IV. BUDGET (25%) 1. UTILIZING BUDGET PROCEDURES

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1 IV. BUDGET (25%) 1. UTILIZING BUDGET PROCEDURES The budget is how the association projects how much the members will need to pay in assessments in order to pay for the maintenance and other costs of running the association. It also provides how the members assessments will be calculated. In other words, the association s budget is how the association projects what revenues it will bring in and what expenses are anticipated to be paid in the upcoming year. The budget is the tool that assists the board in estimating the amount of revenue that must be generated in order to pay the association s expenses. Association boards have a fiduciary duty that is owed to all of the members of the association, and the budget assists the board in fulfilling this duty. Some associations create budget committees. Remember, committees that make recommendations to the board regarding the association budget must notice their meetings 48 hours in advance and the meetings must be open to the unit owners. The yearly budget is how the assessments (aka dues, fees or payments), that members must pay, will be calculated. Assessments are often collected annually, bi-annually, or quarterly (at least quarterly for condominiums). Board members and managers refer to the budget frequently throughout the year, comparing monthly financial statements to the budget, to make certain that the association is operating within budget. If the association is over budget, the board may consider making changes to the budget, but must follow the proper statutory procedures and it must be pursuant to the community s documents. The budget process should begin up to three months in advance of the meeting where it is to be reviewed and approved. The analysis should include any historical information that will be relevant to the upcoming year s budget such as, contracts for maintenance, costs of utilities, and past budgets. The payment histories of the members of the association are relevant to the creation of the new budget. Ask yourself, Are there any future anticipated expenditures or 119

2 projects that may have not been included in previous budgets? The more information that can be gathered the more accurate the budget will be, and this will lessen the chance of the association having to go back and amend the budget. It will also ensure that owner s assessments are calculated accurately to reflect their proper share of expenses. In older communities, the most effective building blocks for preparing a budget are budgets from the previous years. Recent budgets will usually provide a good idea of what expenses need to be accounted for and how much those expenses have historically cost the association. In newer associations, it is a little bit more difficult because you're going to have to rely on the budget from the developer in order to project the costs. Developer budgets can be less reliable and often underestimate the costs of maintenance and services. This is because developers are trying to project the unknown years in advance, and they also typically want to make the cost of living in the association not look too expensive for prospective buyers. a. EXPENDITURE CATEGORIES Budgets will likely have two main sections: operating and reserve. The operating section contains the expenses that relate to the day-to-day operation of the association. These expenses are referred to as line items. These are the expenses that the association anticipates it will incur during the budget period for normal operation of the association. The reserve portion of the budget, on the other hand, relates to funds restricted for specific purposes and usually involves large expenditures. Florida condominium associations are required to establish reserves, while homeowners associations requirements are circumstantial and exemptible. This means HOA s do not need to have reserves in their budgets unless there are specific circumstances that require it. Moreover, homeowners associations ability to establish reserves may be restricted by the association s governing documents. The following is the list of expenditures expected to be included in the budget of a condominium association: a. Administration of the association 120

3 b. Management fees. c. Maintenance. d. Rent for recreational and other commonly used facilities. e. Taxes upon association property. f. Taxes upon leased areas. g. Insurance. h. Security provisions. i. Other expenses. j. Operating capital. k. Reserves. (discussed in detail below) l. Fees payable to the division. b. FUNDING THE BUDGET The association budget is funded by the assessments collected by the association from its members. For condominium associations, an assessment means a share of the funds which are required for the payment of common expenses, which from time to time is assessed against the unit owner. The Homeowners Act defines assessment as a sum or sums of money payable to the association, to the developer or other owner of common areas, or to recreational facilities and other properties serving the parcels by the owners of one or more parcels as authorized in the governing documents, which if not paid by the owner of a parcel, can result in a lien against the parcel. A member of an association cannot waive their right to use the common elements in order to avoid paying their share of the assessments. Joint and Severable Liability for Assessment A unit owner, regardless of how his or her title has been acquired, including by purchase at a foreclosure sale or by deed in lieu of foreclosure, is liable for all assessments which come due while he or she is the unit owner. Additionally, a unit owner is jointly and severally liable with the previous owner for all unpaid assessments that came due up to the time of transfer of title. This liability is without prejudice to any right the owner may have to recover from the previous 121

