Association Developments

Fourth Quarter Volume XIV

1998

a service provided by Clayton & McCulloh

TURNOVER:

THE GREATEST RISK OR REWARD

Turnover (i.e., transition from Developer control) is perhaps the most important event in your Association's history. The Legislature (through the Condominium Act, Fla. Stat. 718.101, et. seq., and the Homeowner Act, Fla. Stat. 617.301, et. seq.,) and the Courts (via Florida Case Law) have set up significant protection(s) for Condominium and Homeowner Associations and their members. Unfortunately, many Associations fail to properly deal with Turnover and thereby fail to obtain and recover many items and funds to which they are entitled.

As alluded to above, there have been significant developments regarding turnover via both the Florida Statutes and significant case law . However, for purposes of this Article, we shall primarily deal with Condominium Associations as opposed to Homeowners' Associations. Nevertheless, Homeowners' Associations have significant rights even if some of their remedies, etc. are not as extensive as Condominium Associations. (Note: the Homeowner Act is still in its infancy compared to the Condominium Act. As such, additional protections exist for Condominium Associations, which do not exist for Homeowners' Associations).

see TURNOVER, pg 2

EVER WANTED A HOW TO BE A DIRECTOR COURSE? HERE IT IS!

Our 1999 Community Association Law Seminars are filling up fast. Since we announced in the last issue of Association Developments the 1999 schedule, we have received numerous reservations for the various locations. The 1999 Community Association Law Seminar this year features our most demanded program, "So, You're on the Board! Congratulations & Condolences (How to be a Director)."

This seminar was even mentioned in Jack Holeman's syndicated column, "Condo Living" featured in the Orlando Sentinel's Home section recently. The last time we presented this program, there wasn't even standing room available. Also scheduled as "shorts" are Clayton & McCulloh's "Short Term Rentals: Heaven or Hell?" and "Is Your Association About to Expire?" The short term rental portion will cover the pros and cons of having short term rentals in your community and your rights to either have or stop them. This program will be an abbreviated version of our Fall 1998 Seminar. The final topic deals with the Market Record Title Act which could make your Association's governing documents unenforceable. Also, covered in this portion of the program will be the consequences of failing to file your Annual Corporate Report with the State.

See SEMINAR, pg 4

Volume XIV                           Page Two                           Clayton & McCulloh

ASSOCIATIONS OFTEN FAIL TO PRESERVE RIGHTS

TURNOVER (from pg 1)

Volume XIV                           Page Three                            Clayton & McCulloh

NOT ALL ACCOUNTANTS ARE FAMILIAR WITH ASSOCIATION AUDITS

Turnover (from pg 2)

a million dollars to be at stake in a Turnover case. Additionally, many of the legal, accounting, design and construction issues are very complex. It is unrealistic for the Association to expect their Board of Directors or even their manager to know how to protect the Association and its members. Such individuals cannot be expected to know or be able to analyze many of the bases for recovery. As an example, attorneys, who do not deal with Condominium Turnover cases, probably do not understand "phantom unit" issues. Nevertheless, these issues can easily account for hundreds, thousands, or even millions of dollars in recoveries. While a phantom unit issue ostensibly is complex, understand:

• Each and every unit designated in the Declaration arguably exists, whether or not constructed; and

• Each and every unit designated in the Declaration may owe assessments from the date the Declaration was filed (i.e. whether or not the units and/or buildings were ever constructed).

Therefore, significant funds can be owed by a Developer to an Association for non-payment of assessments, for units and buildings which were never built but are designated in a Condominium Declaration or Amendment thereto.

Pursuant to Fla. Stat., 718.3, Condominium developers are required to provide the Condominium Association an audit of the Association's financial affairs through the date of Turnover and this audit is to be performed by an independent accountant. What is sad is the fact that often times Associations believe that, by virtue of their obtaining such an audit, they are adequately protected. These Associations believe that if there were any funds still due and owing to the Association, such would be clearly earmarked in the audit. Unfortunately, this is not necessarily accurate or true. In fact, it is our experience that the majority of the §718.301 audits performed in connection with Turnovers are deficient and that it is extremely common for Associations to be entitled to significant additional funds from the developer. While most accountants may be familiar with doing audits, this does not mean they are familiar with all of the additional requirements of Fla. Stat. §718, much less the Administrative Rules and case law governing this area of the law.

Another big problem area that needs to be evaluated at the time of Turnover involves developer guarantees of the budget and whether the developer properly paid pursuant to the budget guaranty and Florida Statutes. Other issues which often become very significant at the time of Turnover involve:

1. Whether reserves have been properly established and funded;

2. Whether reserves have been waived, and whether proper and accurate reserve evaluations have been performed by the Association during the developer-controlled time period; and

3. Whether the developer low-balled the Budget.

See Turnover, pg 4

Volume XIV                              Page Four                          Clayton & McCulloh

TURNOVER (from pg 3)

The above discussion has only briefly touched on a few of the accounting issues. This article has not even touched on the potential severe construction defects and deficiencies which separately may exist, but which must be analyzed and addressed during the Turnover process.

Since Hurricane Andrew struck, the public appears to have become more aware and more concerned with construction defects and deficiencies. We hope so, as we see such defects and deficiencies week in and week out in our Turnover cases. Moreover, the cost to correct these defects and deficiencies can be astronomical. The Board of Directors needs to consciously decide:

1. Whether to properly evaluate and investigate the sufficiency of the construction (i.e., whether defects and deficiencies exist);

2 Whether it wants the cost to correct defects and deficiencies to be born by the owners or the developer.

Given the fact that members of the Board of Directors owe a fiduciary duty to the Association and its members, we strongly urge the Board of Directors to always investigate and evaluate whether construction defects exist, and if they do exist, to properly evaluate with their attorney how to proceed.

