Reserve Funding for Condo Associations: Options and Best Practices

Millions of Florida residents live in condominium units, be they stand-alone villas or penthouse units in a 30-story building. Irrespective, Florida Statutes section 718.112(2)(f) provides a default rule that condominiums must reserve fund balances to repaint, resurface the roads, replace the roof, and perform any deferred maintenance or replacement that costs more than $10,000. This means condominium associations must set aside enough money each year to replace certain components at the end of their useful life without the need for special assessment or borrowing.

As a result of the recent tragedy at Champlain Towers in Surfside, this topic has appropriately been in the spotlight. In that awful collapse, the Board of Directors may have been aware of needed repairs impacting the building’s structural integrity and nevertheless routinely sought approval from the owners to waive reserve funding. While no Board wants to be known for increasing assessments, it is also inevitable that condominium buildings in marine environments will require constant and expensive attention. 

The Florida legislature recently arrived in Tallahassee with a mandate to adopt safety and inspection requirements for condominiums three stories or higher. In addition to routine engineering requirements, some of the proposed legislation called for expanded and routine reserve study requirements and sought to make it harder to waive reserves. Unfortunately, the legislative session ended in a stalemate without approving any needed legislation. One factor preventing legislative approval was that the new reserve requirements would inevitably increase annual reserve assessments. For better or worse, the concern was that owners, faced with a sudden increase in reserve assessments, would be unable to pay and become delinquent. As you can imagine, a high delinquency rate likewise has a significant impact on financial ability to make necessary repairs. 

As of the date of this advisory, the Florida legislature has not reconvened to address this issue. Florida Governor Ron DeSantis recently signaled that he would welcome a special legislative session to address condominium safety, so it is possible some reserve legislation will be enacted in the near future. Until sweeping legislative is enacted, I routinely recommend condominium associations follow these best practices.

  • Engage a Professional Reserve Study. Although Chapter 718 provides that a Board can annually consider changes in useful life and replacement cost, the Board may not understand the full scope of required reserve items or the marketplace. Aside from the three express requirements (repaint, resurface and reroof), the $10,000 threshold has been static since I have practiced law. As a result, it is entirely possible you need to add critical components to your reserve schedule – either because of historical inflation or because you never contemplated having to replace concrete. In other words, you need to know what you don’t know. 

  • Consider Inflation. Especially in today’s environment of supply chain disruptions and cost increases, you can and should consider the impact of inflation on future replacement costs.

  • Prioritize Critical Items. Although it is politically popular to renovate common areas and replace pool furniture, these items should not take priority over waterproofing, expansion joints, plumbing, and concrete restoration. All of these items have a useful life and will cost more than $10,000 to replace. If you believe it is necessary to waive certain reserves, prioritize infrastructure over aesthetics.

  • Have a Backup Plan. Florida law is clear that you cannot include a balloon payment in your reserve schedule or budget for future borrowing to satisfy reserve funding. That being said, condominium associations are great borrowers and maintaining a line of credit to address emergency repairs does provide a source of instant liquidity.

If you have questions concerning current Florida condominium reserve laws or your reserve practices, please contact Varnum real estate attorney Steve Adamczyk ([email protected]).

DOJ Aggressively Targeting PPP Loan Recipients for Fraud: What Businesses Need to Know

More than five million businesses applied for emergency loans under the Paycheck Protection Program (PPP), and with a hurried implementation that prevented a full diligence process, it’s not surprising the program became a target for fraud. The government is now aggressively conducting investigations, employing both criminal and civil enforcement actions. On the civil lawsuit front, companies that received PPP loans should be aware of actions brought under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). This advisory details some of the key points of these enforcement tools and what the government looks for when prosecuting fraudulent conduct.

How will PPP Loan Fraud Enforcement Under the FCA Work?

A company can be liable under the FCA if it knowingly presents a false or fraudulent claim for payment or approval to the government or uses a falsified record in the course of making a false claim. 31 U.S.C. § 3729(a)(1)(A), (B). The FCA allows the government to recover up to three times the amount of the damages caused by the false claims in addition to financial penalties of not less than (as adjusted for inflation) $12,537, and not more than $25,076 for each claim.

The FCA can be enforced by individuals through qui tam lawsuits. This means a private individual, known as a relator, can file a lawsuit on behalf of the government. When a qui tam case is filed, it remains confidential (under seal) while the government reviews the claim and decides whether to intervene in the case. If the lawsuit is successful, the relator is entitled to a portion of the reward.

