Alan Tannenbaum, Esq.:
Okay. Welcome, everybody. This is Alan... No, I am Alan Tannenbaum. I'm here with my partners Jon Lemole and Cindy Hill, and we're going to give you a presentation on some of the really hot issues relative to this new legislation. It's going to be somewhat of a more casual look at the issues. We're not going to cover everything in the statute, but in the last couple of months we've been peppered with questions. We've talked to lawyers around the state, engineers and insurance people also, about some of the definitional issues that they're grappling with, we're going to cover those. But we actually have another video that was more of an overview of the entire statute that you can look at on our website and find that. Our firm is a full-service community association firm. Up until about three months ago, we were a construction firm that was specializing in representing the community association industry, doing turnovers, repair consulting, and repair-contract enforcement.
But we made a determination, my former partner, Chad McClenathan, decided that he wanted to retire, and wanted to know if I wanted to take over his practice, he's a general counsel. And I contacted Cindy Hill, my new partner, and said, "Cindy, do you want to come along with us? We'll take on Chad's practice, we'll take on your practice, and we will become a full-service community association firm." And that's what we've become. Jon and I spend most of our time on the construction side. Cindy spends most of her time on the general-council side. Chad McClenathan and is still with us on a council basis. We have offices and in Fort Myers, Sarasota, Clearwater in Orlando, but we've been contacted actually from groups all across the state. And with the advent of Zoom, we are now representing clients in the far reaches of Florida. So we're available for everybody, and we network with a number of lawyers around the state.
Couple of ground rules. Any questions you have put in the chat, and keep yourself on mute. We will stay as long as to answer all of your questions even after our hour period is complete. So with that, let's get into the program. One person I'd like to introduce also is Michelle Colburn, who actually engineers these programs for us, any issues that you have before or afterwards, you probably have been in contact with her, is also my new wife, we got married about 12 days ago. And so I have to be especially nice to her about any engineering flaws that may occur. So let's go on to the... You can put up the next slide, Jon, and we'll get you started.
Jon Lemole, Esq.:
Yeah, let introduce what we're going to talk about. So the title of the presentation today is Grappling with the Havoc the Florida Legislature has Wrought on Condo World. And that's a pretty bold title for our program, but as you all know by now, the new condo safety legislation came about after a pretty whirlwind two-day special legislative session. When it was announced, the focus of the condo community and the legal community tended to be on these big-ticket items that were contained in the legislation. And we, in the early stages, looked at them from the 10,000-foot level. As with all game-changing legislation, however, as time go goes by, we begin to learn the gaps and ambiguities contained in the new statutes. And this statute, this legislation is no different. As associations and lawyers have begun thinking about how to meet these new legal requirements, we've all been left with some pretty big areas of uncertainty.
So while the intent behind the legislation was good, it certainly appears that the hasty drafting of it has left many of us having to make difficult decisions on how to interpret these new laws. In our conversations with members of the condo community, the Safety Act has indeed wrought some havoc in that community. So we want to focus today on some of these big areas of ambiguity, because these are the tough questions that you all are going to have to deal with in how to meet the requirements of this law. Unless the legislature provides us with some guidance, associations and their legal counsel and their general counsel are going to need to make some difficult calls. And we hope that the takeaway from today is that every community, every condominium, which is potentially subject to these new provisions, or closely with general counsel, make decisions which can be supported by the business judgment rule. And good luck with some of these tough calls.
So let's talk about our agenda. We're going to talk about meeting, and I think instead of possible deadlines, that should probably say impossible deadlines, because they may be impossible for some. We're going to talk about meeting impossible deadlines. We're going to reflect on some of the big areas of ambiguity in the new legislation. Alan is going to discuss this issue of architects, and are our architects licensed and insured to undertake structural inspections and reporting. He's going to talk about structural engineers being already overburdened. We're going to look at indemnification clauses and limitations on liability in engineering agreements, because those are going to be front and center as you engage engineers to do your studies. Cindy's going to talk about insurance premiums skyrocketing, how's everybody going to afford it? And a little bit of a talk about what do you do with owners who can't afford a special assessment to take on the work that may need to be taken on as a result of the studies.
And then hopefully our goal here is to leave some good time for a question and answer. So we'll jump right into it. So meeting impossible deadlines, let's take a quick review of what some of the deadlines here are for condominiums. And these apply to co-ops too. And maybe if there's one co-op person represented on these things, it's probably a lot, but we're focusing on condos. So there's two inspection schemes you'll recall. There's a milestone inspection scheme, which is really just focusing on the structural integrity of buildings. And then there's a second reporting that's required for some of you, and that's a structural integrity reserve study. So these are two separate investigations and two different types of reports. That's an important thing to remember, because as we're starting to see some engineering companies try to jump out in front of this, it's not always clear where the distinction is between milestone inspections and structural integrity reserve studies.
And so if you want to be in compliance with the law, you really need to be paying careful attention because these are two separate reports. Let's talk about milestone inspections, and let's refresh when they're due. First of all, they're due every 10 years after the completion of the condominium buildings which are subject to those inspections. So milestone inspections every 10 years from completion, which is really when the certificate of occupancy was issued. And those studies need to be done for all buildings three stories or higher. So if you've got buildings three stories or higher, you've got to do a milestone inspection every 10 years, the first one being due 30 years after the condominium was built. And if you're on a coastline, and we're going to talk about that a little bit in a few minutes, if you're on a coastline, the first one is 25 years from when the condominium was built.
Now there's this really weird little gap here, because what the legislature did, is that because the law took effect on January 1st of this year, they said any condominium that's subject to these milestone inspections, which was completed prior to July 1st, 1992, which was 30 years ago, is going to have until December 31st of 2024 to do their first milestone inspection. So they gave those much older condominiums a grace period, but here's where here, here's what's a little bit ambiguous and where this gets a little difficult, and why we're calling it an impossible deadline. Let's suppose your condominium buildings three stories or higher have certificates of occupancy from November of 1992. Well, the legislation says that you have to complete your phase-one milestone inspection by December 31st of the year in which your subject buildings turned 30 years old. So you can see where a condominium that has a three-story or higher building, that was given a certificate of occupancy in November of 1992 is now 30 years old in November of 1992.
And all of a sudden they've got this really tough schedule to complete a phase-one milestone inspection. And same thing for condominiums that were completed in 1993. So this is going to put some real pressure on some condominiums as to how they're going to meet this obligation. Let's talk about the structural integrity reserve studies, that's a completely separate report. Now they made that a little bit of a different timeframe. So any condominium which was still under developer control before July 1st of this year, the developer now has an obligation to provide a structural integrity reserve study before turning the condominium over to the unit owners. If your condominium was turned over after July 1st of this year, every owner-controlled condominium now has to do a structural integrity reserve study by December 31st of 2024. And that again is for buildings that are three stories or higher.
So you can see where, right away, some condominiums may be in another difficult situation because there is some overlap between the structural integrity reserve study and the milestone inspection, because they both involve a visual inspection by an engineer or architect of the structural components of the building. And so there are some condominiums which may be able to combine those, and we've seen some engineers starting to offer that, but there may be some condominiums which may not have to combine those, and maybe looking at having to do one report really quickly, and maybe not wanting to spend the money to do the other report right away. So that's going to create some ambiguity and some tough decisions for condominium. And then with the structural integrity reserve study, let's just remember that after you do your first one, then you have to do one every 10 years thereafter.
So that should give you some sense of some of the problems that some condominiums are going to face in meeting these deadlines. Now, one other thing, and Alan's probably going to talk about this a little bit when he speaks about the areas that he's going to talk about, but we've been talking to a lot of engineers. In fact, I was on a panel with one yesterday. They are overburdened. They are looking, at least right now, the ones that are doing these, six to eight months out in some instances for being able to be ready to get out to your communities and do these inspections. The takeaway here is don't wait. If you're going to have to comply with these provisions, you need to be thinking about them right away. And especially if you have a short timeframe for doing that milestone inspection, you need to be jumping on that, because you're going to find that engineers, as they start to take on this work, are getting further and further stretched out in their time and their availability to be able to complete these reports.
Alan Tannenbaum, Esq.:
Jon, could I point out something? One of the things that groups have asked us is, "Well, we just wait to see if the legislature does a glitch bill? Maybe we will be relieved of some of these deadlines of some of these requirements." I used to work in the legislature, you can't predict at all what they're going to do in the next session or the session after, it's a perilous journey. Our recommendation is that you make every attempt to comply with the statute, make a record of all your attempts. Some groups have told us, "Look, I called seven engineering firms and they couldn't get anybody out." Keep a record of that, because if you're ever challenged, anything happens to your building and they challenge, "Did the board make a good-faith effort?" You want to have that record. So even though the statute may present some impossible deadlines, and the marketplace will not produce for you right now, making the effort is really important in establishing that record. But Cindy, isn't there also a reporting deadline by the end of this year?
Cindy Hill, Esq.:
It's a simple reporting that simply designates the buildings that are going to be subject to this new statutory regulation that are on the condominium property. We can provide the link to the new report. I'm not sure where we would want to put it. We can certainly provide it, we have it, your new wife Michelle has shared it with all of us. And it's something that if managers don't have, they definitely want to have, if in doubt, report. Now, how the division is going to handle all this information is another conversation. But yes, there is a deadline to report if you have buildings that are going to be subject to this. And it is buildings, I want to clarify, since this is a point, it is not just necessarily residences that the owners live in, it is buildings, that's the word. So if you had any three-story buildings on your condominium property, regardless of whether they're recreational or residential, they need to be reported.
Alan Tannenbaum, Esq.:
But the key is, by the end of this year, every condo that's subject to the statute has to do that reporting, it's just letting the state know that we qualify under the statute, so that the state has a record of every condo in Florida that, I guess they have to pay attention to. Go ahead, Jon. I'm sorry.
Jon Lemole, Esq.:
Yeah. Okay, let's shift and look at some of the big ambiguities or ambiguous language in the statute, or statutes, because it's actually multiple statutes, but this is where other tough calls need to be made. One of the things is this area of engineer versus architect. I'm not going to talk about that, Alan's going to spend a little time on that in a couple minutes, but I just want to throw it up there so you know it's coming. I talked to an engineer yesterday and I asked him, I said, "Is there a definition for substantial structural deterioration? Is there an industry standard? Is there something that an engineer could point to that defines that for all engineers?" And the short answer to that question is no. And so every engineer may define what substantial structural deterioration is a little bit differently. And that may be a question of how risk-averse the engineer is.
This is a really tough question right now because, and I'm going to jump to another slide here, the phase-one milestone inspection, the whole purpose of it is for a visual examination of the habitable, and I'm going to talk about habitable in a second, and non-habitable areas of a building, including the major structural components of a building, to provide a qualitative assessment of the structural conditions of the building. If the architect or engineer finds no signs of substantial structural deterioration to any building components, then you don't need to move to phase two of the milestone inspection. Now, the legislature tried to define substantial structural deterioration a little bit, and they defined it by what it may not mean, but it's really not helpful, I don't think, it's not clear, and I think engineers were also grappling with this.
But the legislature was good enough to say, "Substantial structural deterioration means substantial structural distress that negatively affects a building's general structural condition and integrity. The term does not include surface imperfections such as cracks, distortion, sagging, deflections, misalignments, signs of leakage, unless the architect or engineer performing the phase one determines that such surface imperfections are a sign of substantial structural deterioration." So I don't really know. I mean, I'm not an engineer, but I would imagine if an engineer is looking at the outside of your building and sees misalignment, deflection, sagging, distortion, I think, not withstanding what the legislature may be saying is that not necessarily indicating substantial structural deterioration. I think if I'm a pretty conservative engineer and I'm worried about my insurance premiums, I'm probably going to make the call in favor of moving to phase two. So I think we can expect to see that a lot of buildings are going to end up going to that phase-two inspection because of the lack of clarity about what substantial structural deterioration really means.
Another term, what is coastline? Coastline is defined in another statute. It's definition is equally confounding. To paraphrase it, it's the point where the mean and high-water mark of the sea, and that's the term that's used, the sea meets the land. Now, buildings that are within three miles of the coastline are going to have to have their first milestone inspection 25 years after completion, but we really don't know what the coastline is. I don't know what the sea is. I don't know if the gulf is the sea, I don't know if it's a saltwater bay or a bay, or a harbor, or a saltwater estuary, is that the sea? Is a fresh-water river, is that part of the coastline? Really not clear. So that's why it's going to be important for your associations to sit down with general counsel, get some legal advice on it, make a call, protect yourselves as board members, for those of you that are board members here on this presentation, protect yourself by asking those hard questions, getting opinions from legal counsel so that you can make a call that will be protected by the business judgment rule.
Now, three stories, we've got a ton of questions on this, because the reports, both milestone and structural integrity reserve studies are for buildings that are three stories or higher, and that's the language in the statute. What is three stories or higher? Does it include buildings that have two stories of habitable units and parking on the ground floor? There's a lot of buildings that look like that. What about underground parking? What about two-story condominiums that have a top floor, has a penthouse, or two stories that have a penthouse? These are all questions which have come up. I think the general consensus right now, without further guidance from the legislature, is that three stories means three stories, whether it's habitable or non-habitable. So if you have ground-floor parking and two floors of units, that's a three-story building.
So essentially three full stories above the ground. But here's where it gets weird, because they've exempted certain villa-style condos, one, two or three families at most, that have no more than three habitable stories above ground. So they went to that next little habitable part of the definition for those villa-style condos that are exempted from these reporting requirements. I don't know why they didn't do it, or may not have done it for the rest of the buildings, but that's what it is. So there's an exemption from reporting if you have one, two, or three family villa-style condos that have no more than three habitable stories above ground. Here's a question that came up in a panel discussion we had yesterday, "The reporting is for each building three stories or higher. So does that mean you have to have a separate report, standalone report for each of those buildings, or can one report cover all of them?"
We don't know. That may affect how engineers price their studies. If you're asking them to produce a separate report for each of your buildings that fall under these requirements, then they may charge a little bit more money than doing one report. I really don't know where they're going to come out on that, but that's certainly a question that you need to discuss with both the engineer and you need to discuss with general counsel so that you can make the right call, or at least make a supportable call on that question. If we go back to the definition of a phase-one inspection, it says, "Perform a visual examination of habitable and non-habitable areas of a building." Well, we've talked to engineers that are grappling over whether this means that all habitable units have to be inspected, do they need to go into every unit? And if not, do they need to go into some statistically relevant number of units, so maybe 20% or 30%? So that's another area of conversation that you'll need to have with both the engineers that you're talking to and general counsel, because some engineers may say, "Look, we want to go and inspect every unit." So you're going to need to prepare your members for that.
There's this huge question of pooled reserves, or component-funded reserves. There's also this question about, "Even if you don't have to do a structural integrity reserve study, do you still have to comply with the rules around fully-funded reserves and use limitations on reserves?" I'm not going to spend a whole lot of time on that, Cindy may touch on that a little bit. But those again, are tough questions that you're going to have to sit down with general counsel and look at both sides of the coin and make a call on how to handle your reserves depending upon what type of buildings you have.
So the takeaway here is, there's a lot of unanswered questions, you may not be able to answer them, you may only be able to make the best call you can make, but in order to protect your decision, sit down, talk with engineers, talk with general counsel, get their opinions so that you can rely upon them in the exercise of your business judgment, so that if they are called out in the future, you've done your duty under the law. And with that, we're going to talk about the issue of architects, and Alan is going to spend some time there. So take it away, Alan.