While this article has barely scratched the surface of what needs to be considered for Turnover, it is hoped that this article will alert Associations to the importance of the Turnover process.

Lastly, Associations need to understand that Turnover refers to a point of time (i.e., when control of the Board of Directors transfers from developer control to non-developer control). However, Turnover also refers to a process during which the Association is to obtain all of the items and funds to which it is entitled.

Please do not forget that Board members have a fiduciary duty to the membership, and in this firm's opinion, one of the first and cornerstone tests of this duty includes properly dealing with the Turnover process.

The following are the dates, locations, and cities where our seminars will be held:

Saturday, January 30 - Daytona Beach -

Adam's Mark Resort

Saturday, February 6 - Melbourne -

Comfort Inn & Conference Center

Saturday, February 20 - Winter Haven -

Admiral's Inn Best Western

March 6 - Orlando - Church Street Station

March 20 - Leesburg -

Silver Lakes Golf & Country Club

Registration begins at 8:30 a.m. The program is 9:30 a.m. - 12:30 p.m. Flyers with more details on these seminars will be mailed out in mid December. A complimentary continental breakfast will be served. If you would like to get free legal advice for your association, please call us at any of our phone numbers on the first page of this newsletter or simply complete the enclosed registration form and mail or fax it back to us.

Volume XIV                               Page Five                            Clayton & McCulloh

MISSION POSSIBLE: SUCCESSFUL BOARD MEETINGS

Too many times Directors just decide at the last minute to call a Board meeting without any thought or preparation. Having a successful board meeting takes preparation. It is not something to undertake haphazardly.

You should first draft an agenda with notes for your other members in advance. Jot down some questions that may need to be answered by other board members, reminders on what they are to bring to the meeting or research that needs to be done prior to the meeting. Try to give your other board members at least ten days advance notice before you formally schedule a board meeting. This gives them time to make room for the meeting in their calendar. Also, distribute reports at the same time with the Directors' agenda. By giving all the other board members the documents and materials they need in advance, you will sharply curtail the amount of time your meeting takes. Board meetings should not drag on for hours. The maximum time allotted for a board meeting should be one and one-half hours. People tend to lose interest and their efficiency after that time. If you are taking more time than that, you are possibly guilty of one of the following things:

• Placing too many items on the agenda. Consider having workshops with your committees if necessary prior to the board meeting when undertaking a large project.

• Not limiting/budgeting time for each subject.

• When drafting the agenda, place time limits for each subject and place those limits next to each item. Try to limit the scope of discussion for each topic. You will probably have to review the agenda each month to make a determination of how much time each topic needs. Rehearse in your mind what you are going to say. Don't let people ramble on.

• Allowing owners too much participation in the meeting. While you do not want to alienate owners from attending, for everyone's benefit, you want to limit their speaking time to two minutes.

• Don't discuss a topic that is not on the agenda. If a topic comes up that needs to be discussed, place it on the next meeting's agenda. Keep to the agenda!

One of your goals should be to encourage your members to attend the board meetings, thus creating more community involvement. Post your Notice of Board Meetings as required by your governing documents and the Florida Statutes, and then encourage member participation. You may even want to give additional time for notices to be posted so the members can work into their calendars to attend. For example, if your documents require forty-eight hours notice, consider giving one week notice in addition to the required notice. Make the meeting accessible to the members. Members are very hesitant to attend board meetings which take place in directors' homes. Many business establishments will provide you with free meeting space to hold your board and/or annual meetings. Some examples of establishments which offer complimentary meeting rooms are: Publix, the county libraries, churches, and local schools.

Some people believe that the president should never cast a vote on an issue unless there is a tie. This belief is false. You not only can, but should, vote on every issue that comes before the board. However, you should abstain from voting on an issue if there is a conflict of interest. An example where you should abstain is voting on giving a contract for landscaping to one of your relatives. It may be the best bid that you have received, but you have a personal interest in your relative getting that contract. In that event, not only should you abstain from voting, it might be prudent to leave the room when the vote takes place.

Become acquainted with Robert's Rules of Order. This is especially important if you are the president. You do not have to know every single point of order, but become familiar so you can competently conduct a meeting with authority and poise. However, remember, unless your documents specifically require

See Mission, pg 6

Volume XIV                           Page Six                              Clayton & McCulloh

BUY A GAVEL AND USE IT!

Mission (from pg 5)

you to abide by Robert's Rules of Order, it is not required that you follow them. They are simply guidelines on how to run a meeting.

The time will come when you will have a "problem meeting." To anticipate this time, buy a gavel and use it when the need arises. It can be a valuable tool in getting people's attention and restoring order to the meeting.

Schedule your board meeting on a regular basis. You may need to meet only once a quarter or once a month. Some associations choose to meet once a week after a new board has been elected and then taper off. Whatever time frame you select (unless your documents mandate when your meetings will be), keep them consistent, and always properly notice them.

This contains just a few suggestions for having successful board meetings. When trying to create your own ideas, review what has been done in the past and use it as a "building block" for better board meetings. Above all, remember that you are a director of a corporation, and even though it may be a not for profit corporation, it is still a corporation and should be treated as a business.

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