4 owner the amounts paid by the owner F.S. Member parcel owners of HOA s have nearly identical responsibilities in regards to assessments F.S. For a unit owner to be jointly and severally liable with the previous owner for unpaid assessments means that if there are assessments owed on a condominium unit when a new owner purchases a unit, then the new owner and the previous owner are collectively responsible for the payment of those unpaid assessments. This protects the association by making both the new and previous owners collectively responsible, thus preventing either of them from skirting their responsibility to pay assessments and to take care of any unpaid assessments before, during, or after the time of closing on the sale of a property. Safe Harbor Safe harbor is a law that protects banks when banks foreclose on homes within associations. They are only responsible for paying a fraction of the unpaid assessments left over from the previous homeowner thus wiping out the majority of the debt. This means the association will never be able to collect all of those unpaid assessments. While Safe Harbor does primarily benefit banks, the association does benefit by incentivizing the banks to take abandoned homes and put new owners in that will begin to pay their share of assessments. More specifically, the Safe Harbor provision in the Homeowners Act and Condominium Act limits liability for first mortgagees (usually banks) who take possession of property via foreclosure, to the lesser of: (1) only the previous 12 months assessments, or (2) 1% of the original loan. Again, Safe Harbor mostly benefits the banks, but it is arguably a benefit to the associations as well since it encourages banks to take title to property when the current owners are probably not paying their assessments anyway. Determining Criteria for Assessments 122

5 Three important factors when computing assessments are allocation, number of units/parcels, and frequency of collection: How are assessments allocated among the parcels or units? o Some homeowners and condominium association documents allocate assessments evenly across the board, and some communities documents allocate a different proportionate share of the assessments based on parcel or unit size. o Condominiums created after April 1, 1992, must allocate the assessments based on either an equal fractional basis or the units square footage of the unit relative to the total square footage of all of the units. This means that owners with larger units could be charged more in assessments. How many units or lots are there in the community? o The number of members must be known in order to compute how the expenses of the association will be divided among them. How frequently will the assessment be collected? o The Bylaws, or other community documents, usually identify how often assessments will be collected. Usually, assessments are collected annually, semiannually, or quarterly. o The Condominium Act states that assessments must be made against units not less frequently than quarterly. That means assessments collected at a frequency any less than four times a year will not suffice. 123

6 If an owner does not pay assessments, associations have the authority to place a lien on that unit or home. The association may then foreclose on that lien and take possession of the unit or home. c. BUDGET ADOPTION PROCEDURES Condominium Budget Adoption Procedure Condominiums have specific budget adoption procedures that must be followed in order to lawfully pass the budget. Passage of the condominium budget requires: A meeting that is open to all unit owners, with 14 days notice that o includes a copy of the proposed budget, and o is evidenced by executing an affidavit of mailing F.S. An affidavit of mailing is a written statement of facts (i.e. notice was produced and mailed), sworn to and signed, usually by the association manager, before a notary public. When you sign an affidavit of mailing, you re simply attesting, under law, that you swear the written statement in the affidavit that the meeting notice was produced and mailed is true. Multicondominium Associations Multicondominium associations must adopt a separate budget for each condominium the association operates and a separate budget for the association. For example, a multicondominium association with 3 separate condominiums would need to adopt 4 budgets: One for each of the three buildings and an additional one for the entire association F.S. Reconsideration of the Annual Budget If a board adopts a budget requiring assessments which exceed 115 percent of assessments for the preceding fiscal year, the board shall conduct a special meeting of the unit owners to consider 124

7 a substitute budget if the board receives, within 21 days after adoption of the annual budget, a written request for a special meeting from at least 10 percent of all voting interests. The special meeting shall be conducted within 60 days after adoption of the annual budget. At least 14 days prior to such special meeting, the board shall hand deliver to each unit owner, or mail to each unit owner at the address last furnished to the association, a notice of the meeting F.S. d. RESERVE REQUIREMENTS Shelling out money for events that have not yet come to fruition is often a difficult task. Most of us, at least at some point in our life, can relate to the difficulty of saving money for a rainy day. This is especially difficult when there is a shared risk amongst many people. This is why the government created Social Security and it is why states require drivers to carry auto insurance. Without some paternal compulsion, humans lack the foresight to prepare for rare, yet costly, expenditures. Similar to Social Security and insurance requirements, Florida requires that condominiums establish reserve funds in order to pay for future and necessary repairs. Overall, this is a good thing and associations and their members benefit greatly by adequately funding their reserves. Reserves means any funds, other than operating funds, that are restricted for deferred maintenance and capital expenditures, including the items required by Section (2)(f)2., Florida Statutes, and any other funds restricted as to use by the condominium documents or the condominium association. Rule 61B F.A.C. Reserves are set aside for specific expenditures that will be incurred in the future. These expenses are usually for major repairs to the association or condominium property. If the association does not budget for reserves and something happens that requires a large expenditure to replace or maintain a common element, then the association will have to levy a special assessment against owners in order to pay for the replacement or maintenance of the common element. Special assessments are assessments made outside of the budget period. More simply, they are assessments that were not budgeted for. Special assessments can often be quite costly. It 125

