Imagine checking into a hotel tomorrow.
You are greeted at the front desk and, after a night’s stay,
at checkout, you are presented with a bill that is $100,000
more than the standard room charge of $100 per night you
were advised of prior to check-in. When you dispute the
bill, the hotel manager explains by stating, yes, you did
receive the same room that the hotel used to charge $100 a
night for, but for the last 10 to 15 years, the hotel has
had guests stay in that room [and all its other rooms at the
hotