Hot Topics for 2023 - Condos and HOAS
Alan Tannenbaum, Esq.:
Yes. I'm Alan Tannenbaum with my partners Jon Lemole and Cindy Hill. The title of the session today is Hot Topics for 2023 Condos and HOAs, so we put values with questions; questions about hurricane claims, questions about the impact of the new legislation relative to structural inspections and reserves for condos, and the new insurance legislation, we're going to cover the top things that we've heard from people that they've been concerned about. We can't account for the legislature. One of the things that the legislature in Florida has done historically, like many state legislatures, is when there is legislation that's affecting an industry or governmental sector, they have historically brought all the stakeholders together, the lobbyists, the lawyers involved in a particular field, the companies involved in the industry, gotten their input and fashioned a piece of legislation that at least takes into account the various interests of all the parties. That's changed very much in Florida in the last few sessions.
The condo legislation was basically cobbled together in two days. Some of the folk involved in the condo industry apparently were brought into the conversation. The insurance legislation was apparently a product of lobbyists for the reinsurance companies, and a lot of the folks who were involved in the industry, otherwise, certainly folks affected as consumers were not involved in the process of that legislation being corrected. Then it all gets adopted and then we as lawyers are tasked with trying to explain it, which is not the easiest thing because we have a hard time understanding parts of it ourselves. One of the questions that keeps coming up is there going to be a corrective bill, especially for the condo legislation? There is one that has been filed, whether it's progressed itself through the legislature, the law is unknown at this point. It's not sponsored by the leadership, but it is sponsored by a Republican representative, which is a positive sign of at least a possibility.
But it's a complex bill and they may not have time for the information to take it up, but there is one filed. Okay, I'm going to cover the first section, which is insurance. One of the big problems obviously is non-renewable, but I'm going to cover our insurance losses first. So one of the big surprises in Charlotte County down into southwest Florida were the things that were not covered by insurance at all. We had a community that lost $2 million of landscaping, made a claim against their insurance carrier. The insurance carrier said, "We don't cover landscaping." There were card boards that were down that were not covered by any insurance policy. So if you're a community that has a significant amount of landscaping and the idea after a storm is to replace it, you need to think about having some sort of reserve for an item like that for an HOA. So be very careful.
I did a single claim years ago in a community in Central Florida and none of the buildings were affected by the entire site was affected including half of the guardhouse that went and fell down into a sink hole in the entrance. The only thing the insurance company covered was replacing the guardhouse, none of the other damage at the property, which was massive because it wasn't covered by the sink hole coverage. Be aware of your deductibles. There's been a lot of surprise deductibles, when coverage usually has a very significant deductible. A lot of groups are surprised that when they make a claim that hundreds of thousands of dollars of the loss needs to be covered by the association coverage itself. Flood insurance, it's also very restricted on what it actually covers. Imagination going to ask if everybody could mute. Okay. Ask if everybody could mute. Okay. Oh, I'm getting feedback from myself. I'm sorry.
So watching deductibles, non-renewal's becoming a big problem. Insurance companies are not required to cover you. We did have legislation in Florida that there was a state-mandated parents company, but now they're eliminating the properties that they're going to insure. So Florida now has created gaps for communities that are just not going to be able to get coverage even though, especially for condos, it's statutorily mandated that they have it. So we're seeing a lot of issues with groups with non-renewal and part of the impetus of the structural inspections, which we're going to be talking about is insurance companies are watching those. If you're not meeting the mandates of the statute, it will give an insurance company an excuse to drop you. So we have folks around the state that we've talked to say, "Well, legislators going to correct some of these things. They're not going to require these inspections in the end." First of all, it doesn't appear unless this bill goes somewhere and it doesn't cover everything that that's going to happen.
But secondly, one of the risk is for non-renew your insurance coverage. I don't know if there's another slide, Jon, but you can go on to the next one. This is actually published by one of the insurance companies and it shows the pressures on the home insurance market, material increases lumber and wood product prices going up, roofing going up, all the disasters including hurricanes that the insurance companies have endured. They've also talked about the job openings in the construction industry in Florida have probably a very large portion of that. So those are all concerns going in. So cover the uninsured losses, be aware of your deductibles. The premium increases are potentially going to continue and get your buildings in shape so that you don't risk being non-renewed. With that, I'm going to turn it over to my partner, Cindy Hill, who's going to cover reserves.
Cindy Hill, Esq.:
Okay. Jon Lemole is going to cover the SIRS part of that and the milestone inspection after I'm done, so I don't want to delve into that. This is about the reserve issues, though, that've been created by these new laws. Jon, if you could move to the next slide. I'm going to start with the issue that people are beginning to become aware of, and that is to the extent when the legislation came out, and this is the new condominium legislation I'm talking about. Condominiums that were three stories or less thought, "Oh, okay. We don't have to worry about the Milestone or the SIRS. We're smaller villa style condominiums or shore buildings." Well, the Division of Condominiums posted on their website that is their interpretation of the obligation to not be able to waive your reserves that came with these new laws applies to all condominiums.
