Managing Owner Concerns Given the Insurance Crisis and New Inspection and Reserve Requirements
Jon Lemole, Esq.:
Our firm is a full service community association law firm serving southwest and central Florida. We handle all facets of association representation, including serving as general counsel, turnover and construction claims counsel, covenant enforcement and assessment collection. Our topic for discussion today continues to explore the effects of the recent condo safety legislation on Florida condo associations. To some extent, some of today's discussion we hope will also be helpful to those of you that are part of HOAs as well, especially when we discuss dealing with spiraling maintenance and repair costs and spiraling insurance costs in Florida, which I'm sure you're all dealing with.
We're going to do things a little differently today. We're going to actually have a panel discussion, and so we've invited some folks here to talk about some of the things that we know from hearing from condo associations that you're dealing with, and especially with regard to the increased financial burdens that associations are facing and how to deal with those, and especially how to manage community expectations and deal with members, because a lot of condo associations, especially, and homeowners associations are facing a very difficult budget decisions, and we know that.
And so we hope that this discussion will give you some good ideas, some best practices for managing those issues in your community. So our panel today is consisting of Cindy Hill and Dan Greenberg, and let me introduce both of them. Cindy Hill is a partner with our firm. Cindy's had a long time practice handling general representation of community associations in southwest Florida. She recently joined our firm and we're very happy to have her. And so Cindy will be speaking on some issues today. And then we've also invited Dan Greenberg and a lot of you know Dan. He's a frequent speaker. I've been on panels with Dan. Dan is a partner in Greenberg, Nickoloff, and his firm also does full service community association representation there in Dunedin, Florida. They represent community associations throughout the Tampa Bay area and central Florida. And Dan's a great friend of our firm and we hope that we're great friends of his firm.
I know that you all saw probably in the invitation we were hoping to be joined by Diane Simons. Diane's an also very, very capable and longtime community association lawyer based in Fort Myers. Her practice serves Lee and Collier counties. Unfortunately, as you can probably imagine, her practice and her life, frankly, has been severely impacted by Hurricane Ian. And unfortunately, she is unable to join us today. And so our thoughts are with Diane and all of our colleagues and managers and boards and residents of community associations down in southwest Florida who are still struggling with the aftermath of the terrible storm. So I've got the topic for today. You should all be able to see it on your screen. And the topic is managing owner concerns given the insurance crisis and new inspection and reserve requirements. So let's take a look at some of the topics that we hope to cover today.
So what we're going to do today is a short recap of the new safety inspection and reserve requirements, which are driving the very difficult budget decisions faced by association boards. We're going to also talk quickly about the nature of the present challenges faced by boards resulting from the inspection and new budgeting requirements. In the past, we've talked about some of the ambiguities in the legislation. So we're going to review some of those, and as we've dealt with this legislation and lived with it now for a few months, some consensus has started to develop around some of the areas of that legislation that were unclear. And so we're going to talk a little bit about that today and hopefully help you all resolve some of your questions about what does it apply to, who has to meet these requirements, who's subject to the new reserve requirements in the new legislation?
A lot of you have asked us in the past about the parts of the legislation that are directed towards manager and director fiduciary obligations. There's some language in there. And so we're going to talk about the changing landscape of board member and manager fiduciary duties and how does that change board decision making, if any, and frankly, why would anybody want to serve on a board anymore? And then probably the thing that a lot of people are really interested in today is how do we manage our members as managers, as directors?
We know that we're going to deal with members who are either not fully informed about the new legislation or who just continue to want to look at alternative reserve funding, waving funding, reducing funding, and those are issues that everybody's going to probably continue to deal with. So we're going to talk about how do we deal with those members and provide some pointers and best practices for that. Look folks, we know that a lot of you are facing very, very difficult budget decisions that are going to potentially increase special assessments for your members and for some of our associations out there, there may be members who are just not able to pay who are financially strapped and who are having financial difficulties. What do we do about those folks? How do we handle those issues when they come up?
A lot of you are also concerned about, well, we've got these inspections we have to do and we don't know what they're going to say, and we've got other projects that we were planning to accomplish, whether it be repair projects, maintenance projects, improvement projects, modernization projects. All a sudden we've got a lot of unknowns about how we should be prioritizing these things. So we'll talk a little bit about what are some of the ways that you can prioritize or should be thinking about prioritizing the projects that you were either contemplating or maybe are getting ready to perform given the new inspection requirements and not really knowing what that may entail as a result of those inspections.
In particular, right now, a lot of you are dealing with hurricane repairs and maintenance projects, and some of that may be covered by insurance and some of it may not be covered by insurance. So what do we do in this situation? We've had a lot of associations who have been coming to us and asking those questions. And then the very last thing that we're going to talk about, which is a topic that really could be its own webinar, but we're going to touch on a little bit because for some associations termination may be the option. And so we're going to talk about a little bit about how you should be thinking about that, what may be entailed with that. We're not going to spend a lot of time on it, but we certainly want to put it on your radar because for those of you that may be considering termination, that's a big step and there's a lot of planning involved in that.
So let's jump in. As you all know by now, the new safety legislation has brought positives and negatives to condo world. Certainly many people are relieved by the legislatures response to the tragedy at Champlain Towers in Surfside. Certainly, however, those safety initiatives and studies may be very costly for condominiums. Certainly the required reports will also need to be followed by costly repairs and repaired maintenance projects. Quick recap of the features of the inspection legislation. For buildings three stories are higher, and this is for condos only and co-ops, for buildings three stories are higher, condo associations are now mandated to have an engineer or architect perform structural milestone inspections every 25 or 30 years depending upon where your buildings are located relative to the coastline, 25 or 30 years from completion of the building, and you're also required to do a separate structural integrity reserve study every 10 years from formation of the condominium, and that's usually when the declaration was recorded.
