Alan Tannenbaum...: Good morning everybody. This is Alan Tannenbaum, of Tannenbaum, Lemole & Hill. I'm here with my partners, John LA and Cindy Hill.
Alan Tannenbaum...: And we ask everybody to put themselves on mute. If you have questions, send them through the chat feature. We will ultimately get to everybody's question. If you have questions after the program, you can email us. We're happy to respond to what we can as long as it's not two document specific.
So we're going to be talking money today. Big topic for every condominium and Homeowner Association in Florida. Financing was difficult to knock in past years, but today we have a series of added burdens, one that the legislature created primarily for three story condominiums, but also other condominiums in Florida. You've had the impact of two major hurricanes in the last season that have thrown the insurance markets into a tail spin, with greatly increased insurance premiums, not only for associations, but also for individual owners on their individual policies. Add to that increased construction costs and supply side problems in the construction industry, and you have a lot of financial pressure on associations.
We're going to be taking at 10,000 square foot view today of some of the things that you should be keeping in mind. We're not going to get into the weeds as far as the statutory changes on reserves for condominiums. We're not going to be tackling the depth of the insurance crisis. So this is a 10,000 square foot view of things that you should be keeping in mind, maybe some bullet points and recommendations for you as you approach next year's budget season on best practices. So for those who wanted to detail explanation of the new reserve statute of the condo, this is not going to be the seminar for that. You can go to some of our other seminars that we have put on in that topic and review those.
So let's get on it and we're going to cover first, and I'm going to ask Cindy to cover first the subject of reserves, but primarily from the standpoint of where do reserves fit in when you're looking at the financial health of an association and how to confront financial challenges. You're on Cindy.
Cindy Hill, Esq...: Well, as Alan was saying, we're not getting into the weeds with this, so for those of you who have some specific reserve questions, you might be a little frustrated by the overview I'm going to give, but again, the point of this seminar was to hit some more broad topics and as Alan was saying, some of these more specific reserve topics are previous conversations we've had on smartboards that are available on our website.
So with that caveat, reserves. Very different topics for condos and HOAs, but I'll try to briefly address each before we get going on how this can be part of the big financial problems that associations are seeing in our current economy. So ideally, both HOAs and condominiums should have been fully funding their reserves, whatever reserves they would have, but ideally we should all be saving a certain amount for our retirement every year and are we all doing that? No.
So if you're in an unfortunate position where you have not been fully funding and you're a condominium, you are looking at the upcoming deadline of December 31st, 2024 for the requirement that you fully fund certain structural reserves, and those include your roof, waterproofing painting windows, if the association's responsible for the windows. These are a statutory list that you should be consulting with professionals to make sure that you're going to be prepared for this because you will not be able to waive those reserves after that 2024 date unless the legislation changes, which I would not expect to change. There are some current bills up in front of the legislature now to adjust some of these issues that are in the new laws, maybe fix a little glitch here, put a bandaid there, but I'm not seeing substantive changes. So I would be still planning for that deadline and knowing that you're not going to be able to have owners who can waive reserves after that time on these structural issues. So those are your definitely mandated reserves.
I will briefly address the Division of Condominiums has taken the position that the condominiums under three stories still have to do this as well, that they will no longer be able to waive their reserves on structural issues either. That is one of the issues though, in some of the new bills that is proposed to be changed, so watch this space. For homeowner associations they might not have any mandated reserves at all depending on how they were set up. Regardless, I would say if you have structures that you reserve for such as a clubhouse or you have private roads, if you've not gotten a reserve study in the last few years, I think it's time to revisit that because inflation has raised the cost of everything and you might not be saving for the adequate amounts.
Moving on to discretionary. Condominiums will still be able to vote to waive non-structural reserves. Again, consult with professionals and your counsels to what that list would be for your community, but as an example, it would include paving the parking lot, resurfacing the pool. These are not going to necessarily be structural reserves which you can no longer waive. So it's important to remember that once the new law takes an effect on 2024 at the end of the year, you're going to have two categories. The category you cannot waive per statute and the category you can waive. So again, consult with your counsel, make sure that you know what those lists are and you're prepared. For homeowners associations if your reserves are discretionary and not mandatory, you may want to consult with your counsel because there is an option in the Homeowner Association Act where you can change that, where if you want to, you can make your reserves mandatory. There could be good fiscal responsibility reasons for doing that. On the flip side, there could be reasons why the community wouldn't do that, but I do want HOAs to know that they have that as an option, that if the majority of all the lot owners approve, a homeowner association can have mandatory reserves.
Moving on to what we experienced in this area last year with Hurricane Ian, looking at your reserves as you revisit them, think about damages that were not covered, both for condominiums and HOAs. I had an HOA that had a couple hundred thousand dollars worth of landscaping that was just eviscerated by the hurricane, and of course that was not covered. I know condominiums that lost landscaping. I know of condominiums that lost carports that were not covered. I've heard of condominiums and town homes losing lanai screens that were not covered. These are not necessarily issues that are going to be reserve items, but these are issues that could be reserve items and should be addressed as you think about how you're going to save funding going forward and the lessons that we've learned from Hurricane Ian, which relates to a similar issue, the insurance deductibles. Some of the insurance deductibles that my clients had after Hurricane Ian, before they even got coverage, were a shock to them. They honestly did not know what the deductibles were, and I think that's because we had all gotten pretty comfortable here in the greater Sarasota Tampa Bay area at least, that hurricanes weren't really a big concern for us. So our hurricane insurance was not something that we revisited with some sort of scrutiny.