So let me back that up. Part of the new legislation said that certain structural parts of the condominium buildings owners can no longer vote to waive those reserves to use the phrase that gets used a lot, to kick the can down the road. That new legislation is obviously going to be an enormous financial burden on condominiums in Florida. But again, smaller villa style condominiums or smaller buildings were thinking they didn't have to worry about that concern. The Division of Condominiums has said otherwise. I have up here on the slide the exact question and answer quote that is from their website. The question was, "I live in a two-story condominium, is our association still permitted to waive reserves?" The answer is, The Division does not consider this provision to base an association's ability to waive reserves on the number of stories that an association's buildings have."
Very wordy response really meaning that we, the Division considered the obligation to now no longer be able to waive certain reserves applies to all condominiums, not just to one's three stories and higher. Jon, if you can move to the next slide. What am I talking about in terms of what items no longer can be waived or now have to be fully funded? That is what is referred to in the industry now as Subsection G, and I have it up here on the screen. That would be your roof. That's a structural component of everyone's building. We can agree on that. Any load-bearing walls or other structural parts of your building, your floor, your foundation, your fireproofing, your plumbing, your electrical systems, your waterproofing, your windows, and then you have the little catchall at the bottom here, "Any other item that has a deferred maintenance expense replacement cost that exceeds $10,000."
That's not a high burden in these days, "and the failure to replace that item negatively affects any of the items above as determined by an engineer or architect performing the Structural Integrity Reserve Study." Well, that's really a bit of a glitch there, because the condominiums that are smaller in size don't have to have a SIRS. So I don't know quite what to tell you about that catchall for the smaller condominiums. But what this means is a matter of let's use some common sense since we have to, since the legislature threw a lot of things at us. If it's going to be integral to the structure you're building, you're going to want to defer on assuming it is part of this catchall and making sure that you're not waiving reserves on it so that you don't run into a problem. Now I've gotten a lot of questions, and we could spend the next part of the presentation trying to address, "Well, what if we're not responsible for the windows," or, "What if there is no problem?" "How do we fund for a replacing a foundation?"
These are issues that are legitimate questions. I don't want to go down that path 'cause it's meant to be more of a spot issue. But I would say that that's really going to be answered for the three stories and above condominiums by the report you get from an engineer. If the engineer doesn't see a problem with your foundation and there's no basis to fund for your foundation. That's really the ten-second answer to that. So in the interest of time, I also want to circle back before I hand this over to Jon to mention what Alan had mentioned that reserves for HOAs are not impacted by any of these new laws, but reserves for HOAs need to be readdressed in terms of now that we've been part of a hurricane to think about those items, as Alan was saying, that you're not necessarily reserving for because you're not anticipating losing them, such as landscaping.
I've had tens of thousands of dollars my communities have lost and hundreds of thousands of dollars for some of the larger one that lost landscaping. Mulch is wildly expensive. We all should have gone into the mulching business. But I say that facetiously, but the idea is these expenses were hard on my communities to suddenly have to decide what to do to replace them. Landscaping isn't something we think about. So to the extent condominiums have a really large burden now for reserves, I would also encourage HOAs to reassess what they're reserving for, what their insurance is covering so that they can also remain fiscally sound and solid properties that people are going to want to buy into. So I know that raises a lot of questions and a lot will take in a few minutes, but I'm going to turn it over to Jon. Again, we are going to answer questions at the end.
Jon Lemole, Esq.:
All right. Thank you, Cindy. I give a lot of talks to different groups of managers and condo directors and I continue to see, and it's surprising to me that there's still a lot of confusion as to first of all, the difference between the different types of inspections that are required under the new safety legislation, the timing of those. I think I heard some statistics recently that less than a third of condominiums that would fall under these inspection requirements have taken any steps to move towards doing those inspections and reports, which was surprising to me because the proverbial clock is ticking and these deadlines are going to sneak up on folks pretty quickly. The other important thing that I want to say at the outset is that if you have a condominium that is captured under the regime of performing milestone inspections and Structural Integrity Reserve Studies, waiting is probably not the best idea because engineers who can do these and both of these studies or reports require the participation of a professional engineer or an architect.
As you can imagine, those folks are pretty busy. So scheduling these things needs to be more of a forefront priority if your condominium is part of or captured under that regime. But what I want to do here today is give a really quick overview of the two different, and let's keep in mind and I want to stress that, these are two different inspection requirements because there seems to also be some confusion as to whether these are a blended process or blended inspections, and they're really not. They're two very separate types of studies that are required, and in fact, they're in two different sections of the Florida statutes. The milestone inspections are covered under the building code provisions of the Florida statutes and the Structural Integrity Reserve Studies are captured under the condominium statute if that's any indication as to the legislature's understanding and commitment to the idea that these are two very separate studies that need to be done.
Now that doesn't mean that they can't be done together by an engineer, but the reporting on this has to be, in my opinion, kept separate so that you can be sure to comply with the regulations and you don't have your local municipality coming at you and saying, "Well, it's not clear to us whether this is a milestone inspection or not, so you need to go back and do it again." So I want to talk about them separately. So we're going to start with the Milestone or sometimes we call them structural safety inspections. What I did, and hopefully, you all got is I put together for our firm what I call a quick start guide or a quick reference guide, which is just a real step-by-step discussion of what each of these different reporting requirements are. So we're going to start with the Milestone Structural Safety Inspection.