For older buildings, those first milestone inspections are due by the end of 2024. For condominiums, the structural integrity reserve study is now due either before turnover by the developer or by the end of 2024 for associations which were under unit owner control prior to July of this year. The new legislation is also brought with it major changes in reserve funding requirements. It appears that gone are the days of reducing or waiving full funding or redirecting the use of reserves. Obviously these new inspection and reserve funding requirements are expected to cause a lot of financial pain, especially for older condominium condominiums or condominiums which are traditionally underfunded reserves. When we consider these new financial burdens in tandem with spiraling construction costs and a very stressed Florida insurance market, boards and managers can expect to face very difficult decisions about prioritizing maintenance and repair projects and annual budgeting.
There's also the possibility of dealing with uninformed and difficult owners or even owners who just don't have the means to pay higher assessments. There are also new considerations for directors and managers relating to their fiduciary duties. Today we'll try to provide some clarity and best practices for dealing with these issues. So I'm going to turn it over now to Cindy Hill. She's going to tackle the topic of ambiguities or talking about some of the ambiguous language in the legislation, defining who has to perform milestone inspections and structural integrity reserve studies and what reserves need to be fully funded and how they are to be funded. I know Cindy just got back from a two day symposium on the east coast where she was talking with condominium lawyers around the state, and so she has some good information for us. So Cindy, help us understand some of the ambiguities here. So two big areas are what constitutes a three story building and then who's subject to the new reserve requirements? Tell us a little bit about those.
Cindy Hill, Esq.:
Well, going back to attending the conference I did over on the East coast with about 500 other condo association attorneys, obviously a group of attorneys can't make decisions that judges will. So these are not set in stone decisions, but they are consensus, and one of the consensus that was reached amongst the attorneys is that the three stories is not limited to what you might call habitable stories. So for instance, the fact that you have a under story that's parking as opposed to three stories of all under air conditioning, is not something that any of us are seeing in the statute that's differentiated. It's quite clear that the statute does just say stories and the building code does not differentiate between habitable or non inhabitable. So I do understand that that leaves still a little hanging issue for folks who have maybe just a little top where they have a viewing area or maybe a half mezzanine on a story.
But I think that the consensus is that if you have a three story structure in the bottom story is parking, that's going to be a three story structure that's impacted by these bills. Again, these decisions have not been made by judges. The legislature has not changed any of the language, but this is the consensus among the community association attorneys and attendance at that conference and amongst those who were not also in attendance at the conference who we all keep in touch... We have an industry that's very communicative, so that that's going to be the consensus, that's going to be the conservative way to take this approach. Does it mean a year from now a judge might rule otherwise? No, I can't guarantee that, but I do advise my clients to take the conservative approach so you don't end up with a surprise. So that is the consensus on the three stories right now.
We will see where the law goes. There was a question earlier in the chat that Senate bill four is very unclear that if you have less than three stories, so not even talking about three stories, let's say you're a one or two story condominium, if you're going to have to follow the requirements of the not being able to waive reserves starting at the deadline of December 31st, 2024. And the division of condominiums, for those of you who are not familiar with that entity, it's a governmental entity based in Tallahassee, has some offices throughout the state, they came to the conference, and candidly, they're traditionally rather cagey about answering specific questions unless they do so in writing, but at this conference, they surprisingly said that they've talked to the legislature and it's going to be their position that yes, all condominiums, whether or not there are three stories.
So one or two are going to be subject to these fully funding requirements. Now let me clarify, fully funding for these structural requirements, the painting, the roofing, just with every other condominium, you are not going to be required to fully fund for areas that are not structural, such as if you have a gazebo picnic area, that is not going to be subject to fully funding for anyone, but everyone is going to see the painting, the roofing, the other what we call paragraph G list that your counsel for your association go over in detail with you.
Those are no longer going to be able to be waived whether you are a three story, one story, two story. So those are some clarifications on the ambiguities. I want to also clarify that there are still so many other ambiguities. All of you should be working with your counsel as you sit down and plan for these because there are no clear answers for some of these issues. And again, even some of the consensus I just participated in last week, we could have a judge who rules otherwise.
Jon Lemole, Esq.:
Thank you, Cindy. Dan, let's talk about fiduciary duties because there's language in the new legislation that presumably adds some elements to the fiduciary duties of both managers and directors. So the question for you is how does those provisions in the legislation, if any, how does that change board decision making and what should managers and directors know about any changes in their fiduciary obligations?
Dan Greenberg, Esq.:
Well, thanks for having me on, John and Cindy, it's always a pleasure to do presentations with you and especially on this topic which everyone is rightfully concerned about. Well, the cagey attorney answer, I suppose, is that it really doesn't change anything with respect to directors and officers fiduciary duty because long before 4D, directors and officers have always had a fiduciary duty to uphold the association's governing documents, follow Florida's statute and act in the best interest of the community. So in previous years, that was really more so related to the maintenance of the building, ensuring that the board properly undertook required maintenance to keep the building in a safe condition. Now with the new statute, that point has been hammered home because 4D has a specific [inaudible 00:18:15] that says it is a breach of an officer or director's fiduciary duty if they willfully and knowingly fail to have a milestone inspection performed.