Alan Tannenbaum, Esq.:
So I've working with engineers and architects for four decades. And in all difference to the architects or retired architect may be in session today, I've never quite understood what architects actually learned in school. I know they certainly know how to coordinate design, they can make a building or project look beautiful, but the technical training I never quite understood. And here's a little cartoon of a architect making a presentation, and keeping that structural engineer at bay as they say, "Well, wait a second, you're not going to be able to do that, or it's going to be very expensive."
But it was very odd to me that the legislature set up the potential of using architects to do structural inspection. And if you go to the next slide, Jon, here's the problem. The problem is that the only exemption in Florida for licensure for an engineer is, "An architect can do engineering services only which are incidental to his or her architectural practice." That's in 481.229. In 471.003, "No person other than a dually licensed engineer shall practice engineering." And again, the old exemption for an architect is if they're performing services which are strictly incidental to his or her architectural practice. So architects are not licensed to do what the legislature has allowed them apparently to do under this legislation.
And if you go to the next slide, Jon, please. Okay, so this is my test. So if any architect, and you can use this, if any architect says, "I'm prepared to do the structural inspection for you," they have to figure out this equation in order to qualify. And I have put this in front of 10 architects, they all failed. So none of them. Anyway, it's a joke that goes to training. Structural engineers, when they're, for instance, examining a reinforced slab, there's a lot of great computer programs, but actually it takes quite an analysis to determine load calculations, at what level the steel has to be placed, and certainly to evaluate whether there is a potential of instructional failures outside of the training of an architect. So beyond that, and if you go on to the next slide, because this is what the legislature indicated, again, structural inspection probably disqualifies architecture right away, they're not trained to review load-bearing walls and primary structural members. And certainly if you go to the next slide, Jon, they're not trained to make these type of calls.
So they're not trained to do it, they're not licensed to do it. Probably also importantly is that their insurance policies do not cover structural design or structural investigation. So any architect, and I haven't heard of any who are taking this on, maybe I can be educated, they would be foolhardy to step into this and take on these type of examinations, because their insurance policy is not going to cover them for undertaking issues outside of their field of expertise. And so it's an anomaly that they're in there, but I don't think it's going to save the workload at all for engineers. And if you look, next slide there, Jon, this reporting requirement. So after all these inspections are done, the structural integrity or the structural inspections are done, there needs to be a sealed copy of the inspection report with all of these criteria. Again, an architect who seals a structural investigation is going way outside of their field of expertise and licensing to determine whether dangerous, it's just not architecture. Go on, Jon, next slide.
Okay. Well, now I've disqualified architects in the state of Florida from doing this work. Let's talk about structural engineers. So there was already, before Champlain Towers went down in Surfside, that unfortunate tragedy, there was already a limited amount of structural engineers who were servicing the condominium field. Most structural engineers work for developers, and they're happy working for developers. They like to do new design, they don't like to mess with board of directors or condo associations. So there's already a limited amount of engineers who wanted to work for community associations or condos at all. Then Champlain Towers occurred, and it scared the boards of condos around the state, and the engineers, their phones were ringing off the hook, "We don't want to be a Champlain Towers, as an anomalous as it was." And their workload increase dramatically.
Now, did the legislature contact the engineering society and say, "We're about to increase the workload of all the structural engineers in the state of Florida who service the condominium field, a multifold, are you ready to handle this load?" I don't think that call was made. Caught the engineers out of the blue, and they're already created a situation where they already burden structural engineers, or their workload is now even increased. Go on the next slide, Jon. So what have they done? Well, there's a couple things happening. Number one, the workload. Number two, all this ambiguity in the statute that they're facing and required to do these inspections and these reports, and the insurance industry paying a billion dollars on the Champlain Towers disaster.
And they're looking at all the structural engineers in Florida and saying, "Okay, you want to be in the structural-inspection business on condos in the wake of Champlain Towers?" Well, even a few years ago, I was talking to an engineer for a million dollars worth of coverage, the premium was $200,000 for a million dollars worth of coverage. And the deductible was a $100,000 under the policy, that's not much coverage. But the insurance companies, what they did is, they said to engineers, "Look, if you add some clauses to your contracts, it'll decrease your premiums. And they along with other industry groups, published for engineers general conditions, which most of them are now attaching to their agreements.
And I'm going to just cover a couple. Jon, if you go onto the next slide. So limitation of liability, we see this all the time, it could be a $3-million repair job on condominium, and the group is ready to go into contract with the repair contractor, he says, "Well, where's your contract with the engineer?" "Oh, that was signed two years ago." They finally find it, and then I find this, which a $3-million repair job, and the engineer is limiting their liability to 25,000 or $50,000, or the amount of fees that they're paid on the job. And they hand you the certificate of insurance for a million dollars or $2 million, board's feeling pretty good about it, but you have this limitation of liability clause embedded in the documents, and something bad occurs, the association sues the engineer, their insurance company shows up, sends you check for $50,000, "We're done."
Alan Tannenbaum, Esq.:
And you say, "Well, why did that happen?" "Because you allowed this limitation of liability to be inserted in the contract." Every day we are talking to the engineers, and saying, "Nice try. Well, what about at a minimum that you limit your liability to the amount of your insurance coverage?" Most of them will modify their agreement to raise the limitation of liability at that level. Some of them will compromise to 300,000 or $500,000, but you better get to it before the contract's signed, because very few of them will modify it after the fact. One of the things that you have to be careful of is, you might sign a contract two years ago that was just an investigation contract, but it also is the same contract you're using for the design and for contract administration, you're stuck with that limitation of liability. As they do these structural inspections, you're going to see these clauses, we can help you negotiate the out, but just be aware that attached to this engineering agreement will be these general conditions, you need to look at them. Jon, go on to the next slide.
All right, the real problem. So indemnification is when somebody agrees to be responsible for your actions, you're getting sued for your actions, you're transferring back the liability to them. And indemnification clauses in construction contracts historically were just the general contractor indemnifying the owner. There was no indemnification between a design professional and an owner, but what the engineers are now doing is they're sticking indemnification clauses in their contracts, which have the association indemnifying the engineer from liability that might arise from any of these structural inspections or repair work that they take on, even to the extent of identifying the engineer against their own negligence. So the engineer comes, does an inspection, misses something, and there's a building failure that is precipitated, or in a repair job, they design something improperly in the repair, it's clearly their fault, you have a $2-million insurance policy, but you've given the engineer an indemnity against their own negligence for a million dollars.
What the insurance company's going to do is, they're going to say, "Well, we will show up and defend this claim, but the first million dollars of defense costs and liability is the association's burden, not the insurance company's burden. We'll cover anything above the million dollars." And the board's going to council and saying, "Well, how did this happen?" "Well, you signed a contract that said that." One of the things to be very careful of, before I turn this over to Cindy, is if you have a contract that has that type of indemnity clause in it, go to your insurance company and try to purchase a writer that covers that indemnity exposure, because your standard liability policy will not pick up that indemnity exposure. So even if you have an existing agreement and check it, it has this indemnity clause, go to your carrier now and your agent and say, "We want to coverage to protect us from that million-dollar exposure under that indemnity agreement."
And if they say they don't offer it, one the things I've learned about insurance is, every risk in society, somebody will write a policy for it, even if you need to go to Lloyd's of London. So real problems with engineers, getting them out there, having them try to interpret a statute that's not written in engineering language, and then presenting you with agreements that are very risky for associations. So we can help deal with that, as we've dealt with engineers for quite some time. So with that, I'm going to turn the program over to my partner, Cindy Hill.
Cindy Hill, Esq.:
Thanks. Got a little humor here hopefully, that with the insurance premiums that are increasing for condominiums across the area, maybe you can just board up your mailbox and avoid getting those premiums in the mail. The reality though is it's obviously not that easy. The Condominium Act does require that every condominium insure the condominium property, which there's no exception to that. And that's been the case for decades. So this is a problem now because of the insurance industry and what has happened with the restrictions that they have implemented to protect their risk and the, not to get political, but rather late correction that Tallahassee has brought to some of these issues, and inadequate corrections, and this is more of an industry burden than it is in actual Condominium Act burden. So what are some of the issues that maybe could help with the rising bills and the insurance?
One of them is roofs. If you haven't already encountered this issue, if you have a roof that's over 15 or 20 years old, or multiple roofs, or even one roof, insurance companies are walking away from that. Why are they doing that? Everybody's had roofs at age for decades. Well, in 2017, Hurricane Irma came through a big chunk of Florida and left some roof damage, that somebody along the lines decided, "Well, let's look into some of this minor roof damage and see if we can turn this into a profitable industry for us." And they did. Some aggressive roofing companies and insurance agents came together and started reaching out to owners, individual owners, condominium associations, whoever they could get to, and said, "Look, if we make a claim on your behalf and go after the insurance company, if we get money to replace your roof, then you agree to hire us to do it."
And this is what happened. I don't have the statistics on it, but I can tell you I've heard enough anecdotally to realize it's happened in the millions of dollars. The insurance industry was not ready for this rather aggressive tactic. That's an issue that could actually be another hour discussed on, but long story short, that's why we're where we're at with roofs. So one of the things your association can think about is whether roof replacement makes sense in terms of putting it back into having more competition for insurance as opposed to having roofs that are 15 or 20 years old, which totally boots you to the side and takes you out of the standard insurance options. Even Citizens has been turning down insurance coverage for barrier islands, older roofs, waterfront properties. And they were supposed to be the insurance of last resort, that's what were they were developed to do.
And that is actually where, in my opinion, Tallahassee should be stepping in and doing some correction to the extent that Citizens isn't insuring some of these properties. I don't do insurance work, I don't understand why, but it seems to me that that's something all of you could be reaching out to your local legislators and saying, "Tallahassee, you need to get on this, you need to fix this." Because when you can't even get Citizens, going back to Allen's comment about Lloyd's of London, that's your insurance of last resort example, and those are always going to be the most expensive, because they don't have competitors. Yes, you can ensure almost anything you want, but the more narrow your insurance window is and the fewer competitors you have, the more expensive it's going to be. And there are no parameters on that, that's industry driven. To the extent you can only get one insurance coverage policy option to you, you really have to take it. Going back to the Condominium Act doesn't allow you to leave it. So something to consider.
When these Lloyd's of London policies that I'm referring to as the Lloyd of London policies get so expensive, because they're actually layered programs. And again, I'm not an insurance expert, but I do want to convey some understanding as to why this happens. Layered programs are when insurance companies come together as a group and offer coverage. So to the extent you have five, six, seven companies offering you a layered coverage, one of the reasons is so expensive is all those companies understand that risk and all of them want premiums for it. So that layered program is not where you want to be if you can avoid it. These are discussions you should be having if you're not already with your insurance agent, they don't necessarily have answers for all of them, but again, they are professionals in these fields and can maybe offer some suggestions for your particular property, maybe help you out. And in terms of, they can also maybe give you some verbiage to take to Tallahassee and say, "Look, here are some potential fixes to these problems."
I've gotten questions about self-insurance, can condominiums self-insure? Self-insurance colloquially is usually referred to as, for instance, someone owns a house, they don't have a mortgage on it, and they decide, "I'm not going to pay these enormous wind premiums for hurricane insurance. I'm just going to rough it out. If my house gets damaged, I'll take the risk, I'll pay for it." Again, the Condominium Act doesn't allow that. Condominiums cannot decide, "Hey, we have all this money in reserves. If we get hit by a hurricane, we'll just fix it, we won't insure." That's not an option. There is a self-insurance program in the statute that does allow the condominiums some options. It was enacted in 2007, it's rather convoluted, and so convoluted in fact, I'm yet to be able to find any condominium that actually used it after that time.
This provision came out with a lot of fanfare in 2007. If you do some Googling, you'll see there's a lot of excitement about it as being an option to not just be able to take whatever the insurance industry offers, but maybe be able to work together and create a self-insurance with other condominiums or other restrictions that the insurance code required. The reality is it became so convoluted no one did it. Again, this is something maybe you could discuss with your insurance agent, see if there's some options or some advice they could give about how Tallahassee can maybe fix that and help. The problem that really you have again is insurance industry problem, they are assessing the risk, they're charging you accordingly. And yes, it hurts, but it's like the inflation that we're dealing with now, you can't exactly walk into Publix and tell them you don't want to buy these strawberries, they're $2 higher than they were a year ago. If you want strawberries, you got to buy strawberries at the price they're at.
So I hate to have that level of bad news, but I hope it does at least provide some perspective. Now, what if these insurance premiums are so bad, and it's going to be the case for some communities, particularly the ones that are wood frame and have older roofs and are on the water, their insurance premiums are going to get so bad, if it's not corrected in the next couple years, is this even sustainable? Well, there is a statutory option called termination. And termination is what you can pursue when a condominium association is no longer sustainable to operate. The traditional example is the hurricane, where the hurricane just flattens all the buildings, it's not even worth the insurance to rebuild it.
It's a statutory process, it's a complicated one, it's one this firm has dealt with before. I hope that no one on this call has to pursue this option, but I want you to know that it is an option as a worst case scenario. So Jon, are you controlling the slides? Thank you. Oh, okay. Owners who can't afford a special assessment. Actually, I'm a little thrown off here. I'm sorry, I put the wrong cartoon up. I had a cartoon where there were a couple of owners coming in, and a real estate agent was showing a nice property and saying, "I think you can picture yourself struggling to make payments here." The point being, sometimes what we want is not necessarily our best practical option. And that's what we have with the special assessments, people who had bought into condominium properties and budgeted accordingly, made decisions, are not necessarily prepared for the special assessments that are coming, not only from the insurance, which I just discussed, but also from what Alan and Jonn were just discussing.
These costs are going to come with the structural inspections, the costs are going to come with raise reserves. All these costs are literally sticker shock for a lot of folks because they did not factor this in to their budgets. So special assessments, never been popular, but were easier to sell when they were for large-maintenance projects. Let's say you special assess because you wanted to revamp the boat basin or you wanted to remodel the clubhouse. Well, people may not like that charge, but at least they can see the increased property values, they can see the benefit that comes from that. Even special assessing for increased preserves has some sellability to it, in terms of you're going to be a more financially viable community that banks will be more tempted to give mortgages for, keep your property values up, but special assessment for insurance premiums, that has to feel like money just down the tubes. That's a really hard sell, but again, it's one that statutorily the boards have to do if they don't have the funds for it.
Now, special assessments don't have to be, if you've not already discussed this with corporate council, please do, they don't necessarily have to be all upfront funding immediately. To the extent you need a special assessment of let's say $3,000 a unit to cover a particular expense, there may be wiggle room in your budget where you can allow that special assessment to be paid off over six months, over a year, maybe even over two years. That's something you should discuss with corporate council, because if you can avoid sticker shock for your owners and do it in a budgetable way, you would want to do so.
Alan Tannenbaum, Esq.:
Cindy, let me make a point, because we've faced a lot of boards recently that, you hear the sob story in your community, and sometimes it's even a board member, of somebody who literally can't afford the assessment, they have no access to funds, and the board tries to alter the course of its business decision making based upon the lowest common denominator financially within the community. That's a very bad mistake. It may be very cold hearted, but I've told boards this for four decades, if you can't afford to maintain real estate, you should not be a real estate owner. Whether you own a single-family house or a condo, one of the prerequisites to qualifying yourself to own real estate is the understanding that it's going need to be maintained and repaired. And what groups have done all over the state is they deferred that because they never wanted to raise the assessment. And who shows up at the meetings are the people who were crying about the assessment all the time.
