STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF BUSINESS REGULATION, ) DIVISION OF FLORIDA LAND SALES, ) CONDOMINIUMS AND MOBILE HOMES, )

)

Petitioner, )

)

vs. ) CASE NO. 86-1752

)

BATURA ENTERPRISES, INC., )

d/b/a ENGLISH PARK, a )

Condominium, )

)

Respondent. )

)

RECOMMENDATION

Final hearing in the above-styled action was held on February 10, 1987, in Cocoa, Florida, before Mary Clark, Hearing Officer of the Division of Administrative Hearings.

The parties were represented as follows:

For Petitioner: Karl M. Scheuerman, Esquire

Department of Business Regulation 725 South Bronough Street Tallahassee, Florida 32399-1007

For Respondent: James S. Cheney, Esquire

Post Office Drawer 10959 Melbourne, Florida 32902-1959

BACKGROUND AND PROCEDURAL MATTERS

This matter arose with Petitioner's Notice to Show Cause, alleging four violations of Chapter 718, F.S., "The Condominium Act". Respondent, in turn, filed its Demand for Formal Hearing.

At the hearing, Petitioner presented the testimony of Marie McElveen, Philip Batura and Eric Larsen, C.P.A. Respondent presented the testimony of Philip Batura. Six joint exhibits were admitted.

After hearing, both parties submitted proposed recommended orders.

Specific rulings on the proposed findings of fact are found in the attached appendix.

ISSUES

The issue for resolution in this proceeding is whether Respondent committed the violations alleged in the Notice to Show Cause:

1. Failure to deliver to the association a review of financial records for the required period. Section 718.301(4)(c) F.S. (1981).

2. Failure to fund reserves. Section 718.112(2)(k) F.S. (1981).

3. Failure to turn over converter reserves. Section 718.301(4)(d) F.S. (1981).

4. Charging the association $10,000 for management services without documentation of the contract for the services.

Section 718.115(1) F.5. (1981).

If it is determined that violations occurred, the remaining issue is what corrective action and civil penalties are appropriate.

FINDINGS OF FACT

1. The parties have stipulated to the following facts:

   1. Batura Enterprises, Inc. (Batura) is the developer, as defined in Section 718.103(13) F.S., of a residential conversion condominium known as English Park, in Melbourne, Florida.

   2. The condominium association for English Park was incorporated on December 2, 1980.

   3. The declaration of condominium for English Park was recorded in the public records on January 22, 1981.

   4. Turnover of control of the condominium association from control by the developer to control by unit owners other than the developer pursuant to Section 718.301 F.S., occurred on May 31, 1982.

   (Joint exhibit #1.)

   
   

2. A review of financial statements dated January 19, 1983, was delivered to the condominium association. The review covers a ten-month period commencing August 1, 1981, and ending May 31, 1982. (Joint Exhibit #4.) A supplemental turnover review, performed during the course of this litigation and signed on February 7, 1987, covers the period from incorporation of the condominium association on December 2, 1980, through July 31, 1981. (Joint exhibit #6.)

   
   

3. The function of the review is to provide an accounting during the time that the developer is responsible for the association, and to insure that assessments are charged and collected. (Testimony of Eric Larsen, C.P.A., qualified without objection as an expert in condominium accounting.)

   
   

4. The proposed operating budget included $15,248.00 for an annual reserve account ($1,270 per month). (Joint exhibit *5, p. 83.) Based on this, the reserve account from the creation of the condominium, January 22, 1981, until the date of turnover, May 31, 1982 should have been $20,688.71 (sixteen months and nine days).

5. The "election period" provided in Section 718.116(8)(a) F.S. (1979) is addressed in the Condominium documents, p. 31:

   
   

   F. Common Expenses payable by the Developer.

   Until the sale of the first Unit in the Condominium, Developer shall be solely responsible for all expenses of the Condominium. Following the first closing, the Unit Owner in whom title shall have been vested shall be responsible for his proportionate share of Common Expenses, based upon his percentage interest in the Common Elements. The Developer shall be excused from payment of the share of the Common Expenses and Assessments relating to the unsold units after the recording of this Declaration for a period of time which shall terminate on the first day of the fourth calendar month following the month in which the closing of the sale of the first unit occurs. The Developer shall pay the portion of expenses incurred during that period which exceeds the amount assessed against other Unit Owners.

   (Joint Exhibit #5.)

   
   

   The first units were sold in April 1981. (Joint Exhibit #2, p. 2).

   Therefore, the "election period" ended on August 1, 1981.

   
   

6. The turnover review does not reflect the existence of the $20,688.71 reserve fund at the time of turnover on May 31, 1982. Instead, it reflects a certificate of deposit in the amount of $18,795.00 that was created as a "reserve for transition operations". This was derived from initial payments made by the owners to the association to provide working capital for the start- up phase. (Joint Exhibit #4., testimony of Philip Batura.)

   
   

   These "initial assessments" are addressed in the condominium documents:

   
   

   G. Initial Assessments.

   When the initial Board, elected or designated pursuant to these By-laws, takes office, it shall determine the budget as defined in this Section for the period cornencing 30 days after their election or designation and ending on the last day of the fiscal year in which their election or designation occurs.

   Assessment shall be levied against the Unit Owners during said period as provided in this Article. The Board will levy an "initial assessment" against the initial purchaser at the time he settles on his purchase contract. Such initial assessment shall be in an amount equal to two months regular assessments, and shall be utilized for commencing the business of the Association and providing the

   necessary working fund for it. In addition, the initial purchaser shall pay the pro-rated portions of the monthly assessments for the remaining balance of the month in which closing takes place.

   The initial assessment and other assessments herein provided shall be paid by each subsequent purchaser of a Unit; no Unit Owner shall be entitled to reimbursement from the Association for payment of the initial assessment.

   Developer shall not be liable to pay any initial assessment. (Emphasis added)

   (Joint Exhibit #5, p. 31.)

   
   

   Based on the above, it is apparent that none of the $18,975.00 was contributed by the developer.

   
   

7. Between April 1, 1981, and August 1, 1981, 60 percent of the units were sold. (Testimony of Philip Batura. Joint exhibit #4, attachment C.) Therefore at any given point in time between those dates, at least 40 percent of the units were in the hands of the developer.

   
   

8. Between August 1, 1981 and turnover at the end of May 1982, an additional 30 percent of the units were sold, for a total of 90 percent. (Testimony of Philip Batura.) This means a minimum of 10 percent of the units were in the hands of the developer at any point between those dates.

   
   

9. While Philip Batura claims that reserves were waived by a majority of members pursuant to Section 718.1l2(2)(k), F.S. (1981), he produced no evidence of that. He admitted that the action is not reflected in association minutes. (Joint Exhibit #1.) Reserves are included in the proposed budget filed with the condominium documents. (Joint Exhibit #5.) Reserves are noted in the supplemental financial review provided by the developer:

   
   

   ENGLISH PARK CONDOMINIUM ASSOCIATION, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

   (SEE ACCOUNTANT'S REVIEW REPORT) JULY 31, 1981. NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   RESERVES - The Association's policy is to currently fund all expected replacements and major repairs of commonly owned assets. Should restricted funds available to meet future replacements and major repairs prove to be insufficient, the Association's Declaration provides that special assessments may be made against the unit owners.

   * * *

   (Joint Exhibit #6.)

   
   

10. The purpose for a reserve account is to insure that funds are available in the future for replacements and deferred maintenance on the common elements. (Testimony of Eric Larsen) In addition to the statutorily-required reserves for exterior painting, roof replacement and repaving, the English Park

    proposed budget includes reserves for the swimming pool and "townhome hot water tanks". According to Philip Batura the budget was not amended prior to turnover.

    
    

11. A separate reserve was required at the time of turnover because this was a condominium converted from apartments. (Testimony of Philip Batura) The only converter reserve applicable was a reserve for roofing in the amount of

    $6,114.00. (Joint exhibit #2, p. 2 of 11.) The Respondent has admitted its failure to turn over this reserve, but claims the obligation is offset by

    $10,000 in management fees which it asserts the association owes. (Joint Exhibit #1, p. 2 of 6.)

    
    

12. Philip Batura is President of Batura Enterprises, Inc. He was elected or designated to the association board of directors at some point prior to turnover and remained on the board at turnover as he still owned some units. He mostly ran the association until the turnover in May 1982. (Testimony of Philip Batura.)

    
    

13. Batura claims that there was an oral agreement for management services for $1,000.00 per month, commencing on August 1, 1981, between the association and Batura Enterprises, Inc. He said this was never paid by the association as there was not enough income to cover the costs of operation.

    
    

14. The financial review covering the period August 1, 1981 to May 30, 1982, addresses the accrual of a management fee of $10,000, "...per the proposed operating budget which was recorded in the original declaration." (Joint Exhibit #4.) It is unclear where this figure was derived, as the budget does not reflect a $1,000.00 per month expense line item for management services. Included in the condominium documents is a proposed contract between the association and Eussel G. Hurren for management services. Both the fee and the term of the contract are left blank. The contract form that was filed is not signed, nor was a contract with this individual ever signed. (Testimony of Philip Batura.) The Declaration of Condominium permits a contract with a professional managing agent, including the developer. (Joint - Exhibit #5, p. 25.) No competent evidence was adduced by either party that this provision was ever fulfilled.

    
    

    CONCLUSIONS OF LAW

    
    

15. The Division of Administrative Hearings has jurisdiction over the parties and subject matter of this proceeding. 120.57(1) F.S.

Alleged Violation - Count I

16. Section 718.3O1(4)(c) F.S. (1981) provides:

(4) Prior to, or not more than 60 days after, the time that unit owners other than the developer elect a majority of the members of the board of administration of an association, the developer shall relinquish control of the association, and the unit owners shall accept control. Simultaneously, the developer shall deliver to the association all property of the unit owners and of the association held or controlled by the developer,

including, but not limited to the following items, if applicable, as to each condominium operated by the association:

* * *

(c) The financial records, including financial statements of the association, and source documents since the incorporation of the association 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 paid invoices to determine if expenditures were for association purposes and the billings, cash receipts, and related records to determine that the developer was charged and paid the proper amounts of assessments.

1. This section was created by Chapter 81-184 Laws of Florida, effective June 15, 1981. The former section required an audit and accounting, but did not specify in detail the scope and period to be covered. 1/ The 1981 amendments had been in effect for almost one year at the turnover and it is appropriate to apply that law, rather than the pre-1981 law as asserted by the Respondent. 2/

   
   

2. The initial review covered only the ten-month period from the end of the "election period" to the time of turnover by the developer. The supplemental review, provided several days

prior to the final hearing, covered the remaining statutory period from incorporation of the association. The compliance was approximately four and a half years late.

Alleged Violation - Count II

19. Section 718.112(2)(k) F.S. (1981) provides

(k) The proposed annual budget of common expenses shall be detailed and shall show the amounts budgeted by accounts and expense classifications, including, if applicable, but not limited to those expenses listed in

s. 718.504(20). In addition to annual operating expenses, the budget shall include reserve accounts for capital expenditures and deferred maintenance. The accounts shall include, but not be limited to, roof replacement, building painting, and pavement resurfacing. The amount to be reserved shall be computed by means of a formula which is based upon estimated life and estimated replacement cost of each reserve

item. This subsection shall not apply to budgets in which the level of assessments has been guaranteed pursuant to s.

718.116(8) prior to October 1, 1979, provided that the absence of reserves is disclosed to purchasers, or to budgets in which the members of an association have, by a vote of the majority of the members present at a duly called meeting of the association, determined for a fiscal year to provide no reserves or reserves less adequate than required by this subsection.