8 may be wise to budget for such occurrences via the reserves rather than hitting homeowners with an unexpected, out of budget period, assessment that they did not see coming. Florida condominium associations are required to establish reserves, while homeowners associations are not always required. There are, however, some circumstances where reserves may be required by HOA s. Homeowners associations ability to establish reserves may also be restricted by the association s governing documents. Condominium and Cooperative budgets must include reserve accounts for capital expenditures and deferred maintenance. These accounts must include, but are not limited to: roof replacement, building painting, and pavement resurfacing, and for any other item that has a deferred maintenance expense or replacement cost that exceeds $10,000. The amount to be reserved must be computed using a formula based upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item F.S. Note on estimated remaining use: For each identified project, the association must identify the anticipated date and cost of the project. For example, a community s roof may have an estimated remaining useful life of 10 years and replacement cost of $50,000. Therefore, in 10 years, the association will need to have $50,000 in the roof reserve account to pay for the replacement. Capital Expenditures and Deferred Maintenance may include: Roof Replacement Building Painting Pavement Resurfacing 126

9 Balcony Restoration Sidewalk Improvement Boardwalk Replacement Seawall Replacement Air Conditioning Replacement Reserves may be waived or reduced only upon the vote of a majority of all nondeveloper voting interests F.S. Reserve funds and any interest accruing thereon shall remain in the reserve account or accounts, and may be used only for authorized reserve expenditures unless their use for other purposes is approved in advance by a majority vote at a duly called meeting of the association F.S. Other Reserves The Department of Business and Professional Regulation (DBPR) Budget and Reserve Training Manual gives examples of other types of reserves, which may include: Insurance premiums, general deferred maintenance and capital expenditure reserve, or reserve for purchase of recreational equipment for the clubhouse. Many associations want to have a reserve called Contingency Reserve. The purpose of this account would be to fund items for which reserves have not been established or to cover unanticipated operating expenses. However, it is inappropriate to create a reserve account for this purpose as there is no apparent restriction on the use of the funds. Consequently, the account does not meet the definition of a reserve, and associations that desire to have a contingency account should budget for a surplus in the operating fund. As stated above, the association may create a reserve for general deferred maintenance and capital expenditures. Funds in this account may be used for any deferred maintenance or capital expenditure project, but not for ordinary operating expenses. 127

10 Pooled Reserves Florida Administrative Code, Rules 61B and 61B , allow associations to establish pooled reserve accounts instead of, or in addition to, individual reserve accounts. This means that an association may have a single source of funds to pay for multiple categories of reserve expenses. For example, if an association establishes a pooled reserve account for roof replacement, building painting and pavement resurfacing, funds may be drawn from this account to pay for any of the three items. Note: Unit-owner approval is required in order to use pooled funds to pay for any expenses that are not allocable to the categories included in the pool. e. AMENDING THE BUDGET The same procedures and notice requirements that must be followed in order to adopt the budget must be followed in order to amend the budget. For condominiums, this would require a special meeting with notice delivered with a copy of the proposed budget at least 14 days prior to the date of the meeting. If the proposed amendment requires a membership vote, such as a proposal to use reserve funds for something other than the designated reserve purposes, then the procedures to conduct a member vote must be followed instead. f. SURPLUS FUNDS Common surplus means the amount of all receipts or revenues, including assessments, rents, or profits, collected by a condominium association which exceeds common expenses. Common surplus is owned by unit owners in the same shares as their ownership interest in the common elements F.S. The provision of the Not-For-Profit Corporations Act requires that any surplus be used to reduce assessments. Chapter 617 F.S. However, common surplus resulting from a special assessment 128

11 may either be returned to the unit owner or applied as a credit toward future assessments F.S. 2. BUDGET FOR RESERVES a. GOVERNING DOCUMENT EXISTENCE Homeowners associations are not required to establish reserves, but may do so if it so chooses. The funding of reserves, however, is constricted to the governing documents limits toward increasing assessments. If the budget of the association does not provide for reserve accounts pursuant to (6)(d) and the association is responsible for the repair and maintenance of capital improvements that may result in a special assessment if reserves are not provided, each financial report for the preceding fiscal year required by subsection (7)-[Financial Reporting] must contain the following statement in conspicuous type: 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 (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 F.S. b. RESERVES, WAIVER, AND TRANSFER PROCEDURES Waiver of Reserves The requirement for condominiums to budget for reserves does not apply to an adopted budget in which the members of an association have determined, by a majority vote at a duly called meeting of the association, to provide no reserves or less reserves than required by F.S. 129