So again, not directly related to reserves, but I do feel like when it comes to planning ahead, thinking about the lessons we've learned from Hurricane Ian and thinking about adding reserves for some of this funding is definitely worth a revisit. So with that in mind, I think that takes us to budgeting, Alan.
Alan Tannenbaum...: Jon, can go to the next slide. So the topic, establishing a realistic budget and just some things statutorily to keep in mind. First for condos, and again, this is a 10,000 foot level view, but remember some basics. The budget must be adopted at least 14 days before the start of your fiscal year. So if your a condo, and it's the summer season, it's good time to start the budget preparation because if your fiscal year starts January 1st, the budget must be adopted by the middle of December and there's a lot of things that proceed that. So it's actually the budget, the preparation for a condo where you're on a normal calendar fiscal year, your process actually needs to begin in the fall at the latest. The budget meeting, of course, has to be open to the owners. The proposed budget has to be presented to the owners at least 14 days in advance.
So again, look at the timing. If you have to adopt the budget by the middle of December and you're going to have the meeting right up at the deadline, you're going to have to get that notice out by at least December 1st, and we recommend that that occur earlier.
An owner has a right in a condominium to object to the budget, but they have to have 10% of the owners going with them on that challenge. If the budget assessments exceed 115% of the proceeding year, but remember that 115% does not include reserve increases, non-reoccurring expenses and betterments, those are excluded from that 115% calculation. So consider really, if normal operating expenses go up more than 15%, then that 10% can object to the budget. Then there's a procedure for adopting an alternative budget. I don't think that happens very much and there would be a lot to be ironed out, but just be aware that they have that right.
Really important, we're not going to go through it here, but if you're preparing the budget, you need to look very carefully at 718, 504 21, which actually is in the developer section of the statute, but gives a detailed recitation of what needs to be in a condo association budget, all of the line items that need to be accounted for are set forth in detail, and it's a requirement of 718 112 that your budget meet the requirements that are in 718 504 (21). We're not going to go through those here, but everybody should be aware.
But comparing that to HOAs and Jon, if you go to the next slide, this is one of the great distinctions between operating a condo association and operating an HOA. There's very little that 720 governing HOAs has to say about budgeting. There are some elements that have to be in the budget that's covered by 723 036 (a), but beyond that budget adoption is document driven. So you're not going to have the detailed requirements that are statutorily required for a condo for an HOA, but look carefully at your documents because they may have something to say about what needs to be in your budget. Also, the reserve requirements are far different. HOA doesn't actually need to have reserves unless it's mandated by your documents.
Now here's an important thing to consider and that is a line item in your budget, you could call it a contingency. I think that's a good description for it or call it the line item for surprises. So you can include in your adopted budget a contingency line item that would cover cost of overrides in any of the existing budgetary elements. So for instance, it certainly was possible for an association, if they were anticipating insurance increases, to include in the line item for insurance what they paid last year, but also either in the insurance line item or in a C line item, an additional amount of money to cover what might be potential increases.
Now, nobody in Florida expected that their insurance was going to go up 200 or 300%, so it was very doubtful that anyone was going to have a contingency that would've covered. But in an age where the legislature is acting, we can't control what's happening in the construction industry or the insurance industry, probably a good idea going forward to have a decent amount in that surprise or contingency line item going forward to cover the volatility that you may be seeing over the next four years.
So realistic budget means certainly determining through an intelligent process what the anticipated costs are going to be in each line item, but also incorporating in there something for surprises. So with that, Cindy is going to talk about budget amendments.
Cindy Hill, Esq...: So before we get to the discussions on special assessments and borrowing, which I know that many of you're going to have questions about, I can already see them showing up in the chat, I want to remind everyone that budget amendments are an option. Both condominiums and HOAs, unless there is some odd provision in their documents, can amend their budgets any time throughout the year for reasonable basis. So why would you want to amend rather than special assess or borrow? Well, some documents have some restrictions on the association taking out a loan that might present a hurdle. They may require a very high owner percentage, for instance, and the same concern may be there for a special assessment. Some older documents don't even mention special assessments in them. So you may have concerns about whether there could be a legal challenge and maybe you want to amend your documents and fix that, but in the meantime, you need the money right now.
So just remember that budget amendments are an option, and if they are looked into, you do need to make sure they're treated with the same notice provisions that your annual budget is, they have to follow the same, notice to the owners decided at open meetings, whatever provisions your documents provide or the statute, depending on if you're a condo or HOA. So I just want to put that reminder out there and now we'll get onto the topic that I'm seeing-
Alan Tannenbaum...: Let ask you a question first, Cindy, before we move on.
Cindy Hill, Esq...: Sorry?
Alan Tannenbaum...: Let me ask you a question first.
Cindy Hill, Esq...: Oh, okay. Go ahead Alan.
Alan Tannenbaum...: So with that 115% provision in a condo, let's say that three months into a new budget, there's a budget amendment that increases that year's budget above the 115% level. Do you think that owners would still have the right to, more than 10%, now challenge the amended budget?
