Connor; Harry Drazin; and Eric Larsen (accepted as an expert in the field of accounting). In addition, Petitioner's Exhibits 1; 4, 5 , 6 and 7 were duly offered and admitted into evidence. The Respondent called the following witnesses: Philip R. Connor; Ellen Balentin: and John Anderson (accepted as an expert in the field of accounting). In addition, Respondent's Exhibits 2, 3, 4 and 5 were duly offered and admitted into evidence. Joint Exhibits 1, 2, 3, 4 and 5 were also duly offered and admitted into evidence by stipulation of the parties. The parties have submitted posthearing Proposed Findings of Fact. A ruling has been made on each Proposed Finding of Fact in the Appendix to this Recommended Order.
Based upon my observation of the witnesses and their demeanor while testifying, the documentary evidence received and the entire record compiled herein, I hereby make the following Findings of Fact:
The Respondent, Ocean Dunes Development Corporation, is the developer of a residential condominium known as Ocean Dunes, located in Highland Beach, Palm Beach County, Florida.
Count One
The first closing on a unit in Ocean Dunes occurred on April 30, 1982.
The Respondent controlled the operation of the condominium association from the incorporation of the association up to February 4, 1986, when unit owners other than the developer elected a majority of the members of the board of administration of the condominium association.
Pursuant to the Articles of Incorporation of the condominium association, the board of directors is composed of three members. According to the by-laws of the association, unit owners other than the developer are entitled to elect at least one-third of the members of the board when they own fifteen per cent of the units in the condominium. The by-laws further provide that within sixty days after unit owners other than the developer are entitled to elect a member of the board, the association shall call and give not less than thirty days notice of a meeting of the unit owners for this purpose.
on July 15, 1982, unit owners other than the developer owned fifteen per cent of the total number of units in the condominium.
The first association unit owner meeting after July 15, 1982, occurred in April of 1983. Present at the meeting were several unit owners and Mr. Philip Connor, president of both the association and the developer corporation.
According to the association by-laws, a quorum is achieved by a majority of the votes of the entire membership. In April of 1983 there were 48 units in the condominium, 17 units were owned by someone other than the developer. Therefore, the developer's unit votes were absolutely necessary to achieve a quorum.
At the beginning of the meeting, Mr. Connor, the president of the developer corporation, stated that he was not authorized to utilize the developer's unit votes through proxy or otherwise. Mr. Connor stated:
First item, obviously is to determine whether we have a quorum in order to properly conduct business. I am not voting on behalf of the developing company this evening. Mr. Hubert (the general counsel of the developer) as far as I know we do not have a quorum.
Therefore, the meeting is officially adjourned.
But, Mr. Connor went on to add:
However, I would like to spend some time with you this evening to go over and formulate any questions or problems, et cetra.
Unit owners other than the developer did not elect a member of the board of administration of the association until April 17, 1984.
Count Two
While operating the condominium association, the Respondent used condominium association common funds to pay for certain carpentry expenses in the amount of $1,836. The carpentry expenses were the responsibility of the Respondent as developer.
During the initial phases of the investigation of this case by the Department of Business Regulation, the Respondent
agreed that the carpentry expenses were the developer's responsibility and reimbursed $1,836 to the association on August 29, 1984.
Count Three
An "election period" is a mechanism by which the developer, as the owner of units, is excused from the payments of assessments against those units for a certain period of time.
See Section 718.116(8)(a)(1), Florida Statutes. During an election period, the developer does not pay assessments on developer-owned units, but instead pays the difference between the common expenses of the association and monies received from other unit owners in the form of assessments during that period of time. In other words, if assessments collected from other unit owners are insufficient to meet common expenses, the developer is required to pay the deficiency.
The election period must terminate no later than
the first day of the fourth calendar month following the month in which the first closing of a unit in a condominium occurs. See Section 718.116(8)(a)(1), Florida Statutes. The first closing on the first unit in Ocean Dunes Condominium occurred on April 30, 1982.