12 Use of Reserve Interest Reserve funds and any interest accruing thereon shall remain in the reserve account or accounts, and may be used only for authorized reserve expenditures unless their use for other purposes is approved in advance by a majority vote at a duly called meeting of the association F.S. Proxies & Reserves Proxy questions relating to waiving or reducing the funding of reserves or using existing reserve funds for purposes other than purposes for which the reserves were intended shall contain the following statement in capitalized, bold letters in a font size larger than any other used on the face of the proxy ballot: WAIVING OF RESERVES, IN WHOLE OR IN PART, OR ALLOWING ALTERNATIVE USES OF EXISTING RESERVES MAY RESULT IN UNIT OWNER LIABILITY FOR PAYMENT OF UNANTICIPATED SPECIAL ASSESSMENTS REGARDING THOSE ITEMS F.S. Similarly, if an HOA has established reserves, it may terminate the reserve account upon approval of a majority of the total voting interests of the association. Upon such approval, the terminating reserve account shall be removed from the budget F.S. Reserves for condominium maintenance may only be used for the purpose for which the reserve funds are intended, unless approved by a vote of the membership to do otherwise. Similarly, reserves may only be waived or reduced upon the vote of a majority of the voting interest. Reserve funds may not be commingled with operating funds except for investment purposes. c. RESERVE DISCLOSURES 130

13 Unless the association maintains a pooled account for reserves required by Section (2)(f)2. Florida Statutes, the association shall include a schedule stating each reserve account for capital expenditures and deferred maintenance as a separate line item with the following minimum disclosures: The total estimated useful life of the asset; The estimated remaining useful life of the asset; The estimated replacement cost or deferred maintenance expense of the asset; The estimated fund balance as of the beginning of the period for which the budget will be in effect; and The developer s total funding obligation, when all units are sold, for each converter reserve account established pursuant to Section , Florida Statutes, if applicable. Fla. Adm. Code 61B Budgets. 3. ASSISTING IN ANNUAL FINANCIAL REPORTING Generally, there are two different types of financial reporting that the community association manager, or management firm, will be responsible for. There are the monthly financial statements that are prepared mostly for the association s board of administration to review, and then there are the year-end financial statements that must be made available to all of the members of the association. Monthly Financial Statements At regularly scheduled board meetings, the manager of the association will usually provide the members of the board with financial statements. Monthly statements, for boards that meet monthly; quarterly statements, if the board meets less often. The financial statements will provide the board a snapshot of the financial health of the association. The financial statement will be prepared by either the manager, or an accountant in larger associations or associations managed by a community association management firm. 131

14 The financial statement will consist of an income statement and a balance sheet. The Income Statement will detail the income and expense activity for that period of reporting time and it will also show the cumulative activity for the year-to-date. This report will detail the income and expense activity against the budget. The Balance Sheet should detail the Association s Assets, Liabilities and Capital (Equity). In all cases, the Assets will equal Liabilities and Capital. It is the responsibility of the board of directors to review the financial statements for any areas of concern, and managers should be proactive in identifying any significant issues, and raising those issues with the board, so corrective action may be taken. Year-End Financial Reporting There are four different types of financial reports that an association may be required to prepare, and which type of report depends on the size and income of the association. When an association has more than 50 parcels or units and more than $150,000 in revenues, it must prepare a formal report. A formal financial report is either a complied, reviewed, or audited, depending on the association s revenues. Formal reports must be in accordance with generally accepted accounting principles (GAAP), and GAAP requires accrual accounting. See below. Types of Financial Reports Compiled a basic statement that does not include assurances from a CPA. Reviewed a more in-depth statement and includes limited assurances from a CPA. Audited the most in-depth statement and includes the highest level of assurances from a CPA. Report of Cash Receipts cash receipts are not considered a formal financial report. 132

15 Cash Basis vs. Accrual Basis Accounting The two primary basis of accounting are: Accrual Basis and Cash Basis. The accrual basis of accounting means revenues are recognized when they are earned and expenses are recognized when they are incurred, regardless of when cash is received or disbursed. The cash basis of accounting recognizes revenues when received and expenses when paid. The cash method. Under the cash method, income is not counted until cash (or a check) is actually received, and expenses are not counted until they are actually paid. Cash basis accounting omits information on unpaid bills or uncollected assessments and is not a true representation of the association s financial standing. Further, it is does not conform with Generally Accepted Accounting Principles (GAAP). Remember, GAAP requires accrual accounting. The accrual method. Under the accrual method, transactions are counted when the order is made, the item is delivered, or the services occur, regardless of when the money for them (receivables) is actually received or paid. In other words, income is counted when the sale occurs, and expenses are counted when you receive the goods or services. You don't have to wait until you see the money, or actually pay money out of your checking account, to record a transaction. Example 1: Your HOA rented out the clubhouse in November, and doesn't get paid until three months later in January. Under the cash method, you would record the payment in January when payment is received. Under the accrual method, you would record the income in your November when the clubhouse was actually rented. Example 2: The HOA purchases a new laser printer on credit in May and pays $1,000 for it in July, two months later. Using the cash method, you would record a $1,000 payment for the month of July, the month when the money is actually paid. Under the accrual method, you would record the $1,000 payment in May, when you take the laser printer and become obligated to pay for it. 133

