IT'S BETTER TO BE THE DEVELOPER IN AN HOA–PART 2

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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