Is an audited financial statement required?

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Legal Matters John C. Goede

Editor’s Note: Lawyers for Goede, Adamczyk, DeBoest & Cross answer questions about Florida community association law. With offices in Naples, Fort Myers, Coral Gables and Boca Raton, the firm represents community associations throughout Florida and focuses on condominium and homeowner association law, real estate law, litigation, estate planning and business law.

Question: I am a member of the board of directors of my homeowners association (HOA) and our financial statements require an annual audit, but we have very strict procedures and many professionals who constantly review the financial statements. Can we avoid the cost of an audit? RP, Naples

Reply: Yes it’s possible. In an HOA, an association with total annual revenues of $ 500,000 or more is required to prepare an audited financial statement each year. That being said, the bylaws later provide that members can vote to forgo audited financial statements instead of a lower level of financial reporting. The necessary voting threshold is the majority of the votes of interest present at a meeting where the quorum is reached.

Two things are important to note. First, the vote of the members mentioned above does not oblige the board to forgo the audit. There are many good reasons to get an audit and the board can request an audit even if the members approve the waiver. Second, the Condominium Act (different statute) previously provided that a condominium could only waive verification for three consecutive years before being required to obtain verification. In condominiums, this law was struck and was never in the law governing HOAs, so members could theoretically vote to waive the audit year after year.

Question: We recently upgraded our video surveillance and caught a tenant vandalizing the clubhouse. We filed a police report and an arrest was made. The damage is approximately $ 10,000. How to recover this if the tenant is irrecoverable? AD, Marco Island

A: The general rule is that the landlord is responsible for the actions of the tenants. This is a common provision in condominium documents, so the first recommendation is to have the constituting documents reviewed by a lawyer licensed in Florida. This can provide direct debit from the landlord, and the landlord could then claim reimbursement from the tenant.

It is important to note that the association must determine how it can recover the $ 10,000. If your governing documents are not strong here, you might be forced to take legal action in a county court where the result is a judgment and the association would then have to recover the judgment through traditional collection means such as wage garnishment, bank account garnishment, asset foreclosure or possible foreclosure of real estate based on homestead issues.

Well-drafted documents today will indicate that the $ 10,000 is attributable to the owner and that the association can collect the $ 10,000 through its power of lien and with the same procedures and powers as a lien for appraisals. If this is an option, then the owner has a direct and immediate threat of losing the unit, which will usually be a powerful incentive to reimburse the association for the damage.

Question: Our condominium association maintains reserves for repainting buildings. For years, the board of directors kept telling us that the reserves were healthy. We recently learned that the council is forecasting a paint cost of $ 100,000, but the actual replacement cost is probably $ 250,000. How is it possible? JT, Bonita Springs

A: The Florida Condominium Act requires condominium associations to maintain certain reserve accounts for deferred maintenance and replacement. Here, the statute expressly obliges the association to maintain a repainting reserve. This means that the association must exercise its business judgment to determine the cost of the paint with an anticipation of the remaining useful life, which means that the association is supposed to put enough money aside each month so that there is enough money available to repaint when the useful life expires without the need for special appraisal.

At the outset, it is important to note that co-ownership membership may allow the board to forgo paint reserves or partially fund paint reserves. Thus, it is possible here that the council was knowingly authorized to fund $ 100,000, but only if the members voted annually to authorize the council to partially fund the paint reserve.

Assuming that this vote never took place, or that it did not take place every year, this budget is insufficient. We often see this when the board tries to cut the reserve budget in conjunction with new or higher operating expenses, or when the board assumes the paint will last longer than expected.

The law provides that the board may annually adjust the reserve schedule to reflect changes in useful life or replacement cost. This means that the board is required to exercise its business judgment in determining the remaining life of the paint.

How can the board of directors accomplish this? First, the board can order a back-up study or an update to a previous back-up study. This is a relatively inexpensive engineering report in which a licensed company inspects paint, roof, and other common items and provides a manual for reserve funding. The advantage of this report is that it is comprehensive and that the council has a professional study to justify its funding decisions. A second option is to have a licensed painting contractor provide an analysis and estimate of the replacement cost. Both of these options provide the board with a professional rationale for funding decisions.

The simple reality here is that the board will have to revise the reserve budget to make up the difference in the remaining years. I’ve been told that paint typically lasts for seven years, so that probably means you’ll have to make a big difference in a short period of time. Another option is to take a one-time special contribution now to make up the difference, and then adjust the budget to maintain current contribution requirements.

A final option is to seek membership approval to maintain a partially funded reserve account if members prefer a special membership fee when buildings need to be repainted. Part of the exercise of business judgment is obtaining reliable opinions and, therefore, the board should periodically engage professionals to provide recommendations so that the timing of reserves is adequate to meet future replacement needs.

Lawyer John C. Goede is a shareholder in the law firm Goede, Adamczyk, DeBoest & Cross. Visit the website at www.gadclaw.com or ask questions about your issues for future columns by sending a request to: [email protected]


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