Cindy Hill, Esq...: I think they arguably have the right to challenge because there's not a provision in the statute that makes an exception for a rise in insurance. I don't think the legislature saw anything like this coming. There is a provision that says if it's basically like a one-time expense, and I'm paraphrasing, it's written more detailed in the statute, that's not anticipated for future years, it can't be part of that assessment to be challenged, but I don't know how we could... and you could make the argument, maybe we could all hope that these high insurance premiums will be this year and not next year, but I don't think that that's an argument anybody can make with any real knowledge, that's too out in the ether, so to speak, but at the same time, ultimately the board has a fiduciary duty to ensure that the facilities are insured in condominiums, that's specifically in the statute. Governing documents for HOAs are likely to put a similar burden.
So if owners want to challenge insurance, they can challenge it, but at the end of the day, the associations are going to need to take the insurance actions they need to take, even if owners object to the high costs, just like FPL can raise their rates for instance, but we all can't just decide not to pay it because we don't like it, FPL will shut us off. It's not the same example, but it's a similar example, there's obligations that are not discretionary.
Alan Tannenbaum...: I think the dreaded special assessment is next. Why don't you take that on?
Cindy Hill, Esq...: I've never seen so many special assessment questions in a season as I've gotten this year, which tells me that a lot of condos and HOAs, condos in particular, imposing special assessments and understandably so, not just the insurance, but for condominiums of a certain size, the milestone and the servs inspections and reserve studies are really hitting their budgets hard with these tight timeframes legislatures put on us.
So one of the mistakes I see made, and I've seen it over all the years I've practiced, is that with a special assessments decided by a board, people don't necessarily realize that that means that at the same time the statutes for both HOAs and condos require that that board meeting be noticed to the owners. There's a disconnect there where there's kind of a presumption of it's a board meeting, all we have to do is post the meeting like we always do, and notice the board. No, both the HOA and the condo statutes, and I've got the sites up here on the PowerPoint, require 14 day notice to the owners. So if you make that fundamental error, your special assessment could be questioned right out the gate. So I cannot emphasize enough, reach out to your counsel, double check on your special assessment requirements because if you mess up the procedural part of them and you have an angry owner or someone who wants to be difficult, you've got a problem. So that 14 day notice is something I can't emphasize enough.
The other issue is you do have to put in that notice specific statutory requirements, and I've quoted them again on the PowerPoint here. For condominiums the notice must specifically state that assessments will be considered and provide the estimated cost and description of the purpose for the assessments. Now, that doesn't mean you need to provide a three page list of all of the changes that are going to be made in terms of what sort of materials are going to be used to change the roof, that's not what I'm saying. But what I'm saying is you make need to make a good faith effort to say, "This special assessment is going to be for roof replacement," so that everyone knows what the funds go to.
For HOAs, similar requirement, you must include a statement that assessments will be considered and the nature of the assessments. A little more vague there, but again, the requirement is to try to tell the owners in good faith what the funds will be spent on.
For condominiums, that's particularly important because the condominium statute requires that if you do end up with surplus special assessment funds and you don't need them for that particular cost anymore, again, let's just say a roof, you cannot just then use them for something else. You either have to credit the unit owners on the general assessments or return the funds. So it's very important that you say what these funds are going to be used for.
Something to consider also when voting at a board meeting to have a special assessment, and again, this conversation is for the board meetings for special assessments, think about having a formal resolution. I do encourage my clients to have that. It doesn't take a lot of attorney's time to present you with a formal resolution so that you have a document the board can sign and fill in the blanks, so to speak, at the meeting in terms of what the assessment will actually be, whether it's going to be one payment, multiple payments when they're due, when will they be late. That resolution sets all of that right there at the board meeting and again, solidifies that you have done the process correctly and that going forward, you're going to be able to collect on it without having procedural concerns. And if you don't do the resolution regardless, once the special assessment is imposed, you do have to let the owners know the amount and the due dates. It makes sense, doesn't it? But you really have to do that. You can't just presume maybe that somehow they'll get word or however it will go through. You need to have a specific procedure, and I recommend actually sending out a paper notice, even if you already have some sort of system with management that maybe wouldn't be as formal.
So I know we're going to have a lot of questions on special assessments, but I would say first, Alan, did you have something in the chat you're seeing or Jon, did you have something you wanted to bring up before?
Alan Tannenbaum...: Well, let's do this. Let's get through the program and we'll hopefully have at least 10 minutes at the end to go through all of the questions on that. We'll give you an opportunity to study them and pick some of the ones out that you think are appropriate.
Cindy Hill, Esq...: And I am trying to... when I look like I might be distracted, I'm not distracted. I do try to answer some of the questions on the chat. So yeah, that's the quick download of the importance of the notice and procedures for special assessments. So Jon, I believe you're up next.
Jon Lemole, Esq...: Yep, I am. So I represent the litigation side of the firm. So I get to talk about claims and despite your best practices and best efforts to create a very good and solid budget for your communities, sometimes things happen and those things can potentially throw a budget completely out of whack. So what we're talking about here is, for example, you have a repair project or an improvement project that goes wrong, it's not done correctly, or maybe it's even completed and sometime later you find out that the contractor did defective work or like we had last year, you have a major hurricane that comes through and creates a whole bunch of different expenses for your community. So there may be potential claims that you can bring, whether it's a first party claim against your insurance policies or whether it's an actual claim against a contractor for defective work, and one of the things, and this is really a philosophical, I guess, discussion or issue, one of the things that I see often is that communities and people in general, review the idea of bringing a claim of some sort as an expense item. And that's primarily because it's no secret that lawyers, litigation costs can be expensive.
