a mortgage and the bank has initiated foreclosure proceedings, it may also be appropriate to notify the bank of the situation. Banks are often unaware of the circumstances and upon being notified, may send someone out to maintain the property, since they have a substantial economic interest in it, and are usually conferred the right to do so by their mortgage agreement, or may seek court permission to do so. Other times, the banks are not equipped to have someone look after foreclosed properties, or they just do not believe it is worth the investment. If your association is considering the task of caring for “abandoned” properties (if authorized by your governing documents), please be aware that there may not be a way to recover the expenses incurred. A property owner who is unable to make mortgage payments, or carry out any other financial obligations (such as paying assessments to the association), is also likely unable to pay the cost of repairs on their “abandoned” property.

I would recommend consulting with the association’s legal counsel to verify whether the association has the authority to enter the property and make necessary repairs. Your attorney should also advise whether this is a proper expenditure of association funds, especially if the prospects of ultimately recovering the money spent are dim. Entering else’s property without proper legal authority may give rise to a trespass claim, notwithstanding the laudable intention of preserving the property values in your community.

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