Unlike condominium associations, homeowners’ associations (HOAs) do not have reserves mandated by statute. Instead, pursuant to Chapter 720 of the Florida Statutes, more commonly known to as the “Homeowners’ Association Act,” reserves in an HOA are either initially created by the community’s developer or by a vote of the majority of the entire membership. Once reserves are established, the reserves must be included in the HOA’s annual budget as fully funded, unless the reserves are later waived, reduced, or terminated by a majority of a quorum at a members’ meeting.
While reserves can be established by the HOA’s developer, the Homeowners’ Association Act also provides that during the time the developer controls the HOA, the developer can be excused from paying “operating expenses and assessments” which are attributable to the lots the developer owns so long as the developer obligates itself to pay any operating expenses incurred by the HOA which exceed the assessments received from non-developer owners. This developer assessment obligation is more commonly referred to as deficit funding. (In lieu of the deficit funding model, the HOA’s developer can also chose to provide a stated guarantee of assessments which is not the subject of today’s article.)
Considering what we know about the establishment and funding of reserves and the developer assessment obligation for deficit funding, a question recently arose whether the HOA’s developer is excused from paying its share of reserves for the lots it owns during developer control of the HOA when the developer has opted for deficit funding? This question was recently asked and clarified by Florida’s Fifth District Court of Appeal in the case of Mackenzie v. Centex Homes, by Centex Real Estate Corporation, et al., decided December, 2016.
In this case, the developer, Centex Homes, built a community with multiple HOAs. Centex Homes prepared the governing documents for all of the HOAs. In so doing, Centex Homes opted to create reserves and to provide for deficit funding. By obligating itself to pay the deficit in operating expenses, Centex Homes was lawfully excused from paying “operating expenses and assessments” for the properties it owned during the time Centex Homes controlled the HOA. But, does that mean Centex Homes was not obligated to fund the reserves, too?
Although Centex Homes paid a nominal sum into the reserves during the first year of development, it discontinued paying into reserves for the remaining years of its control of the HOA. However, Centex Homes continued to collect reserves from all of the non-developer owners. Had Centex Homes paid reserves, its reserve payments would have equaled almost $1 million dollars. After Centex Homes relinquished control of the HOA to the non-developer owners, upset owners, the Mackenzies, brought a complaint against Centex Homes seeking a judgment from the court that Centex Homes failed to meet its reserve funding obligations and an order compelling Centex Homes to make the payment.
The Court, deciding in the Mackenzies’ favor, held that notwithstanding Centex Homes’ exemption from paying the “operating expenses and assessments” attributable to the properties owned by Centex Homes while it controlled the HOA in exchange for deficit funding, Centex Homes was still required to fund the reserves once they were established.
Due to the ambiguity created by the Homeowners’ Association Act in referring to the developer’s exemption from “operating expenses and assessments” under deficit funding and the requirement to fund reserves once they are established, the Court was required to interpret the reserves provisions and the deficit funding provisions of the Homeowners’ Association Act to give both meaning within the intent of the legislature that created them. If the Court were to agree with Centex Homes’ argument that it was excused from paying its share reserves because it was deficit funding, the obligation to fund reserves upon their establishment would be meaningless. Therefore, the Court reasoned that Centex Homes was not excused from its obligation to fund reserves attributable to the properties it owned during its control of the HOA as a benefit of deficit funding.
The moral of this story is that if a developer creates reserves in the HOA’s declaration, then, notwithstanding the deficit funding obligation and the financial relief it provides to the HOA’s developer, the reserves will still require funding. If the reserves are not properly funded, and there is no waiver or reduction accomplished by a vote of the members, then, according to the Mackenzie v. Centex Homes case, the developer is on the hook to fund the reserves.
This case could certainly lead to a chilling effect in that, in spite of a developer’s careful planning for its community and its desire to ensure success for the newly created HOA by ensuring reserves are created for future maintenance and repairs, after reading the Mackenzie v. Centex Homes case, why would any HOA developer create HOA reserves?