So when evaluating whether or not you should bring a claim of some sort, I think there's a natural bias to be very wary of it because, "Oh boy, that's going to be expensive. Lawyers are expensive, court costs are expensive," and that may be true, but I think that if we turn that around a little bit philosophically and look at claims as a potential source of revenue, it makes the discussion a little bit easier to digest and a little bit easier to present to your owners as well for those situations, like in homeowners associations where you may need to have owner approval in order to go forward with a claim.
Folks, we handle a lot of litigation on behalf of community associations. We handle defects claims when repair jobs go wrong, we handle claims coming out of turnover against developers and builders, and our job and any lawyer's job is to achieve a net result for that association, which creates positive cash flow. Okay?
So let's break that up down a little bit. Let's suppose you put a new roof on your buildings and six months after the project is completed, your roofs are leaking and you realize that the contractor did a really bad job on these roofs. So you can look at that potential claim as an expense item, "It's going to cost us a lot of money to go after that contractor. Also, we're going to have to make repairs," and if you make those repairs, that's all going to come out a hundred percent funded by your association and your owners.
If you look at it as a source of revenue, even with the expense of going forward with a claim, and it doesn't matter whether it's a net positive result of 10%, 20%, 50%, whatever it is, that reduces the burden that has to be shouldered by the owners in your community or by your budget, frankly, whatever that number is, less than a hundred percent, that's a positive result for the association. Now, any lawyer hopefully is going to try to maximize that net result for their client and that's our goal, that's always our goal, but it doesn't have to be complete reimbursement or a hundred percent I've been made whole because anything less than a hundred percent is still a positive result for your association.
So whether it's pursuing a claim for defective, for defective repair work or a defective improvement work, or whether it's a potential first party claim because we've seen a lot of associations that have, maybe for a variety of reasons after the hurricane decided, "Well, we probably don't have a claim. It's probably not going to be in excess of our deductible. Whatever we do, we're going to have to pay a lawyer or it's going to come out of the recovery or if we get an adjuster involved, that's going to come out of the recovery. All of that stuff is expensive, we may not have a very valid claim." Don't think of it that way. Look at it as a potential source of revenue. Investigate that, talk to your general counsel, talk to a first party insurance, plaintiff's attorney, talk to a firm like ours that handles construction litigation.
The other area, which I want to just touch on really quickly for some of the newer associations, is when you come out of turnover. We've represented a lot of associations coming out of turnover, whether it's a condominium association or homeowners association and we've been able to bring revenue back to the association by pursuing claims against developers and builders for, whether it's defects in the buildings, even in a single family home homeowner's association, for site issues, pavement issues, drainage issues, your site improvements.
So for your associations that are coming out of turnover or approach or approaching turnover or going through the turnover process or recently having gone through turnover, look at the idea of getting engineering studies done and I know it's an expense, but typically when you do those studies, you may find that you have potential claims against the developer and the builders, which can, as I've said, be a source of revenue for your association if you pursue those.
So even after you've paid the engineering expense and the expense of lawyers and costs to bring those claims, the net positive or the net result of that is money being returned to the association to help offset the costs of maintaining those conditions, fixing those problems that may have been identified by the engineer or putting money back into reserves for fixing things down the road, which may not need immediate attention, but may result in a shortened life expectancy for those systems, components, roads, drainage systems, lift stations, whatever they are. All of that is a way of managing the future cost for the association in a way that creates less of a burden on the association itself and the owners and returns money into the reserves of the association to handle those things.
So that's it on claims as a source of revenue, but that's the takeaway here, look at claims as a source of revenue, not necessarily just an expense item. With that, I think I'm throwing it back unless anybody's got questions or comments. I'm going to throw it back to, I think, Alan on loans and lines of credit.
Alan Tannenbaum...: Yeah, one more addition to what John just said. In a turnover situation the other inquiry is, did the developer handle our money correctly during the period of developer control of the association? So getting an auditor in to make sure that the developer used association funds only for association purposes and not for developer purposes, that all of the contracts were market value contracts, that association funds were not spent incorrectly, those are additional inquiries and additional sources of claim possibilities. I think 2, 3, 9, 6, 3, 3, there you go. Thank you.
Okay, next topic. Loans and lines of credit. I'm a great proponent for associations to consider project loans and lines of credit. I've been around long enough to remember the time early in my career when a condominium association president would go to a bank to say, "I need a loan." The first thing the bank officer would say was, "Well, what property can you put up as collateral?" And the association president would tell the bank, "Actually, a condominium association doesn't own anything other than maybe the office furniture and the pool furniture," and the bank officer would say, "No problem, I just need your personal guarantee and I will be happy to give you this loan." And the association president would say, "I'm not quite paid enough to put my personal assets on the line for my condo association." But what banks have finally realized, and this occurred over the last decade, is that condominium associations and HOAs, as long as their default rated on their assessment collection is low, are excellent risks, and now there's a bunch of banks that are happy to assist associations with project loans and lines of credit.
