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The is a case study where the lack of financial controls resulted in 2
special improvement projects going significantly over budget and what
could be done to prevent such problems in the future.
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Status of the Finances for the Special Projects at the Portofino on the
Intracoastal Condominium, Fort Lauderdale FL subject to Special
Assessment
Recommendation for Financial Controls of Special Projects
Prepared by the Treasurer of the Association, January 2001
A Study of the finances for the Special Project and the finances for
the Dock Replacement Project at the Portofino on the Intracoastal
Condominium, Fort Lauderdale, FL.
The following is a summary of the results of this review. Please note
that all findings are preliminary and subject to an audit by the
Association's CPA firm. This review was prepared by an accountant
familiar with the project. He did not conduct an audit but merely
reviewed the information presented and compiled this explanation of the
financial situation for the membership of the Association.
Cash Reserves and Summary Conclusion
The Board was concerned about the low level of cash reserves. A review
of the "Beautification Project", which was funded by the special
assessment in 2001, was commenced. It appeared that the project is
about $85,000 to $90,000 over budget and as a result the Association
could run out of cash by early March, 2002. A Board meeting was called
on February 5th to assess the situation and address the issue of how to
pay for the project overruns. While it is important to find out how the
Association went over budget on the Beautification project, it is
imperative that a means of financing this deficit be decided upon at
the meeting on February 5th or as soon thereafter as possible as the
Association will be unable to pay its daily operating bills by early
March.
The Beautification Project - Original Budget $275,000
The "Beautification Committee" which was formed in 2000 to
recommend improvements to the common elements of the Portofino
Condominium. The original plan was prepared by Harvey Herman Designs.
The plan submitted by Harvey Herman was deemed to be too expensive and,
in the words of the Board Chairman, "too conservative" and with a
"lack of color". Consequently, the Committee retained the services
of a resident of the Portofino, an interior designer, who prepared the
overall design for the interior remodel. A budget for the project was
approved by the Board and a special assessment of $275,000 was passed
by the Board in June 2001. This entire amount was collected in two
installments in July and September, 2001. Upon approval of the project
by the Board, the project was handed over to the building manager and
the Board chairman to implement. A decision was made, due to budgetary
limitations, to have the building manager serve as "general
contractor" instead of having the interior designer serve in this
capacity. It should be noted that the building manager did not have
check signing authority and did not sign any of the checks related to
the project.
Attached is Exhibit 1 is a schedule showing the original "special
project" budget and the amounts spent as of January 31, 2001. This
schedule also shows the additional amounts expected to be paid in
February which will complete the original project.
Of the $275,000 raised, $40,000 was allocated to cost overruns
associated with the separately approved Elevator Replacement Project,
thus leaving only $235,000 for the rest of the project. The Project
components are shown below (see Exhibit 2):
Budget Actual as January 31, 2002
Elevator (Special Assessment portion) $40,000
$32,739
Guard House and Cushion $9,000 $1,500
Parking Deck Resurfacing $78,000 $72,883
Landscaping $50,000 $52,400
Interior Remodel $100,000 $196,728 (as of 1/31/02)
Total $275,000 $356,250
The Elevator Project
As of December 31, 2000 the elevator reserve was $63,457. An additional
$67,102 was added by the quarterly reserve assessments in 2001. The
original bid for the elevator project came was approximately $130,000.
An additional $40,000 was added when it became clear the elevator
project was over budget. This amount was budgeted as part of the 2001
special assessment. Actual expenditures for the elevator replacement
project were $167,166. Accumulated interest on the reserve funds was
$3,869.
The Interior Remodel
A summary of the "Special Assessment Project" is attached as
Exhibit 3. Detailed schedules are included as Exhibits 4 and 5. While
the Special Assessment Project was budgeted at $275,000 (including
$40,000 for the elevator project) the actual expenditures through
December 31, 2001 were $329,623. As of December 31st the over-budget
amount was $59,294. In January, an additional $27,280 of bills came in
bringing the total project amount to approximately $356,000, which is
over budget by approximately $82,000 (or 32%). The interior remodel
portion of the project is over budget by approximately $97,000 (as of
January 31st) - See Exhibit 4. According to Paul Levine we can expect
additional bills of approximately $5,000 (or less?) to come in during
February.
The over-budget invoices have been paid from the operating fund. As a
result the Association will run out of operating cash within 30 days.
