Funding Major Repair Projects
By Alan E. Tannenbaum,
Board Certified in Construction Law by the Florida Bar.
Florida condominium associations are under both a statutory and documentary obligation to maintain and repair the common elements. Florida homeowner associations are under a documentary obligation to maintain and repair association-owned property or property which is otherwise under the HOA’s maintenance and repair responsibility. An association’s lack of available resources is not an excuse for a board failing to order necessary repairs and maintenance. Consequently, planning for the funding of major repair projects should be a top-of-mind concern for any prudent community association board. There are six possible funding sources for repairs.
FUNDS CURRENTLY BUDGETED OR IN RESERVE
Hopefully, prior boards had good information (in the form of reserve studies and regular engineering reviews), presented budgets with fully-funded reserves, and the membership chose to not vote to waive reserves in whole or in part. Assuming that the cost of the major repair which needs to be undertaken does not carry a price tag substantially more than anticipated, reserve funds and funds budgeted for repairs can be applied to fund the repairs.
If reserves were not adequately funded, and the budgeted amount for repairs in the current budget cannot fund the gap, or the repair cost is substantially higher than anticipated, a special assessment may be necessary to fund the repairs. Most documents allow for the adoption by the board of a special assessment to fund necessary repairs.
Your documents may allow for a mid-year amendment to the adopted budget. For condo associations, this would require a budget meeting making the passage by the board of a special assessment usually the more preferable method of funding. For HOAS, there may be no particular advantage to either strategy.
Far different than for most of the history of community association operation in Florida, banks have figured out what a great credit risk most community associations are, and are now competing to place loans to fund major community association repair projects. Granted, a high assessment default rate within the community may disqualify your property for borrowing consideration. But if your community association qualifies, the advantage of bank financing is that the payment burden for a major repair project can be spread over several years, negating the need for an unpopular special assessment or a drastic budget amendment today.
RECOVERY FROM THE DEVELOPER AND OTHER RESPONSIBLE PARTIES
If the community is not more than a decade old, and the problems precipitating the major repairs are substantiated by an engineer to be defects in the original design or construction of the buildings and improvements, it may be possible through claims’ pursuit to recover from responsible parties a substantial portion of the repair cost. Because major claim recovery can be delayed sometimes for two to three years, it is advisable for boards to undertake the necessary repairs and view the claims’ process as a means of securing reimbursement for amounts expended. Bank financing of the repairs to cover the gap period between repair and recovery can be attractive under these circumstances because the assessment burden can be kept lower during the progress of the case and the recovery used to satisfy the loan.
FIRST-PARTY INSURANCE CLAIM
A necessary repair may be precipitated by a storm event or other casualty negatively impacting the buildings and improvements. Or, portions of a building may be in a state of collapse or near-collapse. These conditions may support a first-party insurance claim against the association’s property insurance carrier. As with claims against the developer and other parties involved in the original design and construction, the claims’ process can be prolonged and thus it may be necessary for repairs to be undertaken before the claims’ process has been completed.
A prudent Florida community association board is going to present budgets with adequate reserves and line-item repair allocations, and persuade its membership not to waive fully-funded reserves. However, even a board which has adequately prepared the association to fund major repairs should ask the question whether the need for the repair stemmed from compensable construction defects, or a qualifying cause under the association’s property insurance coverage. Attorneys specializing in construction defect and first-party insurance claim recovery should be consulted to review these possibilities. Where funds are not available to undertake necessary repairs, bank financing can be considered to lessen the short-term burden for the membership, or bridge the gap until recovery is realized from third parties or the association’s insurance carrier.