Now, what are the benefits of borrowing? And I'm talking about specifically for unanticipated or non-reoccurring expenses. So your reserves are not sufficient, and you have a major repair roofing project to undertake. Your choices are include that cost of that extraordinary expenditure in your normal budget or do a budget amendment if it happens bid year or do a special assessment.
But there's a fourth possibility, which is to borrow the money, either through a line of credit or a project loan, to undertake that repair effort. And the benefits are you're now spreading the cost of that project over several years rather than paying for an assessment upfront, and if you think about it, in the commercial world, if a company is going to build a new warehouse or a new factory, they don't necessarily put that on their current balance sheet. They may, from a strategic standpoint, borrow the money that's necessary in order to undertake that major project, and it doesn't become a normal balance sheet item. So you're spreading it over several years instead of the assessment upfront.
Now, as John indicated that if there's a claim involved. So let's say that you're going to make a claim against a party. The process is going to take a year, a year and a half to get the recovery, but you need to spend the money now to repair it or to even study it. That gives you the opportunity, through a line of credit, to pay those expenses and then when the recovery's made, then you pay the line of credit off, and all the association has incurred in the process is the carrying costs on the loan rather than for the entire repair, knowing that recovery is coming in the future.
For turnovers. So let's say you've an HOA has just turned over, you're going to get an infrastructure study by an engineering firm that's going to cost $75,000. You're going to get an audit from an auditor that's going to cost $10,000, and you're going to pay some legal fees for the negotiation of those issues with the developer. So you get $150,000 line of credit, which you use for those extraordinary expenses and after a year of negotiations, after you have all those studies done with the developer, the developer says, "We'll rent a check for $200,000 back to the association to cover those issues." and you could then recover the cost of what has been spent on that engineering cost and the legal cost and so forth without having to hit the owners with an increase in assessments that they're normally going to get anyway after turnover because the developer has understated those claims. So it gives a significant amount of flexibility. Again, the debt service and not the project cost will be reflected on the balance sheet and you're spreading it over it.
But here's a real key of where a line of credit is really helpful. Let's say you have a roofing project and it's a combination of a fixed price, but there are some allowances, let's say how much decking may be removed from the roof in the process. There's going to be some fascia and soffit work that's done that until you get into the project, you don't know what that cost is going to be. The contractor has in their contract that if the price of materials goes up over a certain amount, that they're able to increase the project cost by the amount of the material increases.
So you really don't know what that roofing project is going to cost, but if you have a wider credit, instead of having to go back to the owners to say, "Well, we passed a special assessment for $100,00, but we're really going to need $110,000 or $120,000 to finish the project and then try to go back to the owners, amend the budget, go for another special assessment, is having a line of credit gives you the flexibility to pay for extras or increased cost of a project more so.
So consider it is as an additional source of funding that has more flexibility, is not necessarily governed by some of the restrictions that might apply to a special assessment or a budget amendment or a budget adoption. But Cindy is about to kick me under the table because she's going to tell me that, just be very careful that your documents actually allow you to borrow money. Some documents don't allow that, some documents have other types of limitations. So the first thing you need to do if you're considering either a project loan or a line of credit, is to make sure you have your general counsel review your documents. You might need an amendment to support your ability to borrow money, but it presents an excellent source of flexibility for associations, and frankly, it's something that most corporations for profit and frankly governmental entities, utilize as part of their fiscal management. And I think that associations should consider it as a tool, especially in a era of fluctuating expenses, unanticipated, you always should have that backup.
If you think about it from a hurricane situation, a hurricane hits, you have immediate costs that you need to spend, totally unpredictable and to have that line of credit available to take care of emergency situations is really important capability to have if there's any type of casualty loss, hurricane situation and so forth, really important for that too.
With that, I'm going to turn it back over to Cindy who's going to give us a little tutelage on collection before we get into your questions.
Cindy Hill, Esq...: Yeah, I can see that there's definitely a lot of questions, and I particularly like to try to answer the ones where I feel like maybe I didn't speak as clearly on something as I had hoped to do. So I do want to make sure we got question opportunity to clarify any statements I made that may have confused anyone. That's the downside of trying to do quick nuts and bolts is sometimes it can be confusing.
So with that being said, the last part of this piece is efficient assessment collection. With the special as assessments, I'm seeing my clients impose I can promise you there's going to now be some collection issues. People are not necessarily going to be able to pay all these special assessments, particularly if they need to pay them more quickly rather than more spread out, which is more likely to be the case considering that these special assessments are coming from a need for quick funding from associations.
So one of the best things you can do as an association is set up a collections policy, work with your counsel, work with management, set up a policy that puts the timeframes or the delinquent amounts for each step of the collection process and for HOAs and condominiums, you have to do a first letter now that people call it various friendly things, the friendly letter, the pre attorney fee letter, there's all kinds of names for it. It is a first letter that goes out before you can impose any attorney's fees on the collection process. So there needs to be a conversation about who does that letter, if it's management or the attorney. For reasons you can probably guess, I recommend the attorney do it, not at any criticism to manage it, but I feel like it's unfair to put the burden on management, that's a legal requirement such as that letter puts.