It's a sad story, but the board of directors owes as much of an obligation to the owner who is a multimillionaire living in your building as much as somebody who may be on a fixed income who's living in your building. And your obligation to all of the owners is to maintain repair it. And the legislature may have done all the boards in Florida a favor, because they've made it mandatory, and included a fiduciary duty obligation. Now you have a basis to look back and listen to a sad story and tell that person, "We have no choice. This assessment's coming along, and you're going to need to pay it. And we're going to need to lien and foreclose if you don't." Some groups have actually gotten voluntary funds that they've raised to help the lowest common denominator financially in their community pay an assessment. I suppose you could do that on a voluntary basis, it should be an association program, that's nice, but probably nothing the board should involve themselves in. Go ahead, Cindy. I'm sorry.
Cindy Hill, Esq.:
No, that's a segue into the point I was going to make with the little cartoon here, why would anyone under these circumstances continue to serve on the board, as the cartoon has a little executive session meeting with the attorney, and usually the attorney's shooting down these great ideas that the board wants to implement because the Condominium Act doesn't allow it, there's other provisions, it's not always fun to be the lawyer in the room. But here the lawyer can be supportive, because to the extent these decisions do put a fiduciary duty on the board of directors, there are general protections in the law that if you are taking advice as a board volunteer from professionals, you're protected from liability. So when you meet with your attorney, when you meet with your engineer, if you are taking action as they recommend and instruct, you are doing what you can do to protect your own personal liability in addition to doing what's best for the community, it's a win-win.
So if you're going to serve on the board and you find that the potential fiduciary duty violation is troubling, then that's the path I would recommend, make sure you are communicating professionals, the decisions you're making are recommended by professionals. And again, going back to Alan's point, that you're letting the owners know this is something you don't have any discretion regarding. You can't decide, "As board directors, we're going to take this path and not do what these new laws require in terms of the reserves and the inspections. We're just going to do what we think makes sense." Well, you can't do that, you could be personally liable for that. So the naysayers and the complainers who show up at the board meetings or the membership meetings, as Alan was saying, and they're in every community, they're going to have to be told, "Look, I'm, this is the reality."
And the reality may be a harsh reality, there may be some retired individuals, there may be some investors who look at their bottom-line budgets and go, "I can't afford to keep this unit if this is where it's going." Well, this is a corporation, the condominium has to be operated under the Condominium Act." And these personal decisions are ones that all of us have to make at some point in life, not necessarily regarding a condominium unit, but a car, a house, a wedding, a divorce, these are personal decisions and they remain that way, it is not the board's burden to fix the personal issues that this is going to raise for owners.
Alan Tannenbaum, Esq.:
Cindy, let's answer questions, because we've hit the noon hour. I see one question, which I will ask you to answer, "Does this new statute require full funding of reserves for associations which have buildings of only one or two stories?"
Cindy Hill, Esq.:
Unfortunately, the law is not clear on that, but no, I would say, but at the same time I would say expect it to follow. I think that that's going to be a follow up that Tallahassee is going to do. And I have not looked at the question since I started my part of the presentation.
Alan Tannenbaum, Esq.:
Okay. Well, that was one question. Jon, do you have a take on that?
Jon Lemole, Esq.:
On full funding for under two stories?
Alan Tannenbaum, Esq.:
Full funding of associations that don't have three stories.
Jon Lemole, Esq.:
I think that's still, as Cindy said, an unclear area. The statute is weird because it says... Well, it has that provision that says, "For the things that are referred to in subsection G of this new provision," which includes the structural integrity reserve study. So arguably if you're reserving for the thing and it falls under that subsection G, then whether you're two stories or three stories, it doesn't matter, you still have to comply with the full funding, but that's an unclear area.
Cindy Hill, Esq.:
It's an ambiguity. And I've been telling my clients, take the conservative reproach and start preparing for this.
Alan Tannenbaum, Esq.:
There's a question about the certification report to a local building official. Yeah, it's required that it be filed with the building official. In fact, they put a requirement of the statute that within any particular jurisdiction that the building officials figure out who's supposed to comply with the statute. And again, on the question of the three-story building, it's going to be very interesting. If you have an area like Anna Maria Island, there's one high-rise building on all of Anna Maria Island. That's the island actually between St. Petersburg and Sarasota, off of the coast of Bradenton. There's one high-rise condo in all of Anna Maria, all the other condo... Not all of them, but many of them are this first-floor stilt, two floors above. And you have the city of Holmes Beach, which is the major city on that island, and is the building official in Holmes Beach going to determine that this is a three-story building that needs the reporting or not?
So there's going to be some discretion on the part of building officials to make those calls, but if they don't make that call, are you relieved? Not necessarily. There's a question on the milestone inspection, "So we need to have the windows in our units included in the inspection when our governing documents specifically state that the windows are the responsibility of the owner?" Jon, are windows and door specifically called out in the statute as something that needs to be inspected, or only the structural aspects of the building?