Now you've heard Phase 1, Phase 2, I have heard from folks who think Phase 1 is Milestone and Phase 2 is Structural Integrity Reserve Study. That's not true. Phase 1, Phase 2 specifically refer to the milestone inspections, so let's make sure that we have the terminology correct. In the milestone inspection, if you have buildings that are three stories or higher in your condominium, you have to do a Phase 1 milestone inspection. So let's talk about what is a Phase 1 milestone inspection. It's a visual inspection of a condominium building for evidence of, and the firm of art here or the statutory term is substantial structural deterioration. Now the statute does provide a not particularly helpful definition of what substantial structural deterioration is, but that's an engineering decision that will need to be made by the licensed engineer or architect who performs this. Now we talked a little bit about this, there's a Senate bill floating around there.
I actually looked at it this morning real quickly for the very first time. I can tell you that the provisions relating to the milestone inspections, there's not a lot in there. There's not a lot of clarification in there. So what you see and what we're talking about here is what still is on the books and what at least in the bill that I've seen is going to continue to be on the books. So visual inspection for evidence of substantial structural deterioration as that term is defined by or determined by a licensed professional engineer or a licensed architect. As you can see, in the second section of this slide which says who does these reports, it's got to be a licensed architect or engineer. Now, we've talked about this in the past, are architects technically statutorily permitted to do structural inspections? That's debatable.
I don't want to argue that point right now, but what I would say to you on a practical level is if you're considering or you're being approached by an architect to do a structural milestone Phase 1 inspection, it'd probably be a good idea to make sure that they've got adequate insurance coverage for that because is there's some questions as to whether that falls within their scope of licensing. If an architect regularly performs structural work, then arguably they can do that. But I don't want to get into the finer points of that. I just want to alert you to that fact and that it's probably a good idea to take a good look at the insurance coverage for that architect who may be doing those in that Phase 1 milestone inspection. Okay. Who has to do a Phase 1 milestone inspection? Any condominium that has a building three stories or higher, and you have to do it for every building that is three stories or higher, so if you have multiple three story buildings or higher, you have to do a milestone Phase 1 inspection that covers each of those buildings.
There's a lot of discussion about what constitutes a story. It's not particularly defined in the legislation. There are some other statutory provisions that we can take a look at, and when we do look at those, what we have determined and what appears to be the general consensus among engineers, lawyers and other professionals is that a story includes ground floor covered parking, which you often see in condominiums in Florida. You've got a ground floor covered parking and there are two stories of habitable condominiums above, that is a three-story building. I get asked all the time, "What if you have a two-story building but the top floor has a loft or a mezzanine of some sort? Is that three stories?" That's a very difficult question to answer. The building code defines what a story is and has a very particular definition of whether a loft or a mezzanine constitutes a separate building story. It's highly complex, highly convoluted.
I would tell you that in this instance, if you're not sure, you ought to consult with an engineer or an architect and let them make the determination as to whether or not your two-story building with a loft or mezzanine is actually a three-story building for purposes of the building code. Because remember, the milestone inspection provisions are in the statutes which relate to the building codes, and so that's what's going to govern that determination. Okay? So if you're within this regime, you've got a building that qualifies as a building that is three stories are higher and you're in a condominium, you got to do a Phase 1 inspection. So what is done in a Phase 1 inspection? What's inspected? For any building three stories or higher at a minimum, A Phase 1 inspection is a visual inspection of the habitable and non-habitable areas for evidence of substantial structural deterioration. We talked a little bit about what that term is. It's not very well-defined, but that's the determination for the engineer or the architect to make.
If in the course of that inspection and reporting, the engineer or architect determines that there is evidence of substantial structural deterioration, then they must do a Phase 2 milestone inspection, so keep that terminology straight. Phase 1, Phase 2, that applies to the milestone study. So a Phase 2 inspection is a much more detailed process and frankly will be a much more expensive process. The engineer is going to drive that. The engineer has to in their professional determination decide what they need to know in order to determine whether there needs to be any work that they will recommend to correct the evidence of substantial structural deterioration. It may include destructive testing, but at the end of the day, the engineer is going to determine in that Phase 2 inspection what the actual structural issues are and then how to correct them. So that report, that Phase 2 will be a much more detailed report about the issues at the building and it must include the recommendations for remediating those defects. Now if you do get to Phase 2 and you have a Phase 2 report, you got to do something with it.
If there's a remediation recommendation by the engineer, you're going to have to implement those repairs and implementing those repairs will be monitored by the local building official, and you'll have a certain amount of time to do that. If you don't do it, you're going to have a very upset building official and that will all be enforced through municipal ordinances. When are these reports due? Now here's where here's surprised that we have a very low percentage of folks that have even started this process. They're due by December 31st of the year in which the covered building reaches 30 years of age. That 30 years of age is driven by when the certificate of occupancy was issued for the building. So if the certificate of occupancy for your building that's three stories are higher, your condominium building three stories are higher was issued, is coming up on its 30-year anniversary, then by December 31st of that 30th year, you've got to do the Phase 1 milestone inspection for that building.