So what that really does in the statute is create a per se violation, meaning the fact that you didn't do it, performed the milestone inspection is evidence of itself that you have breached your fiduciary duty. So it's not so much a factual issue anymore. The fact is you didn't perform the milestone inspection on time, therefore you have reached your fiduciary due to the corporation. And so that could theoretically lead to personal liability on behalf of an officer or director. And what I mean is normally you're protected by your directors and officers or errors and omission policies. So if the board makes an honest mistake and they are sued in their individual capacity, that case will be handled and covered by the association's directors and officers policy. Now though, if a board willfully chooses not to perform a milestone inspection and they are held in breach of their fiduciary duty by the statute itself, there's a very strong likelihood that the directors and officers policy will not cover those individual directors who voted not to perform the milestone inspection.
And I highlight that because, and this is true in all scenarios, when there's a controversial topic or something that may lead to a liability type of situation, those directors who try to do the right thing and are on record in the minutes voting in favor or against, depending on the situation, that issue, they would very likely be absolved of personal liability. Every director is a one person, one vote situation, so you can't necessarily force your other directors to do the right thing legally. So in this case, those that vote no or who choose to ignore the situation entirely could find themselves on the other end of a personal lawsuit attacking their personal finances.
Jon Lemole, Esq.:
Dan, we've heard from a lot of folks why would anybody want to be on board anymore given the things that they're expecting as a result of this legislation and the battles that are going to have to be fought with members? I would think that in some respects, this new fiduciary language in the statute also provides them with a ready answer to members who are creating issues around assessments and reserve funding.
And that kind of dovetails with the next topic that I'm going to ask you to talk about is you've got owners who are either uninformed, and I don't mean that in a bad way, they're just living their lives, they don't know what the statute says, and then there's probably a second class of owners who, despite what the statute says, and maybe knowing what the statute says, still are resistant to the reserve decisions that the board now has to make. So give us some ideas for how directors can handle that and managers as well, how do they handle those folks?
Dan Greenberg, Esq.:
Yeah, so this is an age old problem that we've dealt with in various capacities is general counsel attorneys for condo's and HOAs for as long as I've been doing this for 12 years, it's just that now the situation seems to be heightened or the stakes seem to be heightened because of the magnitude of the projects that we're [inaudible 00:22:04] undertake. So the philosophy is the same. And to answer your first question, it's hard enough to get board members to volunteer.
So why would anyone want to volunteer when now the stakes seem to be even higher and all these things? Well, the answer remains the same, again, we need good directors to run associations and it is a difficult job. It's always been a difficult job. It will always be a difficult job, but if the good responsible well meaning people don't step up to run their community, then we kind of know what that's going to default to, and for as much as it may be a daunting task for a good, intelligent, well-meaning person to step up and see their community through this process, the alternative is far more damaging and destructive. And so I do want to make sure I'm very clear that those directors that step up through this difficult time and serve dutifully and bring their community through the other side are protected. So your coverage will protect you in those decisions that you make.
And it's very critical at this stage for condos, particularly the three story and higher condos that are going to have to go through these inspections and possible reconstruction projects to have as responsible of a board as possible to mitigate any of the various issues that could arise as we progress through this over the next couple of years. So I will continue to encourage directors to hang in there. It may get a little more difficult, but then to answer the second part of your question, the key is to surround yourself with good qualified vendors and professionals that are going to aid the board in making these decisions and getting the building properly inspected and reconstructed if necessary, and not only that, but the good vendors should help the board communicate these issues to the membership to avoid the very question that you've raised, which is some owners simply are not going to be informed about these issues.
They're going to be questioning why we're doing it, they're going to be pressuring the board or badgering the board to do it on the cheap or to try to keep assessment levels low and their perspective is going to be in the wrong place and not aligned with these responsibilities. So that all then comes down to communication. Boards are going to have to try to step up their efforts to ensure that the community understands why we have to do these things.
And that could include inviting in the attorney and the engineer and the reconstruction experts and the insurance agent in to additional meetings or putting that on as an agenda item at the next few meetings, offering these on Zoom where maybe you didn't in the past to try to encourage your out-of-state or out of country owners to join. The more that we can get the message out and get owners geared up for what is about to happen, I think the better chance we will have for the board to have a relatively easy path because the last thing we need is internal strife and resistance to what is already going to be a very challenging and likely costly project.
Jon Lemole, Esq.:
How about, Dan, business judgment rule? Is that affected? We heard Cindy talk a little bit about some ambiguous areas in the law. There's some consensus and Cindy, please weigh in as well. There's some consensus building on some areas, but take the reserve funding issues, although DBPR apparently says, or the division of condominium says that even two story buildings have to comply with these, where there are those ambiguous areas, does the board risk facing a charge of breach of fiduciary duty by making the call on some of these things or do they still have the benefit of the business judgment rule?
Dan Greenberg, Esq.:
Yeah, they absolutely do especially if they do the right thing and rely on the expert opinions to the best that we're able to provide guidance. This is a prime example of when the board needs to employ those folks to help guide the decisions. Business judgment rule protects board members when they act reasonably and in an informed and good faith manner. It does not mean that the project or the decision has to work out. Sometimes things go sideways for no fault of the boards at all. Sometimes it could be a vendor issue, sometimes it could be something unanticipated. That's life, and directors are not held to a perfection standard, but what they can't do is simply take everything on themselves and say, well, in an effort to save money, for example, we are not going to listen to or engage professionals to help guide these decisions.
We're going to wing it and hope for the best. That's the scenario where if the project goes sideways and the owners are financially damaged or worse, physically damaged in a worse case scenario, that's when the board's decision making is going to come under very intense scrutiny, and for those boards who choose to forego the wisdom of professionals who do this for a living full-time and who like you and I have been digging into this now for months, for hours and hours on end, it's our job to advise the board so that they can make the best decision possible for the association. And again, it's not a perfection standard. We can't guarantee results, but what we can do is try to guarantee that the process that the board follows is the correct process and then hopefully we end up with the right result.