The Dock Project - Original Budget $100,000, final cost in excess of
$350,000
The Board also approved a $100,000 replacement of the docks. This is an
increase over the $45,000 dock remodel project passed by the Board a
year earlier. To finance this project, the Board approved a $110,000
line of credit with a local bank.
This project was to be financed out of "surplus dock revenue" and
it was estimated that it would take four years of surplus to pay off
the project (surplus from years 2001, 2002, 2003 and 2004). Dock
revenue surplus' available from 2001 (actual) and 2002 (budget) are
$22,000 and $30,000 respectively. Thus it appears we will only need to
borrow between $48,000 and $52,000 (depending on interest charges
incurred) which would be repaid in year 2003 and 2004 (approximately
$26,000 in each year). When the dock project was finally completed the
total cost was in excess of $350,000.
Recommendations for Financing the Deficit
At present the deficit of about $100,000 is being financed through
operating funds. The Board is scheduled to meet on February 5th. At
that time the Board will consider a special assessment for the interior
remodel deficit. If the Association runs out of cash before the
Assessment can be passed and collected, the Association will have no
choice but to use the Line of Credit obtained for the Dock Project to
pay bills from the operating fund.
It appears that the only means for paying for the deficit in the short
term is another Special Assessment. Even if the line of credit or
another loan were obtained for the deficit it would still have to be
paid off from an assessment. In light of other irregularities in
accounting and cash discovered since the initial date of this report
including inaccurate cash reports and evidence that monies were taken
from reserve funds to pay for the beautification project it is
recommended that counsel for the Association be directed to investigate
whether any monies can be recovered from the Association's Directors
and Officers Liability policy and from other sources. The Board should
also consider whether those who signed contracts and checks for these
overages should continue in their positions on the Board with check
signing and contract signing authority until said investigation is
completed.
In consideration that the dock project has doubled in scope and
increased in cost by over 100% it is also recommended that the Board
consider raising the dock lease fees. These fees should also be
applicable to all boats that newly arrive at the Portofino after this
assessment is passed.
Recommendations for Accounting and Finance Policies and Controls
In order to avoid over budget expenditures in both the operating
accounts and the capital accounts (reserve and special project
accounts) the following is recommended:
The Budget Committee's name be changed to the Finance and Budget
Committee. The responsibility of the committee is as follows:
1) Review financial statements quarterly to determine that the
Portofino is operating within budget (note: this isn't an audit and it
can not guarantee that there will be no errors in allocation of
invoices to the proper accounts)
2) A review of cash balances in all accounts
3) A review of all monies used from the Line of Credit
4) A review of the budget and actual expenditures for Special projects
such as the Dock replacement project.
5) To develop accounting systems and budget controls for special
projects to help insure that no unbudgeted expenses are incurred in the
future without proper approvals.
6) Prepare the annual operating budget in a timely manner in accordance
with the requirements of the declaration and Sate law.
7) Prepare revisions to the budget and present it to the Board if it
becomes clear that the Association is going to be over budget in any
one category by more then $10,000.
Signatures on Checks
At present only one signature is required on checks. It is proposed
that all checks in excess of $1,000 require two signatures, one of
which is the Secretary/Treasurer (or the Vice-President of the Board,
if the Secretary/Treasurer isn't available). If a Special Project is
over budget by more then $5,000 then a emergency meeting of the Board
must be called to review the project.
All contracts obligating the Association to an expense in excess of
$1,000 require two signatures. All contracts require Board approval.
All draws on the existing line of credit require two signatures.
Membership Approval for Future Special Projects
Prior to 2000, projects that materially altered the common elements
required approval by a supermajority of the Unit owners (66%). This
process was deemed to be too complicated for items such as roof repair
and painting of the building so the Declaration was changed in 2000 to
allow the Board to make changes, without limit, to the common areas. As
a result, the Beautification Project and the Dock Project did not
require ownership approval.
It is recommended that all Special Projects that are not of an
"emergency nature" shall be presented to the Membership for a vote.
Approval by a majority of those members responding is required. An
emergency is defined as a project necessary to meet regulatory
requirements of outside agencies such as the Fire Marshall or those
projects which effects the immediate safety of residents and are
necessary for the daily operation of the building (such as plumbing
repair, gate repair, roof repair, etc.). Special projects don't
include projects funded from the reserves.
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Recommended Financial Controls for a Homeowners or Condo Association