That being said, it's each board's decision, and then to have a policy for the next two letters that come after that. The first one, which is the pre lien letter, and then the second, which is the claim of lien on the property, and then if you need to proceed with a lawsuit on the lien. The reason I highly recommend you involve association counsel and that discussion is a lot of board directors are not aware of how that process actually plays out and what it means to file for lean foreclosure for assessment collection, and that community associations can actually take possession of a property in the same way that a mortgage can if you don't pay your mortgage. Too much information to delve into right now, but certainly things to think about.
A policy also helps you avoid arguments of selective enforcement because whether or not a board is trying to let somebody slide and somebody not slide, which is unlikely, it's more likely that the board maybe isn't aware that this person's just as behind as this other owner just because board members are volunteers, managers are overwhelmed, maybe you're even self-managed. So a policy will help avoid treating one owner a little differently than another when it comes to assessment collections.
My last piece of advice is a practical one on this. Make sure you're getting regular updates from management or counsel on collections. I can tell you as counsel, I have been frustrated by trying to reach out and say, "Okay, the next step in this process is," and I don't get an answer back, and it's not because anybody... Well, I don't know, maybe they don't like me. There's always that, but I'm going to presume it's not because they don't like me, it's because there's not really a process in place where on the board meeting for each month it's being discussed, what the status is and what the attorney needs to know to move forward. So I highly recommend having a process.
Then the last caveat to that is there are debt collection laws where associations can get into legal trouble if they appear to be disparaging someone who has a debt. So with that in mind, I highly recommend always referring to the unit number, the lot number, the address. Do not use people's names when you are going over these matters and board meetings. So that's my quick and dirty on collection processes.
Alan Tannenbaum...: All right, Cindy, let's get into some questions. The question I'll answer right away, doesn't take much. David asked, "Do we have permission to use the seminar videos and transcripts to educate our board members and association members?" The answer is yes. They're published on our website. Our website is open for public view, have at it. So Cindy, you said you saw a number of questions. What do you want to respond to?
Cindy Hill, Esq...: I saw a lot of questions about special assessing for not having sufficient reserves. This is an issue that is a new issue for a lot of associations because up until the statutory deadline has been imposed to fund reserves, there's never been a need to necessarily a special assess for any reserve issue. So I hope that my answer has helped make clear that generally the practice is to put your reserves in your budget and have them be part of the special assessments, even if that means amending your budget because you're now going to have to fund for fuller for larger amounts. But I also wanted to make clear that that special assessing for reserves can be a set of circumstances that could make sense in particular facts, scenarios, and documents.
So I cannot advise as to what that would be. You will need to get with counsel on that, but I can say it's best practices to go ahead and be planning in your budgets for these increased reserve amounts and doing so earlier rather than later. Even if you want to go ahead and amend your budget for this, you're arguably doing your owners a favor if you're starting to set those costs out sooner rather than with a shocking amount later.
Alan Tannenbaum...: Cindy, I see a question from Donna about whether loans or lines of credit can be used for a reserve shortfall, and I'll handle this and you can edify on it.
Cindy Hill, Esq...: Sure.
Alan Tannenbaum...: Right now, the statute Condo Act does not allow you to get a line of credit or in order to fund reserves, and several folks have imposed it, but the legislature's not acting on it yet. So reserves have to be fully funded, but what's interesting about having a line of credit is you can use a line of credit to cover a budget shortfall. There could be a situation where you use a line of credit, you fully fund the reserves, but if the association runs out of money by the end of the year, you use a line of credit to cover operating shortfall, which is not restricted by the statute.
Cindy Hill, Esq...: That's absolutely right, Alan, it's a tap dancing act to use the line of credit that way, but again, at the risk is selling like a broken record, that's why these issues have to be individually dealt with counsel. The lending restrictions in your documents and how you're going to handle are vital to be analyzed.
Alan Tannenbaum...: Okay, so Diane says, "I'm working on a $700,000 loan for an 18 unit renovation interest rate. The only lender who will lend for 125 units is 11.5%, which is $80,000 in interest for...
Cindy Hill, Esq...: Woo.
Alan Tannenbaum...: Diane. I'll do it for 10%. So... no, don't call me. I haven't heard that. I didn't realize, and if you maybe contact some of the lenders that are involved with, for instance, the CII chapters, run that by additional lenders, but maybe some underwriter has determined that for a smaller condo, there's a greater risk for them. But I had not heard anything like that quoted. It's good to know.
Cindy Hill, Esq...: I haven't heard that either, but I will say at least one of my small condos did get a small business loan from the government for the damages due to Hurricane Ian and the percentage rate on that was like four something, and it's payable off in 30 years. So I don't know the circumstances of the facts you read Alan. Unfortunately, I can't find that scenario in the chat, but I throw that out there as something that might be available to an association.
Alan Tannenbaum...: Okay. There's a question from Susan, "Can an association especially assess for the entire projected cost of a project and not draw down the reserve funds for that asset line item? Possible reasoning is to have funds on hand for overrides to start up the funding again for that asset." So if I understand the question correctly, let's say that an association condo has a roof reserve with $200,000 in it and they need to do a re-roofing project. Do they have to use the reserve in order to fund that re-roofing project or can they separately pay for that re-roofing project outside of the reserve process? Does that make sense?
