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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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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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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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A blog reader recently posed a question containing the following statement:

We are a HOA of 8000 parcels, and we do not have Statutory required membership or developer reserves.

Membership (mandatory or voluntary) in an homeowners association (HOA) is not regulated by Statute.  Section 720.301(9), Florida Statutes defines an "homeowners' association" or "association" subject to the requirements of Chapter 720 as:

... a Florida corporation responsible for the operation of a community or a mobile home subdivision in which the voting membership is made up of parcel owners or their agents, or a combination thereof, and in which membership is a mandatory condition of parcel ownership, and which is authorized to impose assessments that, if unpaid, may become a lien on a parcel.  The term "homeowners' association" does not include a community development district or other similar special taxing district created pursuant to statute.

In the event the association is considered a "homeowners' association" pursuant to Chapter 720, Florida Statutes and the budget contains reserve accounts (as defined therein), those reserves must be determined, maintained and waived in compliance with the statute.

More information is available about governance of homeowners' associations from Florida Department of Business and Professional Regulation, Division of Florida Condominiums, Timeshares and Mobile Homes.

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