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Weathering the Storm of Unexpected Community Association Financial Needs

In Florida, particularly in the summer months, a beautiful sunny day can suddenly morph into a torrential downpour. Similarly, an association with no obvious financial problems can suddenly find itself in the perfect storm that arises when restrictive financial language in governing documents, unexpected-yet-necessary repairs and a shortage of funds collide. There are various ways a community association can address these unexpected financial times as there is no one size fits all. Key however to every community is discussing the issue with its attorney, treasurer and accountant as the budget, fund availability and governing documents all come into play.

The Florida Condominium Act, Cooperative Act and Homeowner’s Association Act all address annual budgets. Generally, the annual budget should set out the estimated revenues and expenses for the year. In addition to annual operating expenses, a condominium association and a cooperative association is required to include reserve accounts for capital expenditures and deferred maintenances. These accounts must include roof replacement, building painting, and pavement resurfacing (regardless of the amount of the deferred maintenance expense or replacement cost), as well as for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000. The budgets for Florida homeowner’s associations may include reserve accounts for capital expenditures and deferred maintenance for which the association is responsible, depending on whether the developer originally established them and/or if the membership affirmatively elects to do so.

In any event, statutory reserve funds are protected under Florida community association law, in that they may only be used for authorized reserve expenditures. Use of reserve funds for any other purpose must be approved by the membership. Further, even if the money is needed for repairs of items that are within the items specifically reserved for, if the reserve money is insufficient to cover the expense the association must seek the rest of the money from other sources.

The need for more money may result in additional assessments. Assessments that are levied above and beyond those derived from the budget are referred to as special assessments. However, Florida community association law does not specifically state that a community association has unfettered special assessment authority. This requires turning to the governing documents of the association for guidance. Some governing documents place restrictions on the right of the association to levy special assessments in terms of the amount of the special assessment or the need for member approval. Even in cases where the Board of Directors is empowered to levy a special assessment without membership approval, the statutes (and sometimes the governing documents) impose specific notice requirements for the meetings at which these assessments will be considered and notice requirements to advise owners of what their share is and when it is due. Finding out about the restrictions, notice requirements specifications and other legal requirements too late can hamper an association’s ability to timely begin collection of necessary funds.

Another option that is sometimes considered as a solution when funds are unexpectedly needed for a repair is a loan or line of credit. As with the special assessments referenced above, some association governing documents require a particular percentage of owner or other approval to authorize the association to borrow money. Further, loan documents can be complex and extensive and have a number of requirements that the association will have to meet before closing the loan. The association should consult with its legal counsel to assist with this and make sure it is not improperly providing collateral to the bank as part of the loan.

The words “unexpected financial needs,” by their very nature indicate the association does not know about them in advance. However, this does not mean that the association cannot prepare for the possibility of unexpected financial needs in advance. It can and it should. Prior to preparing the next year’s budget, community associations should meet with their accounting and legal professionals to discuss the benefits and detriments of the varying options available to the association for funding unexpected financial needs and the approval or procedures required in order to use any one of them. It may be that a revision to the proposed budget or reserves or amendments to the governing documents can be used to make the process less frustrating. Making it easier to weather the storm when it does strike.

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