Cindy Hill, Esq...: I'm still trying to process. I'm sorry.
Alan Tannenbaum...: Okay. So you have a $200,000 reserve for roofing and you have a re-roofing project. Do you have to use the reserve for the re-roofing project or can you just pay for that roofing project either by borrowing or out of regular assessments? I don't see any necessary restriction on that. There's nothing that says you have to use a reserve to pay for an ongoing project if you choose not to.
Cindy Hill, Esq...: Yeah, it's the flip side that you can only use the reserve money for the project it's reserved for.
Alan Tannenbaum...: But there's nothing requiring you use the reserve to fund a project, you can use other sources of [inaudible 00:51:20] a restriction on that.
Cindy Hill, Esq...: That's a question honestly, I haven't gotten before, and I would always, again, would want to look at someone's documents. But yeah, I guess if there was a reason to do it that way, and it sounds like there is a reason based on the question, I'm not aware of a restriction that would prevent that.
Alan Tannenbaum...: So you raised a specter of somebody on your opinion on windows, which we've got.
Cindy Hill, Esq...: Yes.
Alan Tannenbaum...: So there are some condos where the windows are actually the maintenance and repair responsibility of an owner, which is never a good idea, but some documents require that. So I've heard differing opinions on whether it's appropriate or necessary for the association to reserve for an item like that where the maintenance or repair obligation for the windows is actually on the unit owner.
Cindy Hill, Esq...: And I will say this for what I call maybe villa or town home style condos, which are small ones, it's not unusual to see that the windows are the responsibility owner because they are more single family style structures. But I agree with you, Alan, there's a bigger problem if windows are the responsibility owners on a 10 story building and I do see that on occasions. This unfortunately gets complex, which is why I advised in the chat, if the windows are not the association's responsibility for your condominium, get with your counsel and find out what the answer on whether or not that's an issue, first of all, that should be looked into and assessed whether it makes good sense and maybe the documents be amended and/or if it's an issue where you're going to need to fund for it or be able to say, "No, we don't because we are not responsible for those costs." So that's a very document driven issue if it's not a hundred percent clear that the association's responsible,
Alan Tannenbaum...: I think you answered this question, but Diane asked, "Is insurance an item that could be excluded from the 115% rule?" And I think you answered that can't be excluded. It cannot be excluded.
Cindy Hill, Esq...: Yeah.
Alan Tannenbaum...: So if the new budget contains a great increase in insurance and it does increase the assessments by going over the 115%, then 10% of the owners can object, but here's the problem with the statute and the legislature kind of like boxed associations in, it says that you have to maintain and repair your buildings, you have to have insurance, you have operate appropriately, but yet, owners can come in and say, "Well, we want this alternative budget." Well, what line item will these 10% of owners suggest that the association cut? They can't cut something that's necessary to repair maintenance. As Cindy said, they can't say, "Okay, we'll cut the electric bill out this year, so we'll do a year without electric."
So I see what the legislature's trying to do, which is give owners some control over the expenses that their association that's going to assess for in a condo, but the solution that they came up with frankly is not very workable, and we rarely actually see owners trying to pass an alternative budget, most of the time they don't even know how to prepare an alternative budget to be considered.
Cindy Hill, Esq...: Correct.
Alan Tannenbaum...: Yeah. Let's see. Anything else you see, Cindy, you'd like to respond to?
Cindy Hill, Esq...: There's unfortunately more questions than I can get to, and I see the concerns. Let's see. There's so many of them. My apologies, there's just not enough time to get to everyone.
Alan Tannenbaum...: Yeah. Somebody's asked whether the new reserve and structural requirements applied to hospitals and apartment buildings over three stories. That answer is no.
Cindy Hill, Esq...: Correct.
Alan Tannenbaum...: It's only condominiums. And let's see. The question from Claire, "Is there a rule of thumb for reserve percentage of total quarterly assessments or is that too dependent on the unique circumstances of each association?" And I think, Claire, that your instincts were correct. If an association has had underfunded reserves for 20 years, the reserve portion of the assessment may be several times what the regular assessment is. So they're really not tied together. Your reserve assessment calculation is an independent calculation from what your operating assessment is going to be.
Cindy Hill, Esq...: Alan, I did see a question where someone was frustrated they can't get amendments to their community documents because they can't get enough people to come to a meeting. Although that's not a so much a financial question, although it might be related to trying to amend documents for financial issues, I will say I advise my clients when you're trying to do any kind of amendment due to apathy of owners and landlords who don't necessarily pay attention, you're going to have to get a committee to do a lot of reach out, go door to door, make phone calls, emails, get those proxies. Another option is instead of trying to update the documents with several issues and people get confused and ask questions, update the documents only with a change of the threshold needed. So let's say you currently need 60% of the owners to agree, you change it to 60% of the owners present at the meeting. Lower your threshold, that's another option, but that's really just some practical advice for anyone seeking to get document amendments.
Alan Tannenbaum...: Cindy, and we'll go on for a few minutes, even though we've passed noon, Sarah asked, "What is the current requirement for the amount that needs to be in the reserves from an HOA?" She says, "All the items in their reserves were damaged by Ian and I guess, utilized for Ian, will either be fixed or replace. How low can we draw down the reserves and for the future, what is the percentage of replacement cost reserves we need to have?" So remember, it's HOA, it sounds like it's fairly document driven, that question.