The False Claims Act has been used to pursue fraud claims in connection with PPP loan applications. Any company that participated in the PPP by applying for a loan should retain documentation justifying all statements made on the loan application and evidencing how any funds obtained through the loans were utilized.

How will PPP Loan Fraud Enforcement Under FIRREA Work?

The government is also utilizing FIRREA in response to fraudulent conduct related to PPP loans. FIRREA is a “hybrid” statute, predicating civil liability on the government’s ability to prove criminal violations. The statute allows the government to recover penalties against a person who violates specifically enumerated criminal statutes such as bank fraud, making false statements to a bank, or mail or wire fraud “affecting a federally insured financial institution.” 12 U.S.C. §1833a.

To establish liability under FIRREA, the government does not have to prove any additional element beyond the violation of that offense and that the violation “affect[ed] a federally insured financial institution.” The government has invoked FIRREA in the context of PPP loan fraud by stating the fraud related to obtaining the loan falls under one or more of the predicate offenses set forth in the statute.

What Factors Determine PPP Loan Fraud Penalties Under FIRREA?

While the assessment of a penalty is mandatory under FIRREA, the amount of the penalty is left to the discretion of the court but may not exceed $1.1 million per offense. There is an exception to this maximum penalty, however, if the person against which the action is brought profited from the violation by more than $1.1 million. FIRREA then allows the government to collect the entire amount gained by the perpetrator through the fraud. The actual amount of the penalty is determined by the court after weighing several factors including:

  • The good or bad faith of the defendant and the degree of his/her knowledge of wrongdoing;
  • The injury to the public, and whether the defendant’s conduct created substantial loss or the risk of substantial loss to other persons;
  • The egregiousness of the violation;
  • The isolated or repeated nature of the violation;
  • The defendant’s financial condition and ability to pay;
  • The criminal fine that could be levied for this conduct;
  • The amount the defendant sought to profit through his fraud;
  • The penalty range available under FIRREA; and
  • The appropriateness of the amount considering the relevant factors.

The government favors utilizing FIRREA penalties to pursue fraud claims for several reasons. The statute of limitations provided in 12 U.S.C. §1833a(h) is 10 years, which is much longer than most civil statutes of limitations. The standard of proof required to impose penalties is preponderance of the evidence, rather than the higher “beyond a reasonable doubt” standard that must be met in a criminal prosecution.

Checklist for PPP Loan Recipients

A company that applied for COVID relief funds, such as PPP loans, should ensure they satisfy the eligibility requirements for obtaining the loan, confirm false statements were not made during the application, and review the rules set forth by the SBA for applying for PPP. The government has shown it is willing to pursue remedies under the FCA and FIRREA for fraudulent statements made regarding a PPP loan application.

For more information about PPP loan eligibility and enforcement issues, contact a member of Varnum’s government investigations team.

Thinking of Establishing Florida Residency? What to Consider Before Changing Your Legal Residence

Our knowledge of sophisticated tax and planning techniques permits us to offer a broad range of services. At Varnum, our Estate Planning Practice Team works continuously to ensure you have an opportunity to explore the most creative and effective techniques in use today to achieve your vision.

Many clients whose family circumstances and employment situation permit them to spend in excess of six months every year in Florida may elect to become Florida residents. The biggest advantage, compared to being Michigan residents, is that Florida has no state income tax. So-called earned income, such as salaries, will continue to be taxed in the state in which they are earned, but “unearned” income such as dividends, interest, rents and retirement benefits will not be subject to state income tax if the recipient is a Florida resident.

Property and Local Tax Considerations

The biggest perceived disadvantage to changing legal residence to Florida is that Michigan and Florida only permit residents to claim a homestead exemption (referred to as the “Principal Residence Exemption” or “PRE” in Michigan); accordingly, a change in residence from Michigan to Florida results in the loss of the Michigan PRE. The PRE exempts your principal residence from the local school district tax of up to 18 mills. Mills are the taxes per each $1,000 of assessed value of your home. Therefore, if the assessed value of your Michigan residence is $300,000 (i.e. an assumed fair market value of approximately $600,000) and your local school millage is the maximum of 18 mills, the principal residence exemption would save you $5,400 annually in property taxes.

It should be noted that changing your residence and rescinding your PRE does not result in a change of the taxable value of your Michigan property (“uncapping”) as long as you continue to own it. If you have owned your Michigan home long enough to have an artificially low real estate tax value (i.e. the cap on annual reassessment of your home’s value on which your property taxes are based means that your taxable property value is lower than it would otherwise be if reassessed annually), that cap on reassessment of the taxable value will not change. The PRE only relates to the local school district tax, so rescinding your PRE means you lose the ability to avoid the local school district tax.