There is a grace period for buildings that were completed prior to July 1, 1992 'cause remember, this law went into effect July 1st of last year. So if you have a building that was completed that had its certificate of occupancy before July 1, 1992, those buildings have until July, I'm sorry, December 31, 2024 to do their Phase 1 milestone inspection. I'm not going to get into the little gaps that creates for some folks that may have had buildings turning 30 before December 31st of 2024, there's some little inequity there for those folks, but it is what it is. That's what the statute says. Adding further confusion, the legislature has put a 25-year schedule for buildings, within three miles of a coastline. They don't really even provide a very good definition of coastline however, and so that's created a lot of confusion and there really isn't a very solid answer for this. I know that's unfortunate, but there's a statutory definition of what constitutes a coastline, and that is the mean high watermark of where the land meets the sea and there's not a very good definition of what the sea is.
So I can't tell you whether the gulf is determined to be the sea or whether a bayou or an inlet or a canal is similarly determined to be a coastline. There's a frequency here, it's not one and done. After your initial Phase 1 milestone inspection, then you have to do another one every 10 years. There's reporting disclosure requirements. Every unit owner must get a copy of the Phase 1 milestone inspection. It must be posted on the property. If your condominium is required to maintain a website, then it must be posted on the website, and then the report must be maintained in the official records for 15 years. Okay? So that's milestone Phase 1 or Phase 2. There's a whole separate reporting requirement and that's the Structural Integrity Reserve Study. You'll find that in Chapter 718. What is the SIRS? It's a completely separate inspection. Its purpose is to define recommended reserves for replacement or deferred maintenance of certain common areas as set forth in, and Cindy referred to Subsection G, which is 718.112(2)(g).
Who does it? Same as a Phase 1 milestone inspection. It must include a visual inspection of the common areas by a Florida licensed engineer or architect. Now here's where this is a little bit different. This is a reserve study, so the reserve calculations don't necessarily need to be made by the engineer or architect, but the visual inspection of those areas that are in G must be done by an engineer or an architect. So if you've got a reserve study team coming in to do this, know that that inspection, that visual inspection needs to be done by a licensed professional. Again, who is captured under this? It's condominium buildings three stories are higher. The story is going to be the same definition as you would find and we talked about moments ago for a milestone inspection. What's inspected? For any building three stories are higher, a visual inspection of the common areas to establish their remaining useful life, the estimated replacement cost or deferred maintenance expense and a recommended annual reserve amount for that common area.
Again, this refers back to those things that are listed in section G. When is it due? Effective July 1, 2022, every developer has to do this report prior to turnover. So for any building, any condominium that is turning over after July 1st or has turned over after July 1, 2022, the developer's got to deliver this Structural Integrity Reserve Study. For owner-controlled associations which turned over prior to July 1, 2022, the very first SIRS reserve study is due by December 31, 2024. Then the frequency thereafter is you have to do one every 10 years commencing with the initial Structural Integrity Reserve Study. These reports need to be maintained and disclosed. They have to be maintained by the condominium and official records for 15 years. If the condominium is required to maintain a website, the SIRS must be posted on the website.
Okay? So those are the two different inspection regimes, and it's very important that you keep them separate. Now, condominiums may be doing and engineers may be proposing to do these two reports under the umbrella of a single inspection. I'm not going to comment on whether or not that's okay or not. You should discuss that with your association's general counsel. But as a practical matter, I would be ensuring that from a reporting standpoint that there's a clear delineation between the milestone reporting and the Structural Integrity Reserve Study reporting so that you can be sure to comply with the statutes and comply with the municipal building ordinances that apply to the milestone inspection because it's the municipality that's going to be enforcing that.
You want to make sure that they have a clear record that you've done a dedicated Phase 1 milestone inspection report. So if you're in doubt and you've got a proposal from an engineer, you can run it by general counsel, you can certainly run it by a construction law firm such as ourselves. We review engineering studies all the time and engineering consulting agreements all the time. So that's really where you need to make sure that you're, your reporting and your inspection process is going to comply with the statute and with local municipal ordinances. I know that's a lot. We'll answer questions afterwards and certainly you can always email us with some questions about this, but we're going to flip it back to Cindy now. She's going to talk about dealing with board and owner resistance to significant assessment increases.
Cindy Hill, Esq.:
Okay, thank you. I think that's solved it. Before I proceed with that, there seems to be some confusion from the chats. I do want to clarify what I was discussing earlier was the reserves requirement. Jon just discussed the inspection requirements. Inspection requirements are for condominiums under 718 that meet that three-story threshold, which as he had discussed, can be an issue if you have a garage or maybe a loft, but that's where that applies. All condominiums are now obligated under the current laws and the division's reading of the current laws to not be able to waive reserves for those item G components, the roof, the windows. So I hope that that helps clarify that issue. In hindsight, I think maybe Jon should have gone ahead of me and I should have gone after Jon to help with that clarification. Moving on, though, to the now hefty bills that condominium associations are looking at to start to fund their reserves and no longer waive them.
If you've already been not waiving your reserves, that's great, but many condominiums do at least partially waive reserves to help with expenses. You're going to get a lot of owner pushback to some of these bills. There's also going to be bills for the inspections for the larger condominiums. First of all, I want to advise, don't feel like you have to do this alone. Counsel for each association can help provide explanations to the owners as to why these actions and expenses are not discretionary. This is not the same thing as deciding, "Hey, let's redo the pool and make it look nice. Get new pool furniture or get new club furniture." No, these are not discretionary decisions. These are obligations that the condominiums have to follow under the act. So I would start with that informed conversation with your owners. Make sure they know that as a board, you are trying to comply with the law.