* * *

This section appeared in substantially the same form in 1980, when the association was incorporated.

1. The substantial weight of evidence established that the English Park reserves should have amounted to $20,688.71 at the time of turnover, based on the proposed operating budget and the absence of any proof of waiver.

   
   

2. Not all of that sum is the responsibility of the developer. Until the first unit is sold, he must pay all expenses of the Condominium. During the

   `election period", he is excused from paying assessments and a share of the common expenses, but he is still responsible for the portion of common expenses incurred during that period which exceed the amount assessed against other unit owners. After the election period, the developer is responsible for common expenses to the extent that it still owns units. Section 718.116(8)(a) F.S. (1979).

   
   

3. The English Park Condominium was created when its declaration was filed. Section 718.104(2) F.S. (1979) From this date, January 22, 1981 until April 1, 1981, Batura Enterprises, Inc. was responsible for the entire expenses of the condominium, including the accrued reserves expenses, which on April 1, 1981, should have amounted to $2,908.71 based on the budget and figure of

   $1,270.00 per month. (See finding of fact, paragraph 4, above.)

   
   

4. From April 1981, until the end of the "election period", August 1, 1981, the developer owned at least 40 percent of the units. The reserve account should have accrued $5,080.00 during that period. However, without evidence of the actual expenses of the condominium and how much of the $18,975.00 was collected during that period, it is impossible to determine that a shortfall existed that would be the responsibility of the developer. Petitioner failed its burden of proving that the developer should have funded any of the reserve account during the " election period".

   
   

5. From August 1, 1981 until turnover on May 31, 1982, the reserve account should have accrued $12,700. We know that the developer contributed nothing to the $18,975.00 (See finding of fact, paragraph #6, above). Yet he owned at least 10 percent of the units during that period. His share of the reserve account for that period was $l,270.00. 3/

   Alleged Violation - Count III

   
   

6. The developer admits that it failed to turn over converter reserves in the amount of $6,114.00, as required by Section 718.301(4)(d) F.S. (1981). He failed to prove the existence of a contract or obligation by the association to him and the sum is, therefore, not off-set.

Alleged Violation - Count IV

26. Section 718.115(1) F.S. (1981) provides:

718.115 Common expenses and common surplus. - -

1. Common expenses include the expenses of the operation, maintenance, repair or replacement of the common elements, costs of carrying out the powers and duties of the association, and any other expense designated as common expense by this chapter, the declaration, the documents creating the condominium, or the bylaws.

1. The Notice to Show Cause alleges this section was violated by the developer charging the association $10,000.00 for management services without documentation.

   
   

2. This section does not create an obligation or give rise to a penalty. Further, the possibility of a management contract is provided in the condominium declaration and documents. (See finding of fact, paragraph #12.) However, Philip Batura's uncorroborated testimony regarding an oral contract effective August 1, 1981, was simply not credible. Neither party proved that the allegation of a contract was anything more than an effort by the developer to off-set funds he knew he owed to the association. The existence of a contract was not established nor was any violation established.

   
   

3. The Division of Florida Land Sales, Condominiums and Mobile Homes has the authority to issue an order requiring the developer or association to cease and desist from an unlawful practice or to take affirmative remedial action. The division may also impose a civil penalty for any violation of Chapter 718. Section 718.501(1)(d) F.S.

   
   

   Based on the foregoing it is, thereby, RECOMMENDED:

   That a Final Order be issued

   
   

   1. Finding the Respondent guilty of violations of Sections 718.301(4)(c) F.S.; 718.112(2)(k) F.S. and 718.301(4)(d) F.S.; and not guilty of violations of Section 718.115(1) F.S.,

      
      

   2. Requiring the Respondent to pay the English Park Condominium Association

      $10,292.71, representing the developer's share of reserve account ($4,178.71) and conversion reserves ($6,114.00); and

      
      

   3. Imposing a civil penalty in the amount of $1,500.00.

   DONE and RECOMMENDED this 8th day of April, 1987 in Tallahassee, Florida.