Cindy Hill, Esq.:
And I'll add to that, Dan, I think one of the questions from the chat touched on boards not necessarily using a professional to put together the reserve study. That's a really ill-advised approach for these structural items. I'll again use the gazebo picnic bench example as if your board is anticipating what it's going to cost to replace gazebos and picnic benches, I'm not concerned as legal counsel, but if your board is trying to, as volunteers, come up with a budget for what it's going to take to do your structural parts of your building, I am very concerned because no insult to any board member, but you're not going to be qualified to have that objective knowledge and information and make those decisions and then you're going to lose that protection that Dan alluded to that when as a board of directors you get advice from a professional, you're able to say, well, we followed the advice of a professional.
Dan Greenberg, Esq.:
Yeah, And SB4D actually specifically addresses that issue with respect to the structural integrity reserve study and says that these structural integrity reserve studies cannot be performed by the management and the board alone. So the SIRs by statute has to involve a visual inspection by the engineer and then the completion of the report by a professional. And I'm glad Cindy raised the point, because historically speaking, many associations got by in years past without a formal reserve study, which was never required under the law. It was always a best practice. So it was very common for boards and managers to work together to build a reserve schedule based on either their own observations or working with local contractors like the roofer or the painter, to establish the useful life remaining on the component and the replacement cost. That is literally illegal now to do with the SIRs.
So we have to now rely on these third party companies, and I saw a question just come up in the chat with respect to the milestone, but also with the SIRs. What if we end up with a report that we don't agree with and we question the competence of the person preparing that report? That's a very problematic situation because you are essentially bound to use the findings of that report. So it really highlights the fact that you have to do your due diligence on the front end. Do not just sign the contract with the cheapest vendor or the one that says, I can get you on the schedule in three weeks. I would really question that vendor in their competence at that point.
You're going to have to do whatever due diligence you can, lean on the management company to use their resources, ask around to other communities who have used engineers. If you have never used an engineer, ask your attorney. You're going to have to really find the right people to produce these reports because I think the answer is on the back end, if you don't like the report that was presented, you're going to have to hire another company to produce a second report that you can then reasonably rely on, and these reports are extremely expensive. So that is really a last resort. So I'm going to encourage you to do as much due diligence on the front end as possible.
Jon Lemole, Esq.:
Cindy, one of the questions in the chat is if board members follow the recommendations of property management regarding financial decisions, does this offer legal protection to the board under the business judgment rule? So I think what the question is getting at is in terms of the reserve funding questions, is it enough to rely upon the guidance of property managers? Should board members be consulting with general counsel on these issues? What are your thoughts around that?
Cindy Hill, Esq.:
Well, property managers have their niche of knowledge, just like the attorneys have their niche of knowledge, the engineers have their niche of knowledge. Asking property managers to answer questions or outside of their niche is not going to be good practices, and it also puts property managers in a really uncomfortable position to the extent that you do see boards who want to try to minimize cost by not asking attorneys, engineers, accountants questions, asking them of their managers. Well, the managers can share their experiences. The managers can share their knowledge of the statutes when it comes to providing notices, the rights of owners to speak at meetings, but managers are not going to be in a position to be the professionals that answer these more complex questions [inaudible 00:32:43] laws. They are not engineers, they do not have law degrees, I'm not putting any managers education or knowledge down, but they are not the right professionals for a lot of these questions.
Now that being said, managers can share industry knowledge that they have from knowing their colleagues and knowing what they're seeing with their clients. But no, I would not want managers or boards to be relying on one another for these structural new issues in the law. And there is also now a provision that says that managers can actually be held liable in these scenarios. And I don't know what the legislature was thinking doing that, candidly, managers can only take action when directed by the board. They're not independent actors. So putting that additional liability burden on them I think was a terrible thing to do, but I think that just is going to add to the hesitation that managers are going to have to want to be the advice source for these issues. And I don't think it's fair to even do that to them. So I would say you can look to your manager for guidance, but don't look to your manager for answers.
Dan Greenberg, Esq.:
Yeah, I think that was clearly the intent of this statute was to separate boards and managers from their longstanding and usually mostly successful practice of keeping as much in-house as possible, saving money on these reports, kind of getting things done on a modest budget, which some communities did successfully, some others not obviously, but with these particular functions, the milestone and the SIRs, the statute is just abundantly clear that the intent is to take that decision making outside of the scope of the board and manager and put it into the hands of qualified professionals so that you can really ensure that your building, in its structural integrity, which is fundamental to everyone's safety, living in a mid and high rise condo, is really affected and governed by professionals whose job it is to ensure structural integrity and we have to accept it. This is not something that we're going to be able to push back against or fight against.
I get that question a lot. What changes do we anticipate in the statute? Will they relax things? People are trying to push projects off until the next legislative session. I'm not optimistic that we're going to see significant changes in the law, particularly not when it comes to the basics of the law and the inspection requirements. There may be some softening of deadlines, perhaps maybe some clarification of categories of review, but I think at this point, the genie's out of the bottle, the state has weighed in and said, we now care about the health of these buildings and we're going to mandate you to care as much as well to ensure that a Surfside never happens.
So we have to just, I think, accept that, we have to budget for it accordingly, and we're going to have to let the professionals do their job to help give everyone in the building peace of mind and ensure that these buildings, some of which are 30, 40, 50 years old, which I think John will get to later, can remain standing for theoretically another 50 years. And that's the goal here.