You're not just trying to put an onerous position on the owners. The other thing to keep in mind is to the extent that some owners may not be able to afford these expenses, it sounds rather harsh, but in life sometimes people have to make some decisions. If something has become too expensive for them to keep, they might have to make some personal decisions about that. Not to say that the board needs to be crass about that, but it's not the board's problem candidly to solve personal financial problems. Now that being said, at the same time, the board does want to be cognizant of the community and try to do what they can to make sure that it's not any worse than it needs to be, for lack of a better way to put it. So waiting for some of these issues, until we get closer to that 2024 deadline, actually means that they're just going to get more expensive. I've been advising my associations to start planning now for these issues.
Go ahead and get yourself in line for the inspections if they're necessary. Start looking at your reserves. See what you're looking at in terms of raising the assessments to fund the reserves. Do these things sooner rather than later. No, they're not fun. But the longer you wait, the more expensive it's going to get. You can also consult with your counsel and see if as for bridging the gap, so to speak, between this now requirement that's going to put some financial burdens on a community and thinking forward, it might make sense to take out some kind of loan to assist with that or rather than at a large special assessment. You can also do special assessments in stages. You're not required to necessarily do a special assessment. That's just a one fund. You can do special assessments where people pay periodically. These are all going to be driven by what's in your documents, though. So I can't give specific advice on that.
I'm just trying to put out some ideas that you can think about with your counsel and to try to best put out the expenses without creating more burdens than you need to for your owners, because I don't need to tell you people are going to complain. No one likes the cost of living going up. Again, starting with what I started this part of the presentation with, think about the communications with your owners. In my experience, a lot of problems can be solved with good communications. Letting owners know that these are not discretionary. They're also going to help you maintain or keep insurance on your buildings and they're going to help you with your property values. Banks are looking now at what financials are for community associations. So these are all sound principles. These are not things that owners are going to like, but it should be things that when owners are told, what the reasoning is for these that they will at least understand. Alan, I think you're muted.
Alan Tannenbaum, Esq.:
I can add to that the people who show up at meetings are often the people who are upset about assessment increases. You may not hear from the vast majority of owners, but the people who do show up generally is with a complaint. Some people want to sell their unit in six months and that's their major concern. We've had boards where there's a board member who is trying to sell their unit and there's a conflict between the long-term decision making that they need to make for the benefit of the association and what their individual interest might be. So I've always told associations that your obligation is for the long-term sustenance of the community, not to deal with short-term interest. With that, it's proper planning, meeting reserve requirements, getting your inspections done and so forth. So that's what we're looking for. We're going to leave a little bit of time for questions, but I want to cover real quickly this last topic of complacency.
We have a lot of people hoping that the legislature is going to modify the condo legislation to extend deadlines to make it less onerous. It may happen, but I was on the construction law committee of the Florida Bar yesterday and one of the pieces of legislation that is actually going through right now, and probably will be passed is to shorten the statute of repose. The time period for pursuing latent construction defects to actually make it synonymous with the statute of limitations. It used to be 15 years, legislature moved it to 12 years, then the legislature moved it to 10 years. Now they're proposing to move it to four years. That's what the legislature is really top of mind in the legislation right now, plus other things that have nothing to do with our industry. So whether they're going to be able to get to a glitch bill or not is very doubtful, so don't wait for that.
There's now fiduciary obligations for condominiums that put individual directors at risk for any kind of delay. One thing I know and any of the construction people on the Zoom will tell you is that building problems do not get better with time. A problem that you have today will be more expensive to repair tomorrow and certainly more expensive to take on in five years, so buildings don't wait. Champlain Towers is the most drastic example, but they knew for years that there was a significant amount of money that needed to be spent both in investigation and repairing that building, and they waited too long in the process to get to that building. There's many other buildings in Florida that face the same consequence. So Cindy or Jon, do you have anything to add to the topic of complacency? Jon?
Jon Lemole, Esq.:
Not anything other than what I had talked quickly about in my section was just the market supply and demand. We're seeing engineers, for example, that are not even in milestone inspections, just doing other types of building forensic inspections and they're booked four, five, six months out. So you don't want to get caught by waiting too long and then you can't get an engineer to do these inspections in time to meet the time requirements. The faster they have to work, they may charge more as well. They may charge premium pricing for faster service.
Alan Tannenbaum, Esq.:
Let's get into some of the questions, and I'm looking at Robert's question. "I was wondering if the laws which came out of Tallahassee will also apply to hospitals, hotels and apartment buildings?" I don't think so. The legislation that was created reserve and inspection requirements was a reaction to a horrendous condominium building collapse at Surfside. Until there's an apartment building that has the same fate or a hospital or another hotel or commercial building, I doubt that there will be evidence on the part of the legislature to impact those issues. The other aspect that you have is obviously hospitals are and hotels and apartment buildings are owned and operated by large commercial interests, much more difficult to legislate anything with a large commercial interest in the political climate of 2023. The reality for Condominium Homeowner Associations is there doesn't seem to be any detriment politically for the legislature to act. In fact, the outcry after Champlain Towers was for the legislature to do something drastic to protect the occupants of buildings. So I doubt whether any of this is going to extend any type of commercially-owned buildings, including hotels. Let's see.
