Q: Our condo board and its attorney have decided that it is legal to gamble our maintenance fees by buying real estate, including improvements in our specific area. I feel that it must be illegal to invest our money. I have my own money broker who is knowledgeable. I don’t want amateurs investing for me. Can you explain if this is a legal issue? I would like an answer ASAP, as the board is getting ready to move on a property now.– K.D., via email
A: Your question does not tell me what real property your association is planning to purchase other than “improvements in our specific area.” I also do not know from where your association is taking association funds for the purchase or purchases.
Condominium association directors have a fiduciary duty to the members of the association. Cooperative and homeowners’ association boards have the same duty. So even though the directors may be “amateur” volunteers, they do control significant sums of money, money that belongs not to just themselves but also to their neighbors. That is a reason that the people controlling association funds are required by law to be bonded.
I have always counseled association directors to keep foremost in their minds that their job is not to make money for the association. Their job is to protect the money they collect from owners and not waste or lose it.
Most associations collect money in reserve for future replacements and deferred maintenance of the common property, unless funding is waived by annual vote of the membership. Even if reserve funding is waived or reduced, which also has to be approved by owner vote, associations must make important decisions as to where and how association money is held or “invested.”
Directors should consider three significant factors in deciding where and with whom to place association funds.
The most important factor is the security of the funds. Not one penny of principal can be put at risk. This means no stock purchases, no deposits in a financial institution that exceed FDIC protection limits and no form of speculation whatsoever.
The second factor is the liquidity of association funds. An association that reserves funds for capital expenditures and deferred maintenance is keeping that money for the proverbial “rainy day.” Let’s say that the association’s reserve study indicates that the building roof will last another five years. The association then invests all the money it has accumulated for roof replacement into a five-year CD. Those studies are just estimates. If the estimate is wrong, and the roof fails in less time, the board needs to get its hands on that money right away. Tying up association money for long periods of time, in the words of President George Herbert Walker Bush (or maybe it was just impersonator Dana Carvey), “wouldn’t be prudent.”
The third factor, which I place in importance well behind the first two, is return on investment. Conservative, risk-free options must be selected. All of us who weathered the last few years know better than we would care to that real estate investment comes with risk.
Condo associations cannot use so-called “statutory” reserve funds for purposes other than for which they were reserved, without prior owner vote. These are funds for roof replacement, building painting, pavement resurfacing and for any other item for which the replacement or deferred maintenance cost exceeds $10,000. If your board is using these kinds of reserves to purchase real estate, they have to first seek owner approval.
That is just one potential issue.
Even if the money is coming from another source, such as financing, an owner vote may be necessary before the board can lawfully take its planned action. If the board is in the process of buying a unit in the condominium, pursuant to Section 718.111(9) of the Condominium Act, it can do so and hold, lease, mortgage and sell it as long as the condominium documents do not forbid it. If the board purchases a unit at a foreclosure sale resulting from its own foreclosure action of its lien for unpaid assessments or accepts a deed in lieu of foreclosure from the delinquent owner, no membership vote is ever required.
If your board is buying real property other than a unit in the condominium, things get even trickier. Thanks to a recent change to Section 718.111(8) of the Condo Act, the association can buy out any land or recreational lease on the condo property under certain conditions, which mimic the requirements set forth in another provision of the Act (Section 718.114.) That section deals with the rights of an association under certain conditions to acquire “leaseholds, memberships and other possessory or use interests in lands and facilities,” regardless of whether the lands or facilities are contiguous to the condominium property. The specific power to purchase such lands or facilities is not set forth in the statute.
Based on the limited information I have, I cannot say if your board is meeting its fiduciary duties and acting within the law. I can tell you that if the board is obtaining financing for its purchase, the attorney who has counseled the board that it can do what it wants to do will most likely have to provide an opinion letter to the lending institution stating that the association has the legal right to make the purchase and to borrow money. Such letters are not rendered lightly, because the attorney risks personal liability if he or she is proven to be wrong.
So, you asked me if a legal issue exists. Although I cannot give you legal advice, I am sure I answered that question for you. In spades.
Tamela Eady is a Florida Bar board- certified real estate attorney with 25 years’ experience. She is an attorney with the the Law Offices of Kevin T. Wells PA in Sarasota, concentrating her practice on community association and real estate. The subjects discussed in her columns are not intended as specific legal advice to anyone and are subject to principles that may change. Questions may be modified for clarity or for brevity. Email questions for possible inclusion in a future column to teady@kevinwellspa.com.