Becoming a Florida resident does permit you to qualify for the Florida homestead exemption, which reduces your assessed value by $25,000 plus an additional $25,000 for non-school taxes on assessed values between $50,000 and $75,000. It also limits future annual increases in assessed value to the lesser of three percent or the percentage change in the Consumer Price Index.

Planning for the Homestead Exemption

There are numerous steps you should take even if you are changing your residence for income tax purposes and do not have a Florida residence that qualifies for the Florida homestead exemption. Be aware, however, that if you become a Florida resident you will lose your PRE in Michigan even if you do not claim a homestead exemption in Florida. You cannot elect to preserve a more valuable Michigan exemption by simply forgoing a claim of homestead exemption in Florida. 

Before turning to the rather intricate steps involved in claiming a homestead exemption in Florida, you should plan to:

  • File a Declaration of Domicile provided by the County Clerk of the county to which you are moving. Each county generally makes the form available on its website.
  • Rescind your personal residence exemption in the Michigan county you formerly claimed as your residence.
  • Register to vote in your new Florida county.
  • File your tax returns with the IRS Service Center in Atlanta as a Florida resident. Remember to file a Michigan return as a partial year resident if you change your residence mid-year or as a non-resident if you continue to have earned income in Michigan.
  • If you plan to apply for a driver’s license in Florida, you should do so within 30 days of filing your Declaration of Domicile. You should also be sure to register your vehicles and insure them with a company doing business in Florida within 10 days of establishing residency.
  • Consider making other less critical changes like updating the address on your passport, maintaining a Florida bank account and using your Florida address on your credit cards.

Reviewing Your Existing Estate Plan

In addition to these important recommendations, nearly every Florida attorney who addresses the topic of changing your residence suggests reviewing your existing estate plan. While an estate plan that is valid where it was signed is valid anywhere, Florida has specific requirements that may warrant an update. For example, Florida law is stringent with regard to who may serve as the personal representative of a decedent’s estate. The personal representative must be one of the following: a Florida resident, certain non-resident family members or entities qualified to do business in Florida.

Additionally, all powers of attorney are given immediate effect in Florida; Florida does not permit springing powers of attorney that are only effective upon incapacity. Florida law does not recognize handwritten or “holographic” wills. Florida does not recognize no-contest or “in terrorem” clauses, which states someone contesting a decedent’s will or trust receives nothing pursuant to the will or trust as a result of their legal challenge. Finally, you may need to incorporate language in your trust to qualify for Florida’s homestead exemption, whereas special language is not required to obtain Michigan’s PRE.  

Our Estate Planning Practice Team includes several attorneys licensed to practice in Florida, as well as attorneys dually licensed in Florida and Michigan who can help with your residency transition. Please contact one of our Estate Planning Attorneys if you have any questions about changing your residency or reviewing your estate plan.

New Rules for Data Transfers Out of the United Kingdom

New rules for personal data transfers to countries outside the United Kingdom enter into force on March 21, 2022. Businesses transferring personal data from the U.K. to countries outside the European Economic Area (EEA) need to analyze their international data flows and potentially update their transfer mechanisms to reflect these new provisions.

Under the U.K. General Data Protection Regulation (GDPR) and the U.K. Data Protection Act 2018 (collectively the “U.K. Data Protection Laws”), companies are required to, among other things, implement valid data transfer mechanisms when transferring personal data outside the U.K. to countries without an adequate level of data protection. Standard contractual clauses (SCCs) are a commonly used mechanism to validate these transfers. Once the Brexit transition period ended on December 31, 2020, the EU-GDPR no longer applied to the U.K. but rather the UK-GDPR. Therefore, when the European Union published revised SCCs in June 2021, they did not automatically apply in the U.K., and U.K. companies continued to rely on the old EU-SCCs to validate data transfers.  

To sort out this complexity, the U.K.’s Information Commissioner’s Office (ICO) recently issued a new toolkit of standardized clauses in the form of two documents. The first is the International Data Transfer Agreement (IDTA). The IDTA may be executed as a standalone agreement to accompany a main contract to ensure compliance with U.K. Data Protection Laws. The second is an addendum to the EU’s 2021 standard contractual clauses (UK Addendum). As noted above, many companies operating internationally already have the EU SCCs in place. The U.K. Addendum to the EU SCCs allows companies subject to both the U.K. Data Protection Laws and the EU-GDPR to secure international data transfers without the need to execute a completely new, separate mechanism such as the IDTA.