During the election period, the developer periodically funded the association and made available to it funds to pay required bills on a current, "as-due" basis. Thus, the Respondent attempted to satisfy its election period payment requirements on a cash accounting basis.
The developer did not perform an election period calculation on the condominium's books and records to determine the difference between expenses incurred during the election period and assessments collected form other unit owners.
Mr. Larsen, a certified public accountant and the Petitioner's expert witness, reviewed the condominium's financial records and calculated an election period deficit of $45,077.88. Mr. Larsen arrived at the figure of $45,077.88 by calculating that assessment revenues from non-developer unit owners amounted to $5,393.92 and that common expenses during the period amounted to $50,471.40, the difference being $45,077.88.
The $45,077.88 figure arrived at by Larsen was composed in part of unfunded reserves during the election period, certain association bills which were left unpaid during the election period but had balances which came due later and certain prepaid assessments from other unit owners paid in advance, but which would have come due after the expiration of the election period.
In arriving at the election period deficit of
$45,077.88, Larsen completed a review or compilation of the financial records of the association using generally accepted principles of accounting for a review or compilation of financial statements.
Count Four
Unit owners other than the developer remitted their assessments on a quarterly basis. In contrast, the Respondent developer provided some funds to the association on a monthly, "as-needed" basis. Typically, when the association funds became inadequate to pay outstanding bills, the developer would contribute its assessments.
At the end of each calendar year, the developer calculated an outstanding assessment liability on its inventory units and recognized that liability on the association's books.
The Declaration of Condominium at Article 6.2, provided that assessments not paid on a timely basis would bear interest at the rate of 10% per annum from the date when due until paid. Although unit owners were paying their assessments on a quarterly basis, neither the Declaration of Condominium nor the by-laws established a date when assessments were due.
Count Five
The percentage of ownership interest of each individual unit owner in the common elements of Ocean Dunes Condominium is set forth in Exhibit B to the Declaration of Condominium. The percentage of common elements per unit ranged from a minimum of
.01959 to a maximum of .02170.
The quarterly assessments to unit owners were not based on the percentages of their ownership of the common elements as outlined in the recorded Declaration. Prior to the formal hearing, the Respondent acknowledged that the proper percentages were not being assessed, and adjustments were made for all unit owners' assessments.
Count Six
A condominium association's annual budget must include a reserve account (unless specifically waived by the association) for capital expenditures and deferred maintenance. The reserve account of the association is set aside for long term items such as roof replacement, building painting and pavement resurfacing. See Section 718.112(2)(f), Florida Statutes.
Ocean Dunes Condominium Association established a budgeted annual reserve figure of $6,000 per year (reserves were not waived). On December 31, 1984, the reserve account, if fully funded, would have contained $16,569.86.
While in control of the condominium association, the Respondent did not maintain a separate, funded reserve account. Rather, the Respondent showed the reserve account as a liability in its accounting statements.
The listing of a reserve account as a liability on a financial statement would not violate, nor be contrary to, generally accepted principles of accounting. The Respondent believed in good faith that it was allowed to carry reserves as liability in the association's financial books.
Count Seven
The Respondent employed the accounting firm of Coopers and Lybrand to handle the financial books and records of
the condominium association. Coopers and Lybrand has offices in both Broward and Palm Beach Counties.
Although the Respondent maintained the corporate books and records of the association at the Royal Palm Beach Bank in Palm Beach County, portions of the accounting records were routinely transferred between Coopers and Lybrand's offices in Palm Beach and Broward Counties.
Count Eight
On February 4, 1986, unit owners other than the developer assumed control of the condominium association.
After turnover, the Respondent provided the association with the annual audits performed by the accounting firm of Coopers and Lybrand. The annual audits did not cover the election period and the period early in 1986 which the audit for the year 1985 did not cover.
After turnover of counsel of the association, the annual audits were the only review of the association's financial records provided to the association by the developer.
