How Deep Are Your Pockets?
The collapse of the Champlain Towers South condominium in Surfside was shocking. Not only for the lives lost (and the way they died), but also for the fact the tragedy might have been avoided had their condominium association done something about the deferred structural maintenance that had accumulated over the years.
Florida’s legislature quickly sought solutions by requiring associations pay attention to the condition of their buildings and maintain adequate reserves to pay for upkeep and repairs. The recently passed Senate Bill 4-D establishes two basic things: one involves a building inspection, the other a reserve study. In theory this hits the bullseye. The long-term ramifications are more complex, costly, and impactful on housing affordability that anyone would have intended.
For buildings 3 stories or higher, associations will be required to have a Milestone inspection once the building reaches 30 years of age. If the building is within 3 miles of the coastline, the Milestone inspection must occur within 25 years. Where a Milestone inspection is required, and the building was completed before July 1, 1992, the initial Milestone inspection must be performed by December 31, 2024.
A Milestone inspection consist of two phases. In Phase 1, a licensed architect or engineer performs a visual exam of the building and improvements, and provides a qualitative assessment of the structural condition. If no signs of substantial deterioration are observed, this concludes the study. If deterioration is detected, then a Phase 2 inspection is required, which could involve destructive or non-destructive testing at the inspector’s direction.
An association must also perform a structural integrity reserve study for each building 3 stories or higher, which includes items related to structural integrity and building safety (the roof, walls, other primary structural members, floor, foundation, fire proofing and protection systems, plumbing, electrical systems, waterproofing and exterior painting, and windows). It also includes any other item that has a deferred maintenance expense or replacement cost that exceeds $10,000, where the failure to replace or maintain such item would negatively affect structural integrity. Associations existing on or before July 1, 2022 must have a structural integrity reserve study completed by December 31, 2024. For new condominiums, a developer must provide this reserve study at turnover.
Historically, the minimum requirements for the above were roof, pavement, painting, and any other capital item that cost $10,000 or more to replace. Senate Bill 4-D added walls and foundations to the list. This leads to a variety of questions, including how would an association reasonably quantity and reserve for structural wall replacement of a multi-story building? It is very likely no association is setting aside funds for these items, since when the walls fail, that is the end of the useful life of the building.
And, it used to be that associations could vote annually to waive reserves, or fund them at a level less than necessary to fully cover the cost of capital repairs and replacements. However, beginning December 31, 2024, associations may no longer waive reserves for structural integrity items for buildings 3 stories or higher. As a result, beginning in calendar year 2025, there could be some massive money owed for those associations who have not fully funded their reserves.
For example, suppose a building’s 23-year-old roof has a 30-year life expectancy. The association previously elected to waive reserves, and continues to do so for the next 2 years. Commencing in 2025, the association will be required to begin fully funding reserves, meaning it has the following 5 years to put aside funds sufficient to pay for the entire estimated replacement cost of the roof when it reaches the 30-year mark. That may have been a manageable number if collected over 30 years, but now they are collecting those 30 years of assessments in 5 years. This would also apply to all structural integrity items. Commencing in 2025, an association must fully fund the amounts necessary to replace the item in question at the end of its useful life.
For older condominiums with buildings 3 stories or higher and inadequate reserves, the obligation to fully fund could be a significant financial burden, especially if there were Phase 2 concerns resulting from the Milestone inspection. Layer in the question of the additional reserve categories for walls and foundation, and the economic pressures of significant increases in the cost of insurance and the requirements insurers are placing on associations leading to costly capital repairs and replacements, and it will not be a surprise to see some associations decide to terminate their condominiums, rather than try to fully fund reserves.
For listing agents and sellers, it has never been more important to be aware of the discussions associations are having on the subject of capital repairs and assessments, and disclose that information to potential buyers. That, and pay particular attention to how the condominium rider is completed about so-called pending assessments.
Williams Parker attorneys pay keen attention to developments like Senate Bill 4-D, and are well prepared to assist with the intricacies of contract preparation and disclosures on these, and myriad other issues. For more information on our capabilities, visit williamsparker.com/practices/real-estate/.