Cindy Hill, Esq...: Unfortunately, all the HOA reserves are going to be document driven because you have to start with the analysis of whether they are going to be statutory reserves, which require certain notice notifications to the owners at the annual meeting if they're not fully funded or if they're non statutory reserves. HOAs can be in either category and it sometimes isn't easy to determine what that category is. So you're going to have to start with the documents on those questions to see what needs to be done. I will say that odds are you've got a lot more flexibility, is going to be the good news in terms of correcting that deficiency.
Alan Tannenbaum...: Kathy, ask a very interesting question. "Does anyone have all-encompassing list of potential reserve items, a list that is not related to a specific property style, but would be of value for most property types?" Well, let's take an HOA for example. Most HOAs have a significant amount of landscaping, they may have carports, and sort of applies to condos too. And one of the things that groups discovered, as we mentioned during the hurricane, was, you lose hundreds of thousands. Some groups lost over a million dollars worth of landscaping. There could be project fencing that is lost, carports, none of which are covered by insurance policies, and it's up to each particular association whether you want to reserve for those issues in mind and would be quite a sizable reserve for that purpose.
Again, I talk about borrowing capacity. One of the things that a homeowners association has that a condo association doesn't have is real estate that actually can be leveraged to support a loan. So an HOA, for instance, let's say they lost $500,000 worth of landscaping, you could reserve for that, but that's keeping a lot of money on the sideline for an habit eventuality that they never occurred. But if instead the association had a line of credit that was available, it could fund that $500,000 landscaping replacement project, spread that cost over several years and that actually may be a more intelligent approach than necessarily reserving for that item.
So again, the flexibility of loans versus reserves is really exemplified there. But really for a condo, most of the things that you need to reserve for are statutorily required, but then look to your common grounds that are not generally affected by reserve requirements because reserve requirements in the Condo Act are primarily tied to buildings and systems, not to project amenities, not to your pool and landscaping and so forth. So if you're going to create additional reserves over the statute, you can look at those. Carports is another good example.
Cindy Hill, Esq...: Alan, I-
Alan Tannenbaum...: Yeah, go ahead.
Cindy Hill, Esq...: I was going to say, I've also seen some questions about borrow repayment options where, for instance, can an owner pay the amount that's their portion of the loan, so to speak, and avoid interest? Those are all going to be document driven questions in terms of how the loan is established and again, how the special assessment was imposed. So you should have those questions answered before the board imposes a special assessment for a loan or before the board takes out a loan. Again, I hate to be a broken record and say really is document driven, but those are the loan documents that need to be coordinated with the board's authority and whether there can be, let's say, incentive for owners to maybe pay upfront if they can do so, but then give other owners the opportunity to pay off a special assessment in stages, but also have them pay the interest on that. So just to give a general answer to that, there are options.
Alan Tannenbaum...: There's a question about foundation reserves. One of my favorite questions because I haven't figured the legislature out yet, of how you do a reserve for a building foundation without excavating under the building to figure out how that building foundation is functioning, which doesn't make a lot of sense. You'll probably cause more damage in the excavation process than it was worth. And really the whole subject of structural reserve, how do you come up with a number of, when you talk about hidden columns in buildings, slabs foundations, unless it's... if that the balconies are deteriorated to the point that they're going to need to be replaced, you can certainly come up with a number for that. But the super structure of the building is really intended to exist for the lifetime of the building and not be replaced. But they call them replacement reserve.
Cindy Hill, Esq...: And Alan, that's part of some of the, I mentioned earlier, there are some band-aids and glitches to the bills and the legislature. That is one of the issues that looks like they're trying to give some more advice on, but until there's actually new legislation that's up in the air.
Alan Tannenbaum...: Cindy, I've been given the hook by our producer, he says that we need to close down, but she has invited me to ask you to give some closing remarks on this whole topic. So you're on.
Cindy Hill, Esq...: Oh, well, again, my apologies I couldn't get to everyone's questions and I hope that at least this gave you some sense of where to start when looking at these issues because really that's what the point of this was. We're not going to be able to give detailed answers to scenarios that we don't know enough about, but I hope this gives you some guidance and some red flags to watch for, some options that are out there.
I want to thank the couple of participants who told us, first of all, about the problem with funding less than 25 units. I was not aware of that. Another participant mentioned that they've been offered a line of credit that's going to be secured by reserves in a CD. I had not heard of that either. So we're learning from all of you too, is what I would say.
Your comments are welcome, your questions are welcome. We appreciate the challenges as we all face these new issues that have been brought by the hurricane, the new statutes, inflation, just this trifecta of issues that have been presented to all of us. And those of you who are volunteers on the boards, my sympathies to you and my kudos to you for being involved with your associations in these troubled times. And again, thank you for the managers who participate as well, because usually the managers are the first people that the boards talk to. The better managers are informed on some of these issues, the better they can help their boards. So I really do appreciate this opportunity. And again, I am sorry we could not get to everything, but I hope the bullet points really were helpful.
Alan Tannenbaum...: Yeah, any questions you didn't get answered, email us and we'll try to hit it after the session. Thanks everybody for attending. See you next month.
Cindy Hill, Esq...: Thank you.
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