After turnover, the association at all times made the corporate books and records available to the developer.
Upon turnover, the Respondent offered to the association 9 pages of separate plans and specifications utilized in the construction of the condominium. Although the plans contained the certificate of a surveyor, only one of the nine plans contained a signed affidavit that the plans were authentic.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction over the parties to and the subject matter of these proceedings. Chapter 120, Florida Statutes.
The Petitioner, Division of Florida Land Sales, Condominiums and Mobile Homes, is charged with the responsibility of enforcing the provisions of Chapter 718, Florida Statutes, the Condominium Act.
Count One of the Notice to Show Cause, as amended, alleges that Respondent failed to call and hold a meeting for the
purpose of allowing unit owners other than the developer to elect at least one-third of the members of the board of administration within 60 days after they were entitled to such representation.
The condominium was fifteen per cent sold out by July 15, 1982. Although a meeting was held in April of 1983, the Respondent frustrated the attempts of other unit owners to elect a member to the board by failing to allow its units to be voted. No unit owner other than the developer was elected to the board until April of 1984. Accordingly, Respondent violated Sections 718.310(1) and (2), Florida Statutes, by failing to call and hold a meeting within the required time period for the election of at least one-third of the members of the board of administration by unit owners other than the developer.
Count Two of the Notice to Show Cause, as amended, alleges that Respondent used association common funds to pay for carpentry expenses of the developer in violation of Sections 718.115(1) and (2), Florida Statutes. The Respondent acknowledged that the carpentry expenses were not common expenses and that it was inappropriate to spend association funds for developer expenses. During the initial stages of the Petitioner's investigation the Respondent reimbursed the association for the amount spent on carpentry expenses. Nevertheless, the Respondent is guilty of Count Two as alleged in the Notice to Show Cause.
Count Three of the Notice to Show Cause charges that the Respondent failed to fund the deficit incurred during the election period. During an election period, instead of paying assessments on units owned by the developer, the developer pays any shortfall between assessments received from the other unit owners and the expenses of the association. The Respondent's method of utilizing a cash accounting basis in determining the difference between assessments received from the unit owners and the expenses of the association was improper. A developer's election period deficit, if any, must be calculated on an accrual basis to carry out the intent of Section 718.116(8)(a)(1), Florida Statutes (1984 supp.). That Section specifically provides that, "the developer must pay the portion of common expenses incurred during that period which exceed the amount assessed against other unit owners". The Respondent is guilty of Count Three as alleged in the Notice to Show Cause.
Count Four of the Notice to Show Cause charges that Respondent failed to pay its share of assessments on units it owned through December 31, 1984. Although the developer was not paying assessments quarterly on developer-owned units, the developer provided some funds to the association on a monthly basis and recognized its obligation to the association for common expense assessments in all of the accounting statements. The
Petitioner argues that this charge seeks to focus upon the "timing" with which the developer paid assessments on developer owned unit and asserts that the Respondent failed to pay interest on assessments which were "late". Although the evidence indicated that other unit owners typically paid assessments on a quarterly basis, neither the Declaration of Condominium nor the by-laws of the association established a "date-certain" for the payment of the assessments. Thus, the Petitioner failed to establish a firm due date for the payment of assessments. Thus, the Respondent is not guilty of failing to pay its share of assessments and/or delinquent fees relating thereto on units it owned through December 31, 1984. The Respondent is not guilty as charged in Count Four of the Notice to Show Cause.
Count Five of the Notice to Show Cause alleges that Respondent failed to assess unit owners for common expenses in the same percentages as their ownership interests in the common elements as set forth in the Declaration of Condominium. According to Section 718.115(2), Florida Statutes:
Funds for the payment of common expenses shall be collected by assessments against unit owners in the proportions or percentages provided in the declaration. In a residential condominium, unit owner shares of common expenses shall be in the same proportions as their ownership interests in the common elements.