Jon Lemole, Esq.:
Cindy, I would imagine that there are probably a lot of older condo communities, middle income type communities that are really going to be affected by these requirements and they may have folks that just can't pay. And so what do we do? What does a board do in that case where just financially this is not doable, or maybe they have some that can and some that can't. What is some best practices that board members can think about in terms of those types of communities?
Cindy Hill, Esq.:
Well, looping back to the fiduciary duty of the board, the fiduciary duty of the board is to make the decisions that are in the best interest of the community. So to the extent that, let's say you have a scenario where 40 of the owners can pay whatever the costs are, but maybe five or six cannot, you can't prioritize the five or six and give them breaks that you would not give to the 40. So whatever approach you're going to take has to be fair and even. The other issue, that's the kind of harder one to take for those of us who do sympathize with people in life, and I would like to think that almost all of us do, is that this is a business. Your condominium, your HOA is a business, and to the extent you have owners who can't pay bills or can't sort out personal issues, it's not your issue to fix.
That's not to say you can't be sympathetic. It's not to say you can't listen, but it's not a board's job to help someone figure out how they can refinance their property. And it's a decision that a lot of people have to make at some point in life, which is, can I afford to stay where I am or do I need to move? And those are going to be hard things to hear, particularly if you have a larger group of owners. Going back to if you don't have five or six, maybe you have 20, maybe a 30, and you get told at a board meeting that you're booting them out of their house, that you're doing all these horrible things. As board directors and managers, you're going to have to remember you are taking action as part of a corporation. You are not an evil person, you are not a bad person.
These accelerated costs that are now coming down to condominiums are statutory, they are not discretionary. That being said, at the same time, your board can look at instead of maybe raising assessments at a higher rate right now, would it make sense to gradually raise them? Would it make sense to have a special assessment that can be paid off over time? That might help some owners. Would it also make sense to maybe take out a loan to help bridge the gap? But these will all be bridge the gap fixes, so to speak, because once the statutory deadline comes for the fully funding of the reserves annually structural items, there's not going to be this window to help bridge that gap between what's going to be much larger expenses from now to that time period.
So as you make these decisions, don't consider taking out a loan thinking somehow it's a resolution necessarily for what's coming. It may make sense for now, it may not. It may be that raising the assessments is going to help some people make some hard decisions sooner rather than later that may be better for them in the long run. So there are no answers to that other than I'd always encourage my boards to listen to complaints even when they feel painful. Listen to your owners, do what you can, but stand hard with [inaudible 00:39:20] this is a business and these requirements are statutory and going forward, it's only going to get more expensive, unfortunately.
Dan Greenberg, Esq.:
And speaking of the expenses, from what I'm seeing on proposals just starting to come in for the milestone and SIRs studies, we're looking at anywhere from two to $400 per unit milestone inspections, and for the combo platter, if you're going to use one firm to do both milestone and structural integrity reserve together, you could be looking at anywhere from four to $600 per unit.
So these are very expensive studies. And so when we talk about budgeting, although the full funding requirements don't hit until the 2025 budget, you really need to start now because you've got tens of thousands of dollars worth of engineering coming within the next 18 to 24 months. And then once we get those reports in hand, you're going to have one year to commence any repairs that are called for under the engineering study, the milestone protection. So within the next few years, it's very possible that you can be looking at tens of thousands of dollars worth of cost just to get you to the point of potentially remediating your building, which then could be tens or hundreds of thousands of dollars.
So this year's budget I think is really critical in a couple of ways. Number one, I would use this budget cycle to advise the owners of what's coming. You're going to have to use a three to five year forecasting plan, I think, because that's realistically what we're looking at. And those owners, to Cindy's point, those owners that are financially strapped or that are going to be financially strapped when these costs hit, they need to know that now, not necessarily in 24 months when $10,000 special assessment is going to have to be levied. You need to give them as much time as possible to start doing their own planning. And you may want to talk to your bank now and talk about opening up a line of credit so that you're not rushing to get funds, or if you're trying to avoid special assessments and a bank loan is a good option for you, start talking to them now.
Make sure that that relationship is solid and that money will be there for you. That is not a guarantee, by the way. And so depending on the health of your building on your delinquency levels, your leasing percentages, you may or may not qualify for traditional lending. So that is a conversation to have now in order to evaluate that because it very well may factor into your long term planning this budget season. And because we're going to have to start fully funding those accounts, the structural accounts in 2025, a lot of groups are starting to increase their reserve funding levels this year, those groups that are not fully funded just to try to lighten the burden in 2025 so it's not such a dramatic increase. So we really need to start this year, even though it's a couple of years off. I think you will be impacted immediately.
Jon Lemole, Esq.:
Cindy, so what I heard Dan just say is that the affected condominium associations are going to be facing engineering costs, they're going to be facing the possibility of having to do something as a result of the engineering inspection because we don't know what the engineering inspection is-
Cindy Hill, Esq.:
There will be something I think.
Jon Lemole, Esq.:
... going to say. So we've got all of these-
Cindy Hill, Esq.:
It could be a lot of somethings. Yeah.
Jon Lemole, Esq.:
Yeah. So we've got all of these unknowns about oh my gosh, we've got to pay the engineer, we may have to do some major repair projects in the future, how does an association prioritize right now? Do they just put a halt on any repair and maintenance projects until these reports are done? Did they have a continuing obligation to continue to do these maintenance and repair projects even though they may have a milestone inspection a year from now, which has additional things that need to be done? What is the association, the board's manager's duty around prioritization of their maintenance and repair obligations right now?