Cindy Hill, Esq.:
Alan, I can add to that. That new legislation actually is exempting commercial condos from these new requirements. So I think that you're spot on with where the legislature's going with that.
Alan Tannenbaum, Esq.:
Okay. There was a question about a apply the laws to one-story condo villas, and I think Cindy did clarify that the general reserve requirement does apply. The legislation that Jon addressed would not apply to a one-story villa, but the reserve requirements as interpreted by the Bureau of Condominiums is that fully-funded reserves without waiver are going to be required even for a one-story villa condo.
Cindy Hill, Esq.:
Correct.
Alan Tannenbaum, Esq.:
Let's see. Are there any exclusions from loss assessment coverage in homeowners policies? I've never seen an insurance policy without an exclusion, so that's an easy one to answer. I can't say offhand unless Cindy has more information about what specifically might be excluded.
Cindy Hill, Esq.:
No, I don't. That's policy driven.
Alan Tannenbaum, Esq.:
I'm sure there is one. Let's see. "Can they deny coverage to an HOA that functions as a condo, i.e., master policy as condo after the rooms hit 17 years of age?" Cindy, you want to attack that one? Generally, an insurance company does not have to have a reason for cancellation. I know there was something on recent legislation that had to do with, 'cause you can't have an automatic cancellation because a roof reached 15 years of age.
Cindy Hill, Esq.:
That was recent legislation, but depending on what the building is, that legislation might not apply. It was meant to apply to residential independent structures, not commercially-insured structures like condominiums are. So that one can't really just be answered without more detail other than I would say generally, the insurance companies are dying because they can. The industry's a mess. Insurance is not going to help you though in any circumstances.
For homeowner associations, not condominiums for homeowner associations, reserves can either be statutory under the Homeowner Association Act or they can be discretionary in the documents. So that one, unfortunately, cannot be answered as a blanket answer. You're going to have to get with your counsel and see what flexibility you have. I can say if your reserves are not statutory and not governed by the Homeowner Association Act, it will be very easy for the board to make an adjustment for that.
Alan Tannenbaum, Esq.:
All right. Jon, you may want to attack this, "Under the new legislation, must a Condo Association engage the Independent Reserve Study Analysis or can an association do an in-house study performed by unit owners?" Okay, why don't you attack that? Can you attack that one, Jon?
Jon Lemole, Esq.:
Yeah. So look, if your condominium building fall within the definition of buildings that you're required to perform a Structural Integrity Reserve Study for, you're going to have to do the SIRS. So buildings three stories or higher, the legislation requires a Structural Integrity Reserve Study. A Structural Integrity Reserve Study, at least part of it, requires the participation of an engineer or architect to do the visual inspection of the Subpart G components in determining the remaining useful life, the integrity, the remaining useful life of those components. So unless you've got a Florida licensed engineer or architect involved in that reserve study process, then you cannot do it in-house. You've got to engage somebody to do that because of that requirement to have a professional involved.
Speaker 4:
I'm talking about the numbers aspect. I get the fact that we need an engineer to do the on-site inspection, but we talk about two components to the inspection. One is the visual by an engineer and the second is the actual numbers, the costs. The question is the cost aspect of the inspection, does that need to be done by outside professional or can it be done in-house?
Jon Lemole, Esq.:
That's a good question and I don't know that the legislation provides a clear answer on that. Arguably, as long as the engineer or architect is involved in making the inspection and essentially providing the useful life data can you determine the reserve requirements in-house? The statute doesn't address that, but the report part of this, that that's where I think you may have some issues because you've got to have a Structural Integrity Reserve Study. It's a report. So I don't know how you would put that report together using a combination of an outside engineer and somebody in-house or an in-house committee who's making those calculations. There may be a way to do it, but I don't have a ready answer for that because the statute doesn't specifically address that.
Alan Tannenbaum, Esq.:
All right, just a minute. So I'm very wary, and Cindy will back me up on this, of board members undertaking and providing information that normally would be provided by an expert that is going to be relied upon by the association and its determination. So perhaps if you got bids from contractors and use that as a basis for your reserve numbers, that would pass muster. But if individual board members, based upon their experience, for example, are coming up with what required reserves numbers should be on their own, let's say somebody's a retired contractor or retired engineer in their community, they're putting themselves at personal risk in making those calculations.
So part of the reason why you hire a professional to perform these functions is you don't want an association making determinations based upon individual determinations by know even knowledgeable board members. So the same reason why a CPA who's on the board doesn't do the association's tax returns, and for legal advice they call Cindy for general counsel questions and not rely upon one of the board members who happens to be a lawyer. They're putting themselves at personal jeopardy and trying to take something like that on.
Cindy Hill, Esq.:
I agree.
Joseph Rickey:
I also think the business judgment rule would come in would be impacted there too because by not consulting an outside expert to assist in those calculations, you may be at risk of not having the protection or the full protection of the business judgment rule as a board.
Cindy Hill, Esq.:
What Jon is referring to is that protection you have as board directors to make reasonable decisions and be shielded from liability for those decisions. If you make a decision based on the advice of a professional, it's very difficult for you to be found liable as board directors for that decision. So if that professional's in-house, so to speak, that protection is not as clear.
