Florida law requires every condominium’s
annual budget to include both operating expenses and
reserves for capital expenditures and deferred maintenance.
Operating expenses are those incurred during the day-to-day
operations of the condominium (e.g., landscaping, pool
maintenance, and management fees). Capital expenditures and
deferred maintenance, on the other hand, are those incurred
during the sporadic repair or replacement of major
components of the condominium property (e.g., the roof,
parking lot, and exterior painting).
To properly budget for reserves, condominium associations
must conduct a reserve study. A reserve study is a long-term
financial planning tool that analyzes the physical condition
of major components of the condominium property, and their
estimated repair or replacement costs. By determining these
factors, condominium associations can then accurately budget
for capital repair and replacement expenditures over time.
For example, if a condominium needs $1 million to replace
its roof in 10 years, its next annual budget should include
$100,000 in reserves. Ideally, the association will continue
to reserve $100,000 each year for the next 10 years in order
to raise the necessary $1 million by the time the roof needs
to be replaced. A reserve study takes this general formula
and applies it to every major component on the condominium
property.
The Problem
Because long-term repair and replacement is inevitable for
all condominiums, one would think that every association
would conduct a reserve study and regularly set aside
reserves. But this has not been the case. Until recently,
Florida law did not require condominiums to conduct reserve
studies, and, despite annual budgets being obligated to
include reserves for capital expenditures and deferred
maintenance, associations were previously allowed to waive
or reduce reserve contributions through a membership vote.
Unit owners often exercised this ill-advised option to keep
assessments as low as possible and/or to avoid paying for
major components scheduled to be repaired or replaced, which
they contemplated would be after the sale of their units.
Continuing with the example above, if unit owners
contemplated selling their units in less than 10 years, and
therefore would not directly benefit from the new roof, they
were likely to vote to waive or reduce the $100,000 in
reserves. By doing this, the unit owners simply kicked the
can down the road for themselves, or they literally passed
the financial burden of the new roof on to the subsequent
unit owners. Either way, this practice illustrates why so
many condominiums are severely underfunded.
The “Solution”
Senate Bill 4-D (“S.B. 4-D”), which was enacted in May 2022
in response to the collapse of Champlain Towers South,
attempts to address the foregoing problems. It amends the
Florida Condominium Act (“Act”) in two significant ways with
respect to condominium reserves. First, condominium
associations must now have a structural integrity reserve
study (“SIRS”) completed every 10 years after the
condominium’s creation for each building on the condominium
property, that is three stories or higher in height.[1] The
Act defines a “structural integrity reserve study” as:
[A] study of the reserve funds required for future major
repairs and replacement of the common areas based on a
visual inspection of the common areas. A structural
integrity reserve study may be performed by any person
qualified to perform such study. However, the visual
inspection portion of the structural integrity reserve study
must be performed by an engineer licensed under Chapter 471
or an architect licensed under Chapter 481. At a minimum, a
structural integrity reserve study must identify the common
areas being visually inspected, state the estimated
remaining useful life and the estimated replacement cost or
deferred maintenance expense of the common areas being
visually inspected, and provide a recommended annual reserve
amount that achieves the estimated replacement cost or
deferred maintenance expense of each common area being
visually inspected by the end of the estimated remaining
useful life of each common area.
Second, beginning in 2025, members of a unit
owner-controlled condominium association may not elect to
provide no reserves or less reserves than required for the
following building components: (1) the roof; (2)
load-bearing walls or other primary structural members; (3)
floors; (4) the foundation; (5) fireproofing and fire
protection systems; (6) plumbing; (7) electrical systems;
(8) waterproofing and exterior painting; (9) windows; and
(10) any other item that has a deferred maintenance expense
or replacement cost that exceeds $10,000 and the failure to
replace or maintain such item negatively affects one or more
of the components above, as determined by a licensed
engineer or architect performing the visual inspection
portion of the SIRS.
The changes to the Act are intended to prevent another
tragedy, but some of the newly identified building
components are questionable at best. No one doubts, for
example, that a foundation is vital to a building’s overall
structure. But performing a visual inspection of this
component is extremely difficult or practically impossible
without substantial destructive work. The new legislation
ignores this reality and arguably requires the inspector to
assign it a useful life in the SIRS so the association can,
in turn, establish it as a reserve amount. Equally elusive
may be determining the useful life of the condominium’s
floors, load-bearing walls, or other primary structural
members.
The new legislation also adds windows as a SIRS item, but in
many condominiums unit owners are responsible for replacing
and repairing the windows that are considered part of the
units. This exemplifies the potential discrepancies that may
now exist between a condominium’s governing documents and
the new legislation. These ambiguities not only burden the
condominiums, but also the licensed architects and engineers
that are supposed to perform SIRS inspections for
determining mandatory reserve contributions.
Conclusion
At this point, the only thing that seems certain for many
condominiums, is that assessments are going to increase.
Even if the legislature addresses S.B. 4-D’s technical
problems, it is unlikely that the structural integrity
reserve study and mandatory reserve requirements will go
away. This means, at the very minimum, condominium
associations will have to pay for structural integrity
reserve studies, and they will have to begin setting aside
reserves for the new components listed above, as well as
make up for any underfunded reserves that were previously
waived or reduced.
The new legislation is truly a “time to pay the piper”
moment for older condominiums where skipping a reserve
study, and/or waiving or reducing reserves has been an
annual tradition. Also, when these new reserve requirements
are tacked onto other association expenses, such as repairs
for substantial structural deterioration and/or rising
insurance premiums, some condominiums may learn that the
price tag of continuing on is simply not achievable.
[1] A condominium’s initial SIRS must be completed prior to turnover from the developer, or for unit owner-controlled associations existing on or before July 1, 2022, by December 31, 2024.