16 Aside from being recognized as in accordance with (GAAP), there are benefits to using the accrual method of accounting. By indicating in the income statement when revenues have been earned and expenses have been incurred, the amounts will more easily be able to be compared to the budget to ensure that the association is within its budget. Or if the association is exceeding its budget, it can more easily correct course. It is important to have an understanding of the benefits of accrual method accounting. Most accounting departments of large community association management firms prefer to use accrual accounting. Often, board members or homeowners will not understand why the association uses the accrual method. They are used to balancing their personal checkbooks, not running a business, and therefore are more familiar with cash basis accounting money out, and money in rather than accrual, where expenses and revenues are recognized when the service has been incurred or provided. You want to be able to explain the benefits to the board and any homeowners if they raise any concerns. Some communities use the modified cash method of accounting. The modified cash method combines elements of the cash method and the accrual method. The modified cash basis method uses accruals for long-term balance sheet elements and the cash basis for short-term ones. This method does not comply with the Generally Accepted Accounting Principles that companies must follow when preparing their financial statements. a. ANNUAL FINANCIAL REPORT AND FINANCIAL STATEMENT REQUIREMENTS The Condominium Act says that within 90 days after the end of the fiscal year, or annually on a date provided in the bylaws, the association shall prepare and complete, or contract for the preparation and completion of, a financial report for the preceding fiscal year. Within 21 days after the final financial report is completed by the association or received from the third party, but not later than 120 days after the end of the fiscal year or other date as provided in the bylaws, the association shall mail to each unit owner at the address last furnished to the association by the unit owner, or hand deliver to each unit owner, a copy of the financial report or a notice that a 134

17 copy of the financial report will be mailed or hand delivered to the unit owner, without charge, upon receipt of a written request from the unit owner. The Homeowners Act Section (7) contains nearly identical language. Sample Budget and Financial Statement notice form: ACME ACRES HOMEOWNERS ASSOCIATION, INC North Road, Suite 123 Hollywood, FL Ph: Fx: January 2017 Dear Homeowner: In accordance with Florida Statutes, the year-end financial statement and 2017 budget are available for your review. If you would like a copy of either of these documents, please complete the transmittal information below, place this notice in an envelope, and return it to the above address. Please feel free to contact us if you have any questions. Name: Property Address: Documents Requested: 2016 Year-End Financial Statement 2017 Budget Delivery Method Mail to Address on File 135

18 ACME ACRES HOMEOWNERS ASSOCIATION, INC. Financial reports shall be prepared as follows: An association shall prepare a complete set of financial statements in accordance with generally accepted accounting principles. The financial statements must be based upon the association s total annual revenues, as follows: An association with total annual revenues of $150,000 or more, but less than $300,000, shall prepare compiled financial statements. An association with total annual revenues of at least $300,000, but less than $500,000, shall prepare reviewed financial statements. An association with total annual revenues of $500,000 or more shall prepare audited financial statements. An association with total annual revenues of less than $150,000 shall prepare a report of cash receipts and expenditures. An association in a community of fewer than 50 parcels, regardless of the association s annual revenues, may prepare a report of cash receipts and expenditures in lieu of financial statements [] unless the governing documents provide otherwise & F.S. The compiled financial statement is the lowest level of service that a CPA can provide for a client s financial statement. A compilation basically involves presenting information, consistent with management s representation, in the form of financial statements, without expressing any 136

19 assurance on them. During a compilation engagement, the CPA is not required to verify or corroborate the amounts included in the financial statement that is presented by the client. A reviewed financial statement requires an accountant to perform more procedures than is required with a compilation. During a review engagement, an accountant is required by the governing standards to make inquiries of the client and perform analytical procedures related to the amounts and disclosures in the financial statement. An audited financial statement provides the highest level of assurance and, as such, requires much more work by the CPA then is required for a compilation or review. The most significant difference between an audit engagement and other financial statements is that the auditor is required to corroborate the amounts and disclosures included in the financial statements through test of the accounting documents, physical inspection, the use of third party confirmations or other procedures deemed appropriate. An audit engagement is planned and performed by an auditor with an attitude of professional skepticism and obtains various types of evidence to reduce the risk that the financial statements are materially misstated. Federal Income Taxes All corporations, for profit or not-for-profit, must file and pay federal income taxes. This does not necessarily mean they must pay taxes, only that certain forms must be filed. Homeowner and condominium associations that file federal Form 1120 (U.S. Corporation Income Tax Return) must file Florida Forms F-1120 or F-1120A regardless of whether any tax may be due. If you file federal Form 1120-H (U.S. Income Tax Return for Homeowners Associations), you are not required to file a Florida return. 4. CONTROL AND DISBURSEMENT OF FUNDS Commingling 137

20 Commingling is the act of mixing funds set aside for one purpose with other funds set aside for a separate purpose, especially when it is necessary to keep the funds separate. All funds collected by a condominium association shall be maintained separately in the association s name. For investment purposes only, reserve funds may be commingled with operating funds of the association. Commingled operating and reserve funds shall be accounted for separately, and a commingled account shall not, at any time, be less than the amount identified as reserve funds. This subsection does not prohibit a multicondominium association from commingling the operating funds of separate condominiums or the reserve funds of separate condominiums. Furthermore, for investment purposes only, a multicondominium association may commingle the operating funds of separate condominiums with the reserve funds of separate condominiums. A manager or business entity required to be licensed or registered under s , or an agent, employee, officer, or director of an association, shall not commingle any association funds with his or her funds or with the funds of any other condominium association or the funds of a community association as defined in s F.S. All homeowners association funds held by a developer shall be maintained separately in the association s name. Reserve and operating funds of the association shall not be commingled prior to turnover except the association may jointly invest reserve funds; however, such jointly invested funds must be accounted for separately. No developer in control of a homeowners association shall commingle any association funds with his or her funds or with the funds of any other homeowners association or community association F.S. 5. COLLECTING ASSESSMENTS HOA fees, which must be paid by homeowners, are often referred to as assessments within the community management industry. In Florida, assessments must reflect a member s proportional share of expenses, as described in the governing documents. When authorized by the governing 138

21 documents, the association has a lien on each parcel, which can be used to secure payment of assessments. The claim of lien secures all unpaid assessments, as well as interest, late charges, reasonable costs, and attorney fees incurred by the association during the collection process. To be valid, a claim of lien must state the description of the parcel, the name of the record owner, the name and address of the association, the assessment amount due, and the due date. a. TIME AND DUE DATES OF ASSESSMENTS The association s bylaws should be consulted in order to determine the proper method and appropriate times that assessments are to be collected. Typical assessment collection time frames are annually, bi-annually, quarterly, or monthly. Condominiums and Cooperatives must collect assessments at least quarterly, while Timeshare plans must assess owners at least annually F.S.; F.S.; F.S. Late Fees & Interest Assessments and installments on assessments which are not paid when due bear interest at the rate provided in the declaration, from the due date until paid. The rate may not exceed the rate allowed by law, and, if no rate is provided in the declaration, interest accrues at the rate of 18 percent per year. If provided by the declaration or bylaws, the association may, in addition to such interest, charge an administrative late fee of up to the greater of $25 or 5 percent of each delinquent installment for which the payment is late. Order to Apply Payments Any payment received by an association must be applied: 1) first to any interest accrued by the association, 139

22 2) then to any administrative late fee, 3) then to any costs and reasonable attorney s fees incurred in collection, and 4) then to the delinquent assessment F.S. Partial Payments and Restrictive Endorsements Sometimes, when there is a dispute regarding assessments owed, owners will send a partial payment check for assessments with a restrictive endorsement, such as writing final payment or a letter with instructions specifying that acceptance of the payment will settle any disputed monies owed. Acceptance of such payments could unwittingly forgive a debt owed by a member of the association. Associations must proceed with caution when a homeowner sends in a partial payment so as not to forgive a debt that is owed to the association. b. DEVELOPER OBLIGATION FOR ASSESSMENTS In condominiums, if authorized by the declaration, a developer who is offering units for sale may elect to be excused from payment of assessments against those unsold units for a stated period of time after the declaration is recorded. However, the developer must pay common expenses incurred during such period which exceed regular periodic assessments against other unit owners in the same condominium. The stated period must terminate no later than the first day of the fourth calendar month following the month in which the first closing occurs of a purchase contract for a unit in that condominium F.S. In homeowners associations, developers do not have to pay assessments for whatever period that is specified in the declaration, stating the developer is obligated to pay any operating expenses that exceed the assessments received from the other members. Guarantee Period 140