Cindy Hill, Esq.:
The new laws don't change any ongoing repair maintenance obligations that have been existing or continue to exist. The statute doesn't give any exceptions to that, doesn't allow the board to go, well, we were going to do this project but now we're not. At the same time, the board still has a discretion to decide that more aesthetic projects can be put on hold. But some of our associations are taking the approach, and I think it's a good way to do it, that to the extent they've already had some big projects in the works, they're getting them done before they do these studies and before they step up to the statutory requirements with the thinking that what these issues already done that will actually assist them in having a reserve study that won't be including a project that's right on top of what's needed to put it that way.
So, the statute doesn't change the obligations the board has to maintain the repair, the safety, the integrity of the buildings has to do whatever maintenance has been scheduled, but at the same time, getting it done right now might actually be a good decision before proceeding with some of these studies so that those items are 30 years out now, so to speak. I'm not going to give actual numbers for what the issues might be, but yeah, the obligations have not stopped, at the same time as a practical reality to the extent you might have been looking at changing the furniture in the entrance foyer, you might not want to do that now.
Dan Greenberg, Esq.:
Yeah, totally agree with that. If you can push anything, it would be those luxury kind of items right now because I totally agree with Cindy that the rest of the maintenance obligations in your declaration are not halted at all. You still have an obligation to maintain all the rest of the property as well, including your other facilities and capital improvements and amenities that these are items that the owners care about more so than all the stuff that we're talking about.
This now becomes your burden, but the reality is for most homeowners is they want the landscaping to continue looking nice and the gate to function and the tennis court to be not... They want to go on with life and the board has an obligation pursuant to the governing documents to continue maintaining other portions of the property as well. So this is just this additional sideline project that somehow has to be managed and funded while you continue on doing the ordinary business of the association.
So you may be able to find a little bit of room in this budget for some of the extra projects that you had in mind. Those may go fall to the wayside, but the other areas remain. So if you have your parking lot and you're due for a paving project because you've got potholes and whatever, even though that's not included in the structural integrity reserve study, your owners are still going to expect that they've got a nice parking lot and an entrance way to traverse. So that does not change and it's going to make it even more difficult for the board to manage everything else on top of the ordinary day-to-day obligations.
Jon Lemole, Esq.:
How are folks feeling, Cindy, you had mentioned this to me the other day. You were talking about the hurricane and you're hearing from a lot of associations about how to prioritize repairs relating to insurable events versus non insurable events. Talk a little bit about what you're hearing and what you're telling associations in regards to hurricane damage that they may have?
Cindy Hill, Esq.:
Yeah, from the maintenance obligations, because I could speak another 20 minutes on this, but just to give the quick on down to the extent that a unit owner's responsible for maintenance of certain areas doesn't mean that they're responsible for hurricane damage. The associations generally have the insurance coverage on your structural parts of the building and the association's going to be looking to their insurer to get these matters resolved. So I strongly advise if there's any question about any hurricane damage to the structure of you're building as opposed to maybe an owner who, oh, I don't know, left their door open and the rain came in, get with your counsel because these distinctions are very important. If you don't take the right path early on after an insurable event such as a hurricane, you may find that later on you lost opportunities for insurance coverage. So don't make any presumptions.
Contact your association counsel on these issues. The other thing I am seeing is some of the vendors don't understand, the mitigation vendors who are coming in and doing the dry out and clean up, some of them don't understand that condominium buildings or not apartment buildings. I was on the phone with a vendor earlier this week who was insisting that the association hire him to just remove everything from everyone's unit and just dump it in a dump and you can't do that.
And he was insisting, well this is how I've always done it. I do this, I've been doing this for 30 years. Who are you? What do you know? Okay, well no, don't let vendors insist that because they've been doing this work that they know how to address a condominium. I was telling this vendor, I'm not questioning what your issues are in terms of knowing that water damaged items [inaudible 00:48:43], what I'm telling you is you can't just carte blanche in a condominium, go and take out everyone's property. It doesn't work that way. So I strongly advise everyone on the call if there's been any hurricane damage to a property you manage or that you live in, that you contact your counsel and make sure that these issues are being addressed properly. And again, I could spend half an hour on that. I don't want to go down that path. But now is the window to get with your counsel.
Dan Greenberg, Esq.:
Couldn't agree more. It is imperative that you do so. Then the last comparable event that we had, at least here in the Tampa area was Irma, and unfortunately everyone was kind of asleep at the wheel when that one hit. No one had dealt with that magnitude of damage. There was a lot of confusion about what was covered by association insurance policies, how that dovetails with individual homeowners HO6 policies, how to document things, how to file claims, whether we should allow owners to do work within their unit or whether we should control it.It was a nightmare. And a lot of clients I think were prejudiced by not having a plan in place or at least a proper response. So if you are a southwest Florida client and you've been affected, I could not agree more with Cindy, this is an issue that you've got to let your property manager work with your attorney help resolve in order to maximize your insurance recovery and minimize your output for issues that really may not be an association responsibility.
These are tough issues to work through and the magnitude typically exceeds what the property management firm can reasonably handle. So you normally do have to get the attorney involved at least to help provide guidance in a situation like this. So I know we got very lucky on our side of the bridge, but I know many of you down further south did not. So any of us on the call that can be of assistance to you, do not hesitate to reach out.
Cindy Hill, Esq.:
Yeah.
Jon Lemole, Esq.:
And let's take a few minutes, so let's talk about condo termination real quickly. Again, we could spend an hour or two on the topic. Here's an interesting statement that we uncovered in the early '80s. Robert Crane, a well known engineer in the condominium construction defect world, was asked by HUD to opine on the anticipated useful life of condominiums buildings built in Florida. His conclusion was 50 years. Are we going to see a major uptick in condominium seeking termination? Cindy?
