Question: Can an association propose a revised budget that doesn’t balance and can the association propose the revised budget and vote to impose a special assessment for a deficit?
Background: The company I work with just took over management of a condominium property that is in receivership. There are 68 unsold units out of 113. A board of directors approved and adopted a budget based on income and expenses for 113 units and the membership voted to fund reserves. The treasurer has now revised a budget using only the 45 sold units and the budget has a very large deficit. The treasurer is proposing that due to the shortfall, the reserves not be funded. The board has scheduled a meeting to discuss the new revised budget.
Linda K.
Dear Linda,
The board cannot decide to stop the funding of reserves; however, the board could call a membership meeting and the members could vote to discontinue the funding of the reserves. They may also vote to transfer any monies in the reserve fund into the operating fund to help offset the deficit.
The correct way to handle this situation is to adopt a budget based on all 113 units. But when you do the budget expense items, you will have a line item for bad debt which will increase the total expense by the amount that the 68 unsold units are not going to pay. This is just sound accounting practices. That will increase the assessments for everyone to make up for the bad debt, and remember the 68 unsold units are still not going to pay so the budget bad debt expense will have to consider that money as well.
This is essentially a special assessment of the 45 sold units in advance of running out of the money during the year. The budget should not be changed after it has been adopted. If additional funding is necessary later in the year, it would come from a special assessment of the 113, factoring in the amounts the 68 unsold units are not going to pay. It can be complicated.
F.S. section 718.112(2)(f)2 states –
In addition to annual operating expenses, the budget shall include reserve accounts for capital expenditures and deferred maintenance. These accounts shall include, but are not limited to, roof replacement, building painting, and pavement resurfacing, regardless of the amount of deferred maintenance expense or replacement cost, and for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000. The amount to be reserved shall be computed by means of a formula which is based upon estimated remaining useful life and estimated replacement cost or deferred maintenance expense of each reserve item. The association may adjust replacement reserve assessments annually to take into account any changes in estimates or extension of the useful life of a reserve item caused by deferred maintenance. This subsection does not apply to an adopted budget in which the members of an association have determined, by a majority vote at a duly called meeting of the association, to provide no reserves or less reserves than required by this subsection. However, prior to turnover of control of an association by a developer to unit owners other than a developer pursuant to section 718.301, the developer may vote to waive the reserves or reduce the funding of reserves for the first 2 fiscal years of the association’s operation, beginning with the fiscal year in which the initial declaration is recorded, after which time reserves may be waived or reduced only upon the vote of a majority of all non-developer voting interests voting in person or by limited proxy at a duly called meeting of the association. If a meeting of the unit owners has been called to determine whether to waive or reduce the funding of reserves, and no such result is achieved or a quorum is not attained, the reserves as included in the budget shall go into effect. After the turnover, the developer may vote its voting interest to waive or reduce the funding of reserves.
Thanks for Asking.
Fred R. Gray