23 A developer who owns condominium units, and who is offering the units for sale, may be excused from payment of assessments against those unsold units for the period of time the developer has guaranteed to all purchasers or other unit owners in the same condominium that assessments will not exceed a stated dollar amount and that the developer will pay any common expenses that exceed the guaranteed amount. Such guarantee may be stated in the purchase contract, declaration, prospectus, or written agreement between the developer and a majority of the unit owners other than the developer and may provide that, after the initial guarantee period, the developer may extend the guarantee for one or more stated periods. c. LIABILITY FOR ASSESSMENTS A condominium unit owner, regardless of how his or her title has been acquired, including by purchase at a foreclosure sale or by deed in lieu of foreclosure, is liable for all assessments which come due while he or she is the unit owner. Additionally, a unit owner is jointly and severally liable with the previous owner for all unpaid assessments that came due up to the time of transfer of title. This liability is without prejudice to any right the owner may have to recover from the previous owner the amounts paid by the owner F.S. Jointly and severally liable means that both the new owner and previous owner are both responsible for the unpaid assessments and the association may go after either owner, or both, for the unpaid assessments. Without prejudice means that even though the current owner is liable for the unpaid assessments, after paying the assessments, he still may attempt to recover the unpaid assessments from the previous owner. Similarly, an HOA parcel owner, regardless of how his or her title to property has been acquired, including by purchase at a foreclosure sale or by deed in lieu of foreclosure, is liable for all assessments that come due while he or she is the parcel owner. A parcel owner is jointly and severally liable with the previous parcel owner for all unpaid assessments that came due up to the time of transfer of title. This liability is without prejudice to any right the present parcel owner may have to recover any amounts paid by the present owner from the previous owner. For the 141

24 purposes of this paragraph, the term previous owner shall not include an association that acquires title to a delinquent property through foreclosure or by deed in lieu of foreclosure. The present parcel owner s liability for unpaid assessments is limited to any unpaid assessments that accrued before the association acquired title to the delinquent property through foreclosure or by deed in lieu of foreclosure F.S. Reminder: Condominium owners or homeowners cannot avoid liability for assessments by waiving their use or enjoyment of the common areas. Conversely, condominium and homeowners associations cannot restrict essential services from homeowners for not paying assessments. For instance, if a community has a gate that can only be opened via gate card, the association cannot revoke a homeowner s access through the gate for unpaid assessments. Nor can they cut off the water, because water is an essential service. They may, however, be able to restrict use of nonessential amenities such as a pool or tennis courts. d. STATUTORY AND DOCUMENTARY ASSESSMENT LIEN RIGHTS Homeowners Associations and Condominium Associations can obtain liens on owners property for unpaid assessments. Pre-Lien Notice HOA s cannot file the lien until it provides a written demand letter that provides the homeowner with 45 days to pay the amounts due. This letter is known as a 45-Day Notice or a Pre-Lien Letter. The letter must be sent by registered or certified mail, return receipt requested, and by first-class United States mail to the parcel owner at his or her last address as reflected in the records of the association, if the address is within the United States, and to the parcel owner subject to the demand at the address of the parcel if the owner s address as reflected in the records of the association is not the parcel address. If the address reflected in the records is outside the United States, then sending the notice to that address and to the parcel address by first-class United States mail is sufficient. 142

25 A Condominium Association cannot file its lien until 30 days after a notice of intent to file a lien has been delivered to the delinquent owner. Condo s have nearly identical certified mailing requirements as HOA s (see directly above). Liens for Rules Violations In addition to liens for unpaid assessments, homeowners associations MAY file a lien on an owner s property once a fine has reached $1,000 (fines must be reasonable and cannot exceed $100 per violation). Condominium associations, on the other hand, CANNOT file liens for unpaid fines. Lien Requirements To be valid, a claim of lien must state: the description of the condominium parcel, the name of the record owner, the name and address of the association, the amount due, and the due dates F.S. The lien is not effective 1 year after the claim of lien was recorded unless, within that time, an action to enforce the lien is commenced. The lien must be foreclosed upon within the year it was recorded F.S. Recent Changes in Lien Law (Statutory Forms) As of July 1, 2014, new legislation regarding liens went into effect. Mainly, numerous statutory forms were approved that allows community association managers to prepare certain lien notices so long as the managers conform to the language provided by the legislature. Prior to the 143