Cindy Hill, Esq.:
I think you will. I don't know how the [inaudible 00:51:23] is. I don't know if the we're going to see it as much in this area, for instance, as they will in south Florida where a lot of condominiums that were built down there, there's a lot more volume, a lot of older ones. Going back to the issue of can people afford this? Do they want to afford this? It may make sense for a 50 unit condo that was built in 1974, is close to the water, has not been well at maintaining reserves, all a hypothetical. But those owners might get together and decide, you know what? It's going to cost a prohibitive amount of money per special assessments, per raising our assessments to address these issues that are now being imposed on this by the legislature. Would we rather get together and look for a developer to buy our property? I think those conversations are going to happen. I think that the developers are ready to have those conversations. Are we going to see-
Jon Lemole, Esq.:
They're always ready for those conversations, I would imagine.
Cindy Hill, Esq.:
Yeah, exactly. And I don't think so. I think a lot of people people have bought condominiums for the purpose of enjoying the Florida lifestyle. Some of them also bought for the purposes of Airbnb or rental income. People weren't ready to turn around and suddenly give up their investments. So I don't know that we're going to see a large intake in it, but we are going to see it. It's going to happen. What are your thoughts on that, Dan?
Dan Greenberg, Esq.:
I agree. I think it's going to be certain specific subsets of condominiums, typically the older ones that folks have been living in since maybe the '60s and '70s and that are more fixed income, older crowd, but yet those buildings are treated the same as any other newer project. They have to be maintained and maintenance is expensive, and particularly in those older buildings that have kind of eschewed full funding of reserves and done minimal maintenance on the buildings, which unfortunately there are plenty in that boat.
For those types of communities where owners may be faced with tens of thousands of dollars worth of special assessments to reconstruct their buildings, that's probably the prime example of the group that may want to consider termination. I agree with you. For most other condos that are kind of middle aged so to speak, I think you're going to probably just suck it up and do the assessments, take the bank loan, reconstruct the project, even if it's a half a million or a million dollar reconstruction project, the reality is the investment is worth it and most owners are going to agree that this is what has to be done.
I'm not looking to give up this condo for all the reasons that you mentioned, so let's just get it done. I think we're going to find mostly a get it done attitude, but there will inevitably be some groups that just simply cannot bear that burden. So I think we'll have a handful of terminations throughout the state and it's an opportunity for redevelopment. We'll look at it positively. I suspect that this will lead to some good development and for the rest of us, I think we're just going to have to bear an increase financial burden to get our buildings into the condition that they should be in. But whenever I give this talk to my clients, I always remind them that what the legislature is now forcing us to do is something that we all should have been doing for the past three or four decades. So they're now just controlling the situation.
I think what we found was that the hands off nature of reserves and building inspection and maintenance requirements throughout the past few decades has come back to bite us a little bit. Some groups have been very good about it, others have not been. And now we're all being forced to look at the condition of the building, which should be of the upmost importance anyway to all owners living in a mid and high rise building. What could be more important than ensuring that the building itself is healthy and in good conditions? So before we go complain and I'll write millions of letters to our legislature saying, please get rid of these requirements, think about what you're asking for because I think at the heart of this legislation is good intent and it's for everyone's safety and I think we are going to have to just do it.
Jon Lemole, Esq.:
Good information, Cindy, Dan, appreciate it. Let's get to a couple of questions because we're almost at noon. Let's talk about windows because that's still an area where everybody scratches their head and goes, well we don't cover windows. It's not within the maintenance. They're part of the units. Cindy, [inaudible 00:56:08], were they talking about that at all? Was there some clarification on the thinking around windows and who's responsible for why windows are in subsection G?
Cindy Hill, Esq.:
Well, I actually tried to answer that in the chat and sending it to one person instead of the group. I'm not the most tech savvy person. The consensus seems to be that the legislature did not intend to nuance that issue. If the association is responsible for the windows, they're going to have to reserve the windows. If they're not, there's no mechanism in there where they force the owners to do it. So the consensus seems to be take the statute as it's written. If the list applies to you, you apply it. If components of the list don't apply to you, you don't apply it.
Dan Greenberg, Esq.:
Yeah, I agree with that. And the one conversation I had with an engineer about that point specifically, they said the same thing, which is that they will get an opinion from the association's attorney as to whether or not the association is responsible for the replacement.
Cindy Hill, Esq.:
Oh, that's an excellent way to proceed.
Dan Greenberg, Esq.:
So we are not responsible for window replacement, it's going to be a zero in the report, and the other things I guess I'll just put out there from conversation with the same engineer, with respect to the foundation and the structural members, which are two categories that everyone has a lot of concern about because at first blush we were all thinking, well, how are they going to value the foundation of a 20 story building? That's insane. That would be millions of dollars or something. So the answer that I got was that it's probably also going to be a zero because from an engineering perspective, there's no work that has to be done to the foundation of the building unless there's some issue or some degradation, which that can then usually just be fixed with some concrete restoration or shoring. So it's not going to be a replacement cost.
You don't replace the foundation of a high rise condominium. Same with the structural members. So what I think is going to happen when these SIRs start getting promulgated is that you're going to have some concrete restoration, deferred maintenance on those items and the engineers will kind of tell us that [inaudible 00:58:24] you probably look at those and maybe you do have to do a little bit of touch up work, but it's not an actual replacement.
But you have to remember that reserves have always contemplated deferred maintenance as opposed to just replacement. Deferred maintenance means we can do something to that component without replacing it, but it's extending its useful life, like an elevator modernization. We don't have to swap out the whole cab. We can do for a third of the price a modernization and get another 30, 40 years out of that elevator, for example. So we may end up having deferred maintenance costs as opposed to replacement costs, and it may be less than we were all initially anticipating or fearing.