For some U.S.-based companies, the new U.K. SCCs could create more complexity in contract negotiations and data transfer activities generally. Companies importing data will need to ensure their internal processes align with both the EU SCCs and U.K. SCCs, including which contract modules apply to each unique relationship. This added complexity may require companies to reassess and potentially revise their methods for executing contracts requiring cross border data transfers.

If the U.K. Parliament makes no further changes, the U.K. SCCs will be effective March 21, 2022. U.K. companies must fully implement the U.K. SCCs by March 21, 2024 and have up to this deadline to update existing contracts with these new clauses. In the meantime, for existing contracts, companies have three options: (1) continue using the older EU SCCs (2) implement the new IDTA, or (3) implement the new U.K. Addendum along with the EU SCCs. These same options exist for contracts executed between March 21, 2022 and September 21, 2022. For contracts entered into on or after September 21, 2022, companies must use the new U.K. SCCs. This means (1) executing the IDTA in full, or (2) executing the U.K. Addendum with the EU SCCs.

While these new clauses create more legal certainty in the area of data transfers out of the U.K., the numerous contracting options available create additional complexity for U.K. companies and data importers in countries deemed inadequate, such as the U.S. We expect the ICO to issue further guidance on specific IDTA and U.K. Addendum clauses in the coming months.


Featuring a high concentration of CIPP-certified privacy professionals, Varnum attorneys guide businesses through all aspects of data privacy and cybersecurity, from compliance and policy issues to breach preparedness and response.

Utah Likely Next State to Pass Consumer Privacy Law

Featuring a high concentration of CIPP-certified privacy professionals, Varnum attorneys guide businesses through all aspects of data privacy and cybersecurity, from compliance and policy issues to breach preparedness and response.

The Utah Consumer Privacy Act unanimously passed the Utah Senate on February 25 and, with a few minor wording changes, passed unanimously in the Utah House on March 2. The final version is awaiting Governor Spencer Cox’s signature. If signed by the March 24 deadline, the law will take effect December 31, 2023, and make Utah the fourth state with a comprehensive consumer privacy law.

The law applies to controllers or processors that do business in the state or produce a product or service targeted to consumers who are Utah residents, have annual revenue of $25 million or more; and either a) control or process personal data of 100,000 or more consumers during a calendar year; or b) derive over 50 percent of the entity’s gross revenue from the sale of personal data and control or process the personal data of 25,000 or more consumers.

Under the new law, consumers have the right to confirm whether a controller is processing their personal data, obtain a copy of their personal data in a format that is portable and readily usable, and request deletion. Utah’s law most closely resembles Virginia’s Consumer Data Protection Act and does not include a private right of action. This means consumers won’t be able to sue for alleged violations, as the law is only enforceable by the Utah Attorney General (including a 30-day cure period). The law includes broad exemptions for entities regulated under certain federal laws, covered entities and business associates under the Health Insurance Portability and Accountability Act (HIPAA), information governed by HIPAA, financial institutions and information governed by the Gramm-Leach-Bliley Act (GLBA), and personal data regulated by the Family Educational Rights and Privacy Act (FERPA). Unlike California, the law does not provide rulemaking authority for the Utah Attorney General’s Office.

Companies are required to publish privacy notices, providing:

  • the categories or personal data processed;
  • the purpose for the processing;
  • how consumers may exercise a right;
  • the categories of personal data the controller shares with third parties; and
  • the categories of third parties with whom the controller shares personal data.

The Utah Consumer Privacy Act also creates requirements for the processing of “sensitive data,” including requiring that controllers first present consumers with clear notice and an opportunity to opt out of the processing.

It is unlikely the addition of a privacy law in Utah will tip the balance in favor of a federal data privacy law during the current legislative session. We are monitoring state legislative activity and could see at least two more states pass similarly comprehensive consumer privacy laws this session.

U.S. Supreme Court to Review Constitutionality of ICWA

The Indian Child Welfare Act of 1978 (ICWA) was enacted to address the high rates of Indian children being separated from their Indian families and Indian communities. The stated intent of Congress under ICWA was to “protect the best interests of Indian children and to promote stability and security of Indian tribes and families” (25 USC § 1902). Recent years have seen an increased number of challenges to various provisions of ICWA and parallel state statutes in both Federal and state court lawsuits, with opponents alleging the statutory provisions are unconstitutionally race-based.