Jon Lemole, Esq.:
Okay. So here's where this gets really confusing. So windows is one of the areas that is included in the part of the statute which says what needs to be evaluated in the structural integrity reserve study, it specifically says windows. Now, whether that means only if windows are common elements, we have no way of knowing, we have no way of knowing that. So that's a gray area, but I would expect that with window inspections, one of the other things you may be looking at, or that the engineer may be looking at, is not just the windows themselves, but the seals around the windows, the waterproofing around the windows. And all of that may be common elements. So don't just assume that because we exclude windows, they're part of the unit, that somehow you can maybe get around having to have the engineer inspect them and make a reserve calculation.
Now, go back to the milestone inspection as a whole separate report, the milestone inspection says the structural engineer will visually inspect the habitable and non-habitable areas. So to me, that would include looking at the windows, because if the windows are somehow not, and I'm not an engineer, I don't know how they would be not structurally sound, but whether they're in the unit or part of the common elements, if there's something wrong with the windows which is impacting the structural integrity of the building, the association's going to have to do something about it one way or another. And that may be either dealing with it themselves as a common element, or telling unit owners that there's a problem and they need to deal with it. So there's not an easy answer on it, the statute says what it says.
Cindy Hill, Esq.:
No, it's not-
Alan Tannenbaum, Esq.:
Cindy, let me give you the next question, "There's a provision of the Condominium Act that if the budget in a given year is increased more than 15% over the prior year, that owners can petition and restricts the board's ability to increase the budget. That wouldn't include a special assessment though, would it?"
Cindy Hill, Esq.:
Well, I started answering some of those questions earlier in the presentation because I saw them coming up. First of all, it's 115%, It's not 15%. And that's a common misconception. And it's when owners want to contest a budget that's raised 115% or more from the previous year, they have a right if 10% of them in writing request a special meeting to do that. And at that meeting, if the owners vote in either a majority at least, or maybe higher if it's in the bylaws, the owners can vote on a budget that they approved and not the board. Now, that 115 under the statute cannot include, and I've got it noted here so that I could go over it quickly, any authorized provision for reasonable reserves for repair OR replacement of the condominium property. So 115 does not include those reserves.
Any anticipated expenses, and that's what the statute says, anticipated expenses which will not be regular or may just be annual. So for instance, if you have an expense in the budget that involves, I don't know, resurfacing the pool, and you're going to do that this year, that's not something that you would do annually. And then finally, it does not include assessments for betterments. And that's all it says. That's a pretty vague category. So the 115% is not just a hard figure, it's a number that certain expenses have to be withdrawn from. And then the other thing to keep in mind is, even if the owners do take this action and approve a different budget, it's a budget. A budget is a guideline worksheet, so to speak. It is not a strict list that the board has to follow. So going to your question, Alan, taking 10 minutes to answer it, sorry, if the board had to special assess for a certain expense that it needed to special assess for, the fact the budget doesn't have it in there does not prohibit the board from doing that.
Alan Tannenbaum, Esq.:
Okay. And even if there was a financial restriction, the obligation to meet the statutory requirements would predominate over the restriction anyway, in my view.
Cindy Hill, Esq.:
I agree with that, that's absolutely right. So to a certain extent, this is a false alarm, this 115. I know people are nervous about it because it's in the statute, it's there, but ultimately it's not going to change the fiduciary duty that the boards are going to have to follow these new laws to insure the building and to do what they need to do it. It's really intended to keep boards from spending a lot of money doing things that aren't necessarily necessary.
Alan Tannenbaum, Esq.:
There's a question that's come up is, really, how do you reserve for a structure? And the gentleman who ask the question says that, "If the building has a $20-million value, does the reserve have to be 20 million?" And our answer would be no. It's a very ticklish issue for the folks who do reserve studies, because the major structure of a building is supposed to last until the end of the useful life of a building. A roof gets replaced every 20 years, in theory, you're going to have to do window caulking, waterproofing, but the building structure is supposed to last until the end of the life of the building. And I would say that the reserves, if there's identifiable problems that need correction, then certainly the reserve study, those figures would be included.
But you don't have to reserve for the entire replacement of all the structural components of the building if the person who's performing the reserve study comes to the conclusion that there's no necessary distress and this building should last on the end of it's useful life, that probably would not require any particular reserve amount. But again, this is something that, you know what a roof's going to take to replace, you go into the marketplace, especially on a high-rise building, you can determine what the appropriate reserve number for the structural elements are, really a big mystery to all the people who are doing reserve studies.
Let's see if there's one or more question. We will provide a copy of the presentation. Just let Michelle Colburn know. It'll be on our website also, the transcript and the video, probably within a week. And I'm not going to the HUD question in this session. Lot of insurance issues. Okay. Well, if anyone has any particular issue that's pertinent to their condo, feel free to shoot it to us, but we're going to at this juncture conclude. Hope that you found today's session helpful. Obviously there's lot of issues that will still need to be grappled with. Jon, one last question, somebody said, "For a 50-year-old building, when is there a study required?"
Jon Lemole, Esq.:
The phase-one milestone?
Alan Tannenbaum, Esq.:
Jon Lemole, Esq.:
Well, you get a pass until December 31st of 2024.
Alan Tannenbaum, Esq.:
Okay. All right...