Jon Lemole, Esq.:
Right. There's a question, do you need to order a SIRs from an engineer or can we rely on our reserve study provider? I think that's pretty clear, right? The SIRs, at least the visual inspection portion of the SIRs, has to be done by an engineer. A licensed engineer or architect in Florida needs to do the visual inspection of the structural components of the building.
Cindy Hill, Esq.:
Yeah. Otherwise you're not going to get-
Jon Lemole, Esq.:
The reserve calculations could be done by a reserve study provider, correct?
Cindy Hill, Esq.:
Yeah. Otherwise you're not going to get a professional assessment. I'll just give an example, after the hurricane, my parents had damage on their tile on their roof and I went over their house and told them, because they're snowbirds, and then the roofer went out there and said, actually the damage is worse than you think because there must have been some sort of a whirlwind that moved tiles on the top of the roof. My visual inspection didn't reveal that. The roofer revealed that. So I'm making a point that's a bit facetious, but the point I'm trying to make is don't go cheap on this. Make sure that you're getting the proper professionals to give you the reports you need because these reports are going to be relied on for many years and you don't want to set your association up with a bad beginning.
Dan Greenberg, Esq.:
A 10 year report. Both of these, the milestone and the SIRs are certified for 10 years, and what the statute says is, like Jon said, with the SIRs you still have to have an engineering component. So to answer the question, some reserve companies are going to have engineers on staff that can satisfy that component of the statute. So some of the reserve companies that you've been working with may be set up to do that, or they may partner with an engineer to come in to do the visual inspection part, then they will build out the reserve component.
Some of the engineering firms are doing both. They've basically staffed up so that they can provide reserve schedules as well or some of them have been providing reserve schedules for years. So you may end up using the same firm for both. You may have two different firms, but if you have two, they're going to have to talk to each other because we want the SIRs group looking at that milestone inspection so that we're kind of jiving and you don't get disparate reports either.
So ideally, sure, using one company would be great. The problem there is if you are less than 30 years old or 25 years, if you're within three miles of the coast, you don't want to do the milestone inspection early most likely. The SIRs requirement hits before the milestone requirement. The SIRs, everybody is three stories or higher, is by the end of 2024. Milestone is tied to the age of the building. And if you do the milestone early, you're creating an extra reporting cycle for yourself. And as we discuss, these are expensive reports.
So if you're a 15 year old building and you're not due for another 10 or 15 years on milestone and you do it now just to knock it out with your SIRs, you've created a full extra cycle of milestone inspection for your building, which could cost you tens of thousands of dollars. Now if you want the peace of mind to do that, by all means go ahead, but don't let the companies talk you into doing both because they say it's going to be more convenient. You'd really need to be sure that you're okay with that and it meets your long term plan because you're not obligated to do that milestone now or by the end of 2024 if you are a younger building.
Jon Lemole, Esq.:
Cindy, last question. Cindy, question was asked, I'm not going to read it verbatim, I'm going to interpret it a little bit, but you had said that the division of condominiums is taking the position that even a two story condo has to have full reserve funding for the reserve items that are specified in that subsection G, which defines what needs to be reserved for and included in instructional integrity reserve study. Does that also mean that those condos can also use those reserves for other uses? In other words, they have to keep those reserves for that specific purpose as well. So they're equally in the same reserve funding and reserve management regime as a three-story building would be.
Cindy Hill, Esq.:
That's correct. So to use the roof is an easy one because every building has a roof, funding is now going to only be able to be used for the roof. You're not going to be able to use it for other components that are part of that, what we call paragraph G, the structural components.
Jon Lemole, Esq.:
And that's across the board for everybody.
Cindy Hill, Esq.:
Per the division's take on this, and it's been the one that's really the conservative way to read the statute, candidly, to the extent it was surprising to hear the division say it out loud because they are so just touchy about not saying things other than what they've written. It makes sense. These are components that are of course bigger safety issues with larger buildings, but going back to some of the points [inaudible 01:04:04] have made, and Dan brought them up in terms of when you are avoiding a big structural necessary item, you're imposing a financial falsehood on some of your owners and they can end up with big bills they can't afford. So I think it makes logical sense even though it's painful to have these items be maintained in a way that everyone can feel that, hey, to the extent maybe we can't remodel the clubhouse, we know we have the money to do the roof and nobody's going to do $30,000 assessment because we didn't have the money.
Jon Lemole, Esq.:
Well, I want to thank both Dan and Cindy for this great information. I want to thank all of you for joining us. I hope you came away from today with some good ideas and some best practices for having some of these discussions in your communities and managing expectations of the members of your communities and dealing with a lot of the things that you're going to have to be dealing with in the coming months and year. And as always, we apologize if we couldn't get to everybody's questions in the chat.
Cindy Hill, Esq.:
Yeah, there were a lot. So definitely.
Jon Lemole, Esq.:
There were a lot today. But we would encourage everyone, feel free to email either our firm, You can email myself, Cindy, you can email Dan Greenberg, and we will be happy to take a look at those questions and provide some thoughts around those as well. And again, if you would like a copy of the presentation PowerPoint, you can email Michelle, I know a lot of you have asked for it in the chat and Michelle is monitoring that. And in about a week or so, maybe two weeks, we'll have this whole presentation both in video and transcribed up on our website, which is www.tlhlegal.com.
Daniel Russo:
Can you give us the Florida statues that you've been referring to in sub section G?
Cindy Hill, Esq.:
It's 718112 paragraph two, paragraph G.
Jon Lemole, Esq.:
Okay, thank you everybody.