Today, February 28, 2022, the U.S. Supreme Court agreed to review four petitions arising from an en banc decision of the U.S. Fifth Circuit Court of Appeals from April 6, 2021, in Haaland v Brackeen. In that case, a Federal district judge in Northern Texas invalidated ICWA. The decision was then overruled by a three-member Fifth Circuit panel before consideration by the entire Fifth Circuit bench ultimately upheld key provisions of ICWA.  

The Supreme Court’s decision to review Brackeen is not surprising considering the ongoing dispute impacts not only ICWA and related rules promulgated by the Bureau of Indian Affairs, but also impacts similar statutory mechanisms and procedural standards in a number of states such as the Michigan Indian Family Preservation Act (MIFPA). A date for argument before the Supreme Court has not yet been set.

Don’t Forget About Early Retirement Benefits in DRO Drafting

The ongoing COVID-19 pandemic has and continues to contribute to a spike in early retirements. Related benefits must be considered when domestic relations orders (DROs) are prepared to complete division of divorcing parties’ retirement benefits. Benefits related to early retirement include the following:

  • Buy-outs are typically one-time benefit enhancements offered by an employer. An example is an increased employee service period for purposes of calculating pension payments. They are generally considered to be a marital asset.
  • An early retirement supplement is usually an additional pension payment paid from the employee’s date of retirement until the employee reaches age 62 and becomes eligible for social security. Care must be given to address such supplements to avoid an unintended penalty on the employee party.
  • An early retirement subsidy is a benefit intended to induce early retirement for employees meeting certain requirements, such as a specified number of years of service. If the alternate payee takes early payment of his/her share of the pension, he or she may miss a significant benefit if the DRO does not allocate such a subsidy and the employee retires early.

A related pitfall can occur where the alternate payee elects to take his/her portion of a pension early based on an expected early retirement subsidy, but the employee works until full retirement age and the subsidy “ages out” or lapses, penalizing the alternate payee. Careful consideration of these issues must be given in DRO drafting.

Filing Tax Returns and Making Tax Payments: Best Practices During the Pandemic and Beyond

With staffing shortages and service center closures, it should come as no surprise that the IRS has faced a number of challenges during the pandemic. A couple of the biggest challenges have been in the opening and processing of taxpayer correspondence and in the processing of tax returns. As National Taxpayer Advocate, Erin Collins, stated in her Annual Report to Congress, “Paper is the IRS’s Kryptonite, and the IRS is buried in it.”

Going into 2022, the IRS has a significant backlog of unprocessed taxpayer correspondence and unprocessed returns. The estimates are staggering.

  • Five million pieces of unprocessed taxpayer correspondence
  • Over 11 million unprocessed tax returns, including:
    • Six million individual income tax returns
    • 2.3 million amended individual tax returns
    • 2.8 million business returns (income tax and employment tax returns)

The 2022 tax filing season, which opened on Thursday, January 24, for individual income tax returns, has the potential to create even more challenges for the IRS. Below is a list of best practices taxpayers can follow to ensure timely processing of their payments, tax returns, and claims for refund. These practices apply to individuals and required filing for businesses.

  • File returns and make payments electronically.
  • If you must file a paper return or mail in a payment to the IRS, send the return or payment to the proper address via USPS Certified Mail, Return Receipt Requested. Using this method will assist in resolving timely filing and/or timely payment penalties assessed by the IRS.
  • Properly notate your tax payment and include the form number, tax period and your social security number or employer identification number.
  • Respond to notices from the IRS in a timely manner. 

In addition to the above, the IRS has offered a few filing tips for individuals.

  • Fastest refunds by e-filing, avoiding paper returns: Filing electronically with direct deposit and avoiding a paper tax return is more important than ever to avoid refund delays. If you need a tax refund quickly, do not file on paper – use software, a trusted tax professional or IRS Free File.
  • Filing 2021 tax return with 2020 tax return still in process: For those whose tax returns from 2020 have not yet been processed, 2021 tax returns can still be filed. For those in this group filing electronically, here’s a critical point: taxpayers need their Adjusted Gross Income, or AGI, from their most recent tax return at time of filing. For those waiting on their 2020 tax return to be processed, make sure to enter $0 (zero dollars) for last year’s AGI on the 2021 tax return. Visit Validating Your Electronically Filed Tax Return for more details.

More individual filing tips from the IRS can be found here.

If you have unpaid taxes or unfiled returns, you need an experienced tax attorney to represent you in your dealings with the IRS or the Department of Justice. An accountant or enrolled agent is not protected by attorney-client privilege. Please contact Eric Nemeth of Varnum’s Tax Practice Team with any questions.