Alan Tannenbaum, Esq.:
Okay. Again, you can continue to send your questions through chat. It's very difficult in a session like this to respond directly to oral questions during the session. So whoever was asking to have further back and forth send your question through chat, and we're going to continue 'cause there's a lot of questions. I see one here, "If the association documents only reference 617 and not 718 or 720, would they still fall underneath the requirement?" Dahlia, we'd love to see those documents because I'm not sure I've ever seen for a homeowner association or a condominium association a set of documents where 720 or 718 do not apply.
Cindy Hill, Esq.:
I have seen them.
Alan Tannenbaum, Esq.:
Okay. Well, Cindy, well, how would you respond to that?
Cindy Hill, Esq.:
Sometimes the documents are older.
Alan Tannenbaum, Esq.:
Right.
Cindy Hill, Esq.:
The provisions in 720, a lot of them were originally in 617 and moved over to 720-
Alan Tannenbaum, Esq.:
Okay.
Cindy Hill, Esq.:
... 20 something years ago. Generally, unless your documents are really old, and we're talking over 45-years-old, you're not going to be a condominium unless it references 718.
Alan Tannenbaum, Esq.:
Okay. There's a question about being three miles from the coast. The only concern for a building three miles from the coast is if you're a three-story building. So if you're a one story or two stories and you're by the coast, you have no special requirement other than if you're a condo meeting the typical fully-funded reserve requirements. Cindy, there's a question of pooling, I don't know if you want to take that on here.
Cindy Hill, Esq.:
Pooling did show up in a couple of questions. I answered one of them. The Division of Condominiums has said that pooling reserves is still okay, but they didn't give us any guidance. So honestly, there is no rule for that now other than we can still pool. I've been under the reasonable assumption, and that's all it can be is reasonable, that you can still pool for the items that are not the item G, like the roof, the waterproofing of the building. For instance, I give the example repaving your parking lot, looks like you can still pool for that. It looks like you probably cannot pool for those other structural items G though. But again, we don't have answers.
Alan Tannenbaum, Esq.:
There's a question from Peter, "Is there any provision of the statute defining procedure for establishing the reserves for one and two-story buildings?" Absolutely. That's right in the Condominium Act if you're a condominium. So the reserve requirements are there for one and two-story buildings and they were there before this legislation passed. So it's right in 718. Cindy, you said for 720 there's a reserve requirement also, I believe.
Cindy Hill, Esq.:
There is, and I could spend a whole hour on that, but each homeowner association's counsel can advise them whether they're reserves are governed by the Homeowner Association Act, what we call statutory reserves or if they were reserves created only by the documents of that community and are therefore, governed by the documents of that community.
Alan Tannenbaum, Esq.:
Okay, so in an HOA, there's nothing in the documents about reserves. Does the 720 section apply?
Cindy Hill, Esq.:
Most likely not. Again, the legislature changed the reserve components for the statute just last year for homeowner associations as well adding to some confusion. If there were no established reserves at the beginning of the community, odds are the reserves are completely board discretionary. Odds are.
Alan Tannenbaum, Esq.:
Jon, I don't know if you want to take this one on, "Services due by 12/31/ 24, budget for 2025 would already be complete for condos under calendar year. Would that information then be used for 2026 budget?" You have a ready answer for that one?
Jon Lemole, Esq.:
I don't know that it's a ready answer, but I would say that, yeah. Off top of my head I would say that's probably accurate; however, as again, I was reading this Senate bill that's out there and they do address that, or at least in my quick reading of it, and I need to look at it in a little bit more detail. But it looks like they may be addressing that issue because they talk about budgets adopted after December 31st of 2024. So I don't want to give a definitive answer on that. I would say to you you ought to sit down with general counsel, take a good look at the statute and make that decision with the advice of counsel. But it looks like if at least the legislature is looking at that particular issue and trying to provide some clarification on it.
Alan Tannenbaum, Esq.:
Okay. Gail asked, "I recall that we have to fund 110% of structural reserves." has either of you heard about that, Cindy or Jon? You don't have to reserve for structural more than your engineering report or would say is a reserve number, there's no [inaudible 01:00:16]
Cindy Hill, Esq.:
There's no magic number. Yeah.
Alan Tannenbaum, Esq.:
Okay. Gail also asked, "In a mixed building, some one-story villas and a mid-rise, can assessments only be on the mid-rise owners, can reserves be split?" So if this is a condo, which I'm assuming it is, I had a case a long time ago where the condo consisted of a mid-rise building on a row of townhouses and the mid-rise building needed significant repair, including redoing the elevators. The town homeowners couldn't figure out why their assessment included having to pay for the mid-rise building. The answer was that's what the condominium documents provided at the outset, equal assessments to all condominium owners. The town home owners needed to understand that they own just as much of the mid-rise as they did their own exteriors of their town home. So the general answer is, unless your documents are very unusual, the assessments and the reserve requirements for your mid-rise building would have to be absorbed by the villa owners the same way as the owners in the mid-rise.