   
   

   MARY CLARK

   Hearing Officer

   Division of Administrative Hearings The Oakland Building

   2009 Apalachee Parkway

   Tallahassee, Florida 32399-1550

   (904) 488-9675

   
   

   Filed with the Clerk of the Division of Administrative Hearings this 8th day of April, 1987.

   
   

   ENDNOTES

   
   

   1/ Section 7l8.30l(4)(c) F.S. (1979) provides:

   (c) An audit and accounting, which need not be certified, for all association funds, performed by an auditor independent of the developer, including capital accounts, reserve accumulations in accordance with s. 7l8.504(20)(c)1.k., and contributions.

   
   

   2/ Respondent has provided no authority for this assertion, made in his Demand for Formal Hearing.

   
   

   3/ The developer obviously owned more than 10 percent of the units at some point between August 1, 1981, and May 31, 1981, but without evidence other than Philip Batura's admission that 90 percent were sold as of turnover, Petitioner failed its burden of proving that he was responsible for more of the reserves.

   
   

   APPENDIX TO RECOMMENDED ORDER, CASE NO. 86-1752

   
   

   The following constitute my specific rulings on the proposed findings of fact submitted by the Petitioner.

   
   

   1. 1. Addendum in Background and Procedural matters. 2.-5. Adopted in paragraph #1.

   2. 1.-2. Adopted in substance in paragraph #12.

      1. Rejected as a statement of the Respondent's argument, which is addressed in the conclusions of law.

      2. Adopted in paragraph #2.

      3. Adopted in paragraph #11.

1. 1.-6. Adopted in substance in paragraph #12. 7.-10. Rejected as unnecessary.

1. Rejected as contrary to the weight of evidence. Batura admitted that the converter reserves were not turned over, but claimed that the $18,975.00 covered the other reserve account.

2. Addressed in paragraph #6.

13.-14. Rejected as unnecessary. However, failure to prove

the waiver and is addressed in paragraph #9.

15. Rejected as unnecessary.

16.-18. The figures given for the reserves are rejected.

These figures are based, in part, on Eric Larsen's statement that the "election period" ended on 6/30/81. Since the only testimony regarding commencement of sales was Philip Batura's testimony that the first units were sold in April 1981, the election period ended August 1, 1981.

1. Rejected as unnecessary, and as to the conversation with the CPA, uncorroborated hearsay.

2. Rejected as unnecessary.

3. Rejected as contrary to the weight of evidence. Eric Larsen's unexplained conclusion that the $18,975.00 could be utilized to off-set reserve deficits after the election period, but not during the period, is contrary to the purpose of the $18,975.00 described in the condominium documents and by Philip Batura.

The following constitute my specific rulings on the proposed findings of fact submitted by the Respondent.

1. Adopted in part in paragraph #2 and in conclusion of law #2. The conclusion as to compliance is rejected as contrary to the facts and law.

2. Adopted in paragraph #9.

3. Addressed in conclusion of law, paragraph #6. Strangely, Respondent's computation of its indebtedness to the reserve accounts exceeds my computation. While it is tempting to adopt that figure, it appears to have no basis in the record before me, and is therefore, rejected.

4. Rejected as contrary to the evidence.

5. Adopted in paragraph #11.

6. Rejected as contrary to the evidence.

7. Rejected as contrary to the law and facts of record.

8. Rejected (as to the amount owed) as unsupported by the weight of the evidence. The alleged indebtedness by the association is rejected as unsupported by competent substantial evidence.

COPIES FURNISHED:

Karl M. Scheuerman, Esquire Department of Business Regulation The Johns Building

725 South Bronough Street Tallahassee, Florida 32399-1007

James S. Cheney, Esquire Post Office Drawer 1959

Melbourne, Florida 32902-1959

Docket for Case No: 86-001752

Orders for Case No: 86-001752