26 legislation, it was argued that managers cannot prepare these types lien documents because doing so amounted to the practice of law, which is illegal for non-lawyers. The release of lien, aka lien waiver, form for condominiums is provided in Chapter (5)(d) Florida Statutes. The lien waiver is used waive any lien recorded against an owner s property in the instance that the owner pays the assessments owed. The waiver would apply to the portion of the debt paid or the entire debt if the owner pays in full. Before foreclosing a lien, the condominium association must give at least 30 days written notice to the unit owner of its intention to foreclose its lien to collect unpaid assessments. The notice must be in the form provided in Chapter (6) Florida Statutes. Before a condominium association records a lien against a unit owner, it must deliver a notice of intent to file a lien 30 days prior to filing the lien. The notice of intent to record a claim of lien must conform to the form provided in Chapter (4) Florida Statues. The release of lien form for homeowners associations is found in Chapter (1)(d) Florida Statutes. HOA s must provide owners with 45 days notice before recording a lien for unpaid assessments. The statutory notice of intent to record a claim of lien form is found in Chapter (4)(a) Florida Statutes. Before foreclosing a lien, the homeowners association must give at least 45 days written notice to the parcel owner of its intention to foreclose its lien to collect unpaid assessments. The notice must be in the form provided in Chapter (5) Florida Statutes. The notice of intent to record a claim of lien must be in substantially the following form: NOTICE OF INTENT TO RECORD A CLAIM OF LIEN 144

27 RE: Parcel or (lot/block) (lot/parcel number) of (name of association) The following amounts are currently due on your account to (name of association), and must be paid within 45 days after your receipt of this letter. This letter shall serve as the association s notice of intent to record a Claim of Lien against your property no sooner than 45 days after your receipt of this letter, unless you pay in full the amounts set forth below: Maintenance due (dates) $ Late fee, if applicable $ Interest through (dates) * $ Certified mail charges $ Other costs $ TOTAL OUTSTANDING $ *Interest accrues at the rate of percent per annum. The notice of contest of lien must be filed in the following form: NOTICE OF CONTEST OF LIEN TO: (Name and address of association) You are notified that the undersigned contests the claim of lien filed by you on, (year), and recorded in Official Records Book at page, of the public records of County, Florida, and that the time within which you may file suit to enforce your lien is limited to 90 days following the date of service of this notice. Executed this day of, (year). 145

28 Signed: (Owner or Attorney) If the dispute of unpaid assessments is resolved and the association decides not to take action, a release of lien is filed in substantially the following form: RELEASE OF LIEN The undersigned lienor, in consideration of the final payment in the amount of $, hereby waives and releases its lien and right to claim a lien for unpaid assessments through, (year), recorded in the Official Records Book at Page, of the public records of County, Florida, for the following described real property: (PARCEL NO. OR LOT AND BLOCK) OF (subdivision name) SUBDIVISION AS SHOWN IN THE PLAT THEREOF, RECORDED AT PLAT BOOK, PAGE, OF THE OFFICIAL RECORDS OF COUNTY, FLORIDA. (or insert appropriate metes and bounds description here) (Signature of Authorized Agent) (Signature of Witness) (Print Name) (Print Name) (Signature of Witness) (Print Name) Sworn to (or affirmed) and subscribed before me this, (year), by (name of person making statement). day of (Signature of Notary Public) (Print, type, or stamp commissioned name of Notary Public) 146

29 Personally Known OR Produced as identification. The intent to foreclose must follow substantially the following form: DELINQUENT ASSESSMENT This letter is to inform you a Claim of Lien has been filed against your property because you have not paid the (type of assessment) assessment to (name of association). The association intends to foreclose the lien and collect the unpaid amount within 45 days of this letter being provided to you. You owe the interest accruing from (month/year) to the present. As of the date of this letter, the total amount due with interest is $. All costs of any action and interest from this day forward will also be charged to your account. Any questions concerning this matter should be directed to (insert name, addresses, and telephone numbers of association representative). In response to the foreclosure action brought by the association, a homeowner may respond with a qualifying offer. The qualifying offer is a written offer to pay the amount secured by the association s lien plus amounts accruing while the lien is pending. The filing of the qualifying offer postpones the foreclosure action for up to 60 days. The qualifying offer must adhere to the following form: QUALIFYING OFFER AUTOMATIC STAY INVOKED 147

30 PURSUANT TO F.S I/We, [Name(s) of Parcel Owner(s)], admit the following: 1. The total amount due the association is secured by the lien of the association. 2. The association is entitled to foreclose its claim of lien and obtain a foreclosure judgment for the total amount due if I/we breach this qualifying offer by failing to pay the amount due by the date specified in this qualifying offer. 3. I/We will not permit the priority of the lien of the association or the amounts secured by the lien to be endangered. 4. I/We hereby affirm that the date(s) by which the association will receive $ [specify amount] as the total amount due is [specify date, no later than 60 days after the date of service of the qualifying offer and at least 30 days before the trial or arbitration date], in the following amounts and dates: 5. I/We hereby confirm that I/we have requested and have received from the homeowners association a breakdown and total of all sums due the association and that the amount offered above is equal to or greater than the total amount provided by the association. 6. This qualifying offer operates as a stay to all portions of the foreclosure action which seek to collect unpaid assessments as provided in s Signed: (Signatures of all parcel owners and spouses, if any) 148