Unfortunately, you're in the same mix as that condo that I just described. One-story buildings have structural items that do not apply to multi-story such as garage doors. So where do those fit? That would be very document intensive to answer that question. We're going to skip the pool reserves because of the doubt at this juncture. All right. This a good question, "What could a unit owner do if they feel that their self-managed association is cahoots with the board to keep fees low and underfund reserves?" So the way I read that question, if you're a unit owner and you're board is not complying with the law, you have a Bureau of Condominiums that governs condominium operation in Florida, you can file an administrative complaint and if you don't want to go that route, or in addition to that, you can go see a circuit judge to ask that the Condominium Act be appropriately enforced at your condominium. For HOAs, there's no state agency that governs your operational issues.
If you're unhappy with the way your board is operating other than recalling the board, you would need to go to the circuit court to straighten things out. Let's see. All right. Diane asked whether there was any science behind the decision to declare three-story buildings as a minimum height requirement for these rules and regulations. We don't know what was in the minds of those particular legislators and that they met for two days and fashioned that legislation as to why three story minimum was determined to be the necessary minimum for that legislation to apply. "What could be done with property managers that I'll advise the board that the reserve requirements don't apply to their condominium association?" Gary, I guess you can terminate a management company that gives you bad advice like that. Other than that, they are also licensed entity managers.
Cindy Hill, Esq.:
Well, on the flip side of that, I would say board directors should not be relying on legal advice that doesn't come from a lawyer. Don't put your manager in a position to answer questions your lawyer should.
Bill:
Can I ask a question 'cause I'm having trouble sending through chat?
Alan Tannenbaum, Esq.:
Okay, Bill, I'll make an exception for you 'cause you have a nice beard. Go ahead.
Bill:
Thank you. I appreciate that. You too, by the way. We have a situation here where the owners are responsible for the upkeep of their windows, et cetera; yet, 718 shows that that'll be part of the inspection process. How do we handle that, please?
Cindy Hill, Esq.:
You're going to need to get with your general counsel on that one because there's no clear answers on that. The legislature did not put in any recognition of the fact that not all condominiums are responsible as an association for the windows. There's no clarification on that. So you're going to have to get advice specifically from your counsel based on your documents, based on the age of your building, based on how many windows have been replaced and haven't, if there's any liability concerns. Unfortunately, we can't answer that one directly.
Bill:
Thank you. I appreciate it. Thank you.
Alan Tannenbaum, Esq.:
"What about a 50-year-old building that is three stories, but very sound, but not to current codes such railing height or width?" Well, Jon, I don't think there's anything specific in the statute that would require upgrade to current codes what the structural inspection would do to determine if the structure is sufficient, but it doesn't necessarily require that it be [inaudible 01:06:31] the current code. Do you agree with that?
Jon Lemole, Esq.:
Right. The Phase 1 is just an inspection for substantial structural deterioration. It's not a code inspection. Now, if the engineer finds that there is substantial structural deterioration, progresses to a Phase 2 and then determines in the Phase 2 report a repair scope or a remediation scope of work that needs to be done, that may put you in a position of having to comply with newer building codes depending upon the work that's being recommended by the engineer, but not for Phase 1. It's not a building code inspection.
Joseph Rickey:
Thank you.
Alan Tannenbaum, Esq.:
Cindy, Brenda has a question. "The fully funding mandate is confusing. I am interpreting a lot of me, we have to begin fully funding as of 2024, but the reserves does not have to be fully funded by 2024." You want to tackle that one?
Cindy Hill, Esq.:
It is confusing, first of all. I'll open with that. What is going to have to be fully funded is going to, first of all, depend on the reports if you are a building, three stories are higher. So I'd have to give individual advice on that issue, but the statute is not clear. But the interpretation that most attorneys are taking, I'll go with that, is that fully funded does not mean that, for instance, I'm just going to make up numbers, if you need $400,000 to put a new roof on, it doesn't mean that by 2024 you have to have $4,000 in the bank. It means that you need to be a schedule that in 10 years when you need that roof, you will have $400,000 in the bank. But then again, that's the interpretation of counsel because the statutes are not clear.
Alan Tannenbaum, Esq.:
All right. There's a question about, "Does the Condo Association and HOA have different requirements for reserves?" That's definitely-
Cindy Hill, Esq.:
I did put in the chat that condominiums are governed by Chapter 718, the Florida Statutes Homeowner Associations by Chapter 720. I know that's not a good layman's answer, but those two numbers will trigger which camp you are in, so to speak. So as an owner, if you're trying to do some research and learn about your community, if you know you're a condominium and you see 720, you don't need to look at 720, and vice-versa, if you're in HOA and you see 718, you don't need to look at 718.
Alan Tannenbaum, Esq.:
Cindy, there's a question, "If you're governed by the 718, can you add a new reserve category for landscaping?"
Cindy Hill, Esq.:
There is a catchall in the established Condominium Act that items of $10,000 in expenses can be added to the reserves. It wouldn't surprise me at all if a condominium is spending more than $10,000 on landscaping.
You can send us some questions via email also, and we will try to get to everybody's questions. So thank you for attending today. We're going to conclude for today. We'll be back next month. I hope we cleared out more confusion than we created today. It's difficult to do in this climate with the legislation that we're dealing with, but we appreciate everybody attending.
Cindy Hill, Esq.:
Thank you.
Jon Lemole, Esq.:
Thank you, everyone.
Alan Tannenbaum, Esq.:
Thank you, everybody.