The Respondent admitted that the unit owners were not being assessed in accordance with the percentages of their ownership in the common elements as provided in the recorded declaration. The Respondent acknowledged that this was a technical oversight and steps were subsequently taken by the Respondent to bring each unit owner's assessment to correct proportion to the percentage of ownership in the common element. Nevertheless, the Petitioner has established that Respondent is guilty as charged in Count Five of the Notice to Show Cause.
Count Six of the Notice to Show Cause charges that Respondent violated Section 718.112(2)(f), Florida Statutes, by failing to waive or fully fund reserves for the period March 29, 1982 through December 31, 1984. Section 718.112(2)(f) provides:
(f) Annual Budget.
* * *
(2)...The budget shall include reserve accounts for capital
expenditures and deferred maintenance.
The accounts shall include, but
are not limited to, roof replacement, building painting, and pavement resurfacing
The annual budget for Ocean Dunes Condominium Association included a $6,000 reserve account. The Respondent believed that once the reserve account was listed in the budget, it could be carried in the financial books as a liability. Although the Respondent's method of listing reserves as a liability does no violate generally accepted principles of accounting, it is contrary to the purposes and intent of Section 718.112(2)(f), Florida Statutes. Because reserves are a budgeted common expense, a reserve account must be funded through the collection of assessments from the unit owners. See Section 718.112(2)(g), Florida Statutes. Thus, since the developer, while in control of the association prior to turnover, failed to insure the full funding of a reserve account, a violation of Section 718.112(2)(f), Florida Statutes, exists. The Respondent is guilty as charged in Count Six of the Notice to Show Cause.
Count Seven of the Notice to Show Cause, as amended, alleges that the Respondent violated Section 718.111(12)(c), Florida Statutes, by failing to maintain the official records of the association in Palm Beach County. The official records of the association were maintained at the Royal Palm Beach Bank in Palm Beach County. However, some of the accounting records were routinely transferred out of the county while in possession of the Respondent's accountants, Coopers and Lybrand, who maintained offices in both Palm Beach and Broward Counties. The Petitioner has not established that the Respondent is responsible for the records not being kept at all times in Palm Beach County. Respondent is not guilty as alleged in Count Seven of the Notice to Show Cause.
Count Eight of the Notice to Show Cause, as amended, alleges that no turnover review was performed and delivered to the association as required by Section 718.301(4)(c), Florida Statutes (1983). That section provides in part that upon turnover, the developer is required to deliver to the association:
... 718.301 Transfer of Association Control.
* * *
(c) The financial records, including financial statements of the association, and source documents since the incorporation
through the date of turnover. The records shall be reviewed by an independent certified public accountant. The minimum report required shall be a review in accordance with generally accepted accounting standards as defined by rule by the board of accountancy. The accountant performing the review shall examine to the extent necessary supporting documents and records, including the cash disbursements and related cash invoices to determine if expenditures were for association purposes and the billings, cash receipts, and related documents to determine that the developer was charged and paid the proper amount of assessments.
The Respondent failed to deliver to the association a turnover review as defined by Section 718.301(4)(c), Florida Statutes. The Respondent merely delivered copies of yearly audits which were performed by the developer's accountants. Although the audits could be utilized in the preparation of a review, the audits were insufficient to satisfy the requirements of Section 718.301, Florida Statutes. The purpose of the final accounting is to ensure that the developer, while in control of the association, paid its assessments and utilized the funds of the association for appropriate association purposes. As such, the preparation of the report is crucial to unit owners other than the developer. The Respondent is guilty as charged in Count Seven of the Notice to Show Cause.
Count Eight of the Notice to Show Cause charges that Respondent, upon turnover, failed to deliver to the association a copy of the plans and specification utilized in the construction of the condominium with a certificate in affidavit form in violation of Section 718.301(4)(f), Florida Statutes. That section provides in part that not more than 60 days after the developer turns over control of the association to other unit owners, the developer shall provide to the association:
