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IT’S BETTER TO BE THE DEVELOPER IN AN HOA
-- PART II
By
Eric Glazer, Esq.
Published November 4, 2019
Last week we showed how it’s better to be the developer in an
HOA instead of an owner. Developers can maintain control over a
community forever in some instances and don’t even have to
provide warranties for anything they build. Nice.
We told you it gets worse and here’s why…..
Under Florida law, a developer can avoid paying the monthly or
quarterly assessments on the lots that it owns, so long as the
developer guarantees to pay any expenses incurred that exceed
the assessments receivable from other members and other income
of the association. 720.308(1)(b). In other words, the
developer has to pay any unpaid bills not covered by the
assessments collected from the home owners.
In Boynton Beach, there is a community called Valencia Reserve
Homeowners Association. When moving into the community each new
owner was required to pay a working fund contribution:
Each Owner who purchases a Lot with a Home thereon from [the
Developer] shall pay to the [HOA] at the time legal title is
conveyed to such Owner, a “Working Fund Contribution.” The
Working Fund Contribution shall be an amount equal to a three
(3) months' share of the annual, non-abated Operating Expenses
applicable to such Lot pursuant to the initial Budget .... The
purpose of the Working Fund Contribution is to insure that the [HOA]
will have cash available for initial startup expenses, to meet
unforeseen expenditures and to acquire additional equipment and
services deemed necessary or desirable by the Board. Working
Fund Contributions are not advance payments of Individual Lot
Assessments and shall have no effect on future Individual Lot
Assessments, nor will they be held in reserve.... Working Fund
Contributions ... may also be used to offset Operating Expenses,
both during the Guarantee Period ... and thereafter.
As you can probably guess, the developer did not pay assessments
on developer owned units. In addition however, the developer
used all of the Working Fund Contribution initially paid by each
unit owner to pay for routine association expenses.
The association argued that the developer cannot have it both
ways. The developer cannot take the working fund contribution
and not pay assessments on developer owned units. The developer
argued it could.
Here’s what the court said:
Thus, we must give the
relevant provisions in Chapter 720 their plain and obvious
meanings. In doing so, we hold that the declaration's terms,
which permitted the Developer to use the working fund
contributions to offset its deficit obligation, did not
contravene Chapter 720. Therefore, we affirm the circuit court's
final order granting partial summary judgment in the Developer's
favor for the following reasons.
First, the declaration's
section entitled “Working Fund Contribution” clearly stated that
each lot owner would be obligated to pay an amount equal to
three months' share of the initial budget's annual, non-abated
operating expenses. The declaration specified that these funds
were due at the time legal title was conveyed to the lot owner.
Significantly, the declaration specifically stated that these
funds could be used for, among other things, initial startup
expenses, unforeseen expenditures, and “to offset Operating
Expenses, both during the Guarantee Period ... and thereafter.”
The declaration also explicitly stated that the working fund
contribution could be used to reduce the operating expense
deficit. As the declaration contained these terms at the time
of recording, every Valencia Reserve lot owner agreed to pay the
working fund contribution and knew that these funds could be
used to cover operating expenses and offset the Developer's
deficit obligation. See Hidden Harbour Ests., Inc., 393 So. 2d
at 639. Given that each lot owner expressly agreed to these
terms upon completing the property purchase, we similarly find
that the declaration's provision authorizing the Developer to
use the working fund contributions to offset its deficit
obligation was “fair and reasonable” as required by Section
720.309(1).
Second, the Developer's use
of the working fund contributions to pay for operating expenses
did not violate Sections 720.308(4)(b) and 720.308(6). Under
these sections, a developer may not pay for operating expenses
using lot assessments which have been budgeted for designated
capital contributions. Here, the working fund contributions were
not budgeted for designated capital contributions, thus,
Sections 720.308(4)(b) and 720.308(6) do not apply.
Third, we agree with the
circuit court's conclusion that the working fund contributions
qualified as regular periodic assessments for the purpose of
calculating the Developer's final deficit obligation under
Section 720.308(5). Per the declaration, all lot owners were
required to pay the working fund contribution at the time of
conveyance. The declaration further stated that the working fund
contributions could be used to pay the HOA's operating expenses
or offset operating expenses during or after the guarantee
period. Under Chapter 720, nothing prevents an assessment from
being used to pay an HOA's operating expenses. Consequently, the
working fund contribution would qualify as an assessment as it
could be used to pay the expenses of the HOA.
Although only paid once, the
working fund contribution was equal to three months' share of
the annual regular assessments calculated pursuant to the
initial budget. In essence, the working fund contribution was
the first regular periodic assessment, due as an upfront,
lumpsum payment. Thereafter, periodic payments were due at
regular intervals set by the declaration. Accordingly, the
working fund contribution is consistent with a regular periodic
assessment that could be used to pay or offset operating
expenses.
Here’s the bottom line. And you won’t like it. But the court
made the absolute right ruling. Here is what the court said in
conclusion:
“…the use of the working fund contributions to offset the
Developer's deficit obligation did not violate the HOA Act. We
find nothing in Chapter 720 that prohibits the Developer's
action in this case. If the legislature wishes to prevent such
action, it can do so by enacting legislation to that effect.”
And there you have it. This was not a bad court decision. The
court was left with no choice but to rule this way. This is a
bad law designed to protect…..the developers. The Florida
Legislature makes it seem that developers are obligated to pay
association expenses not covered by the assessments paid by the
owners, but it’s a ruse. A hoax. All the developer needs to
do, has done and will continue to do is make owners not only pay
their assessments, but also tack on a working capital
contribution or “working fund contribution” that the developer
gets to take and use to offset their financial obligations to
the association. Can you imagine if you had the ability to
charge your mortgage company a fee every month that equals the
amount of your mortgage payment? That sounds like a great gig
doesn’t it? By the way….there’s no cap on the amount developers
can ask for either. So as you will soon see, the amounts of
working capital contributions or working fund contributions due
at closing will continue to rise so developers won’t have to
come out of pocket at all during the time they are trying to
sell units. Soon you will see 6 months or one year of
assessments due at closing to a working capital fund or the
like.
But wait……it gets worse. The developer is going to be entitled
to prevailing party attorney’s fees against the association.
Let’s just say that after an expensive appeal, rest assured that
the 3 months contribution that the home owners had to pay will
be chump change compared to the special assessment that is no
doubt coming to pay the developer their attorney’s fees.
As we told you……it’s better to be the developer.
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About
HOA & Condo Blog
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Eric Glazer graduated from
the University of Miami School of Law in 1992 after
receiving a B.A. from NYU. He has practiced community
association law for more than 2
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decades and is the owner of Glazer
and Sachs, P.A. a seven attorney law firm with offices in
Fort Lauderdale and Orlando and satellite offices in Naples,
Fort Myers and Tampa.
Since 2009, Eric has been the host
of Condo Craze and HOAs, a weekly one hour radio show that airs
at noon each Sunday on 850 WFTL.
See:
www.condocrazeandhoas.com.
He is the first attorney in the
State of Florida that designed a course that certifies
condominium residents as eligible to serve on a condominium
Board of Directors and has now certified more than 10,000
Floridians all across the state. He is certified as a Circuit
Court Mediator by The Florida Supreme Court and has mediated
dozens of disputes between associations and unit owners. Eric
also devotes significant time to advancing legislation in the
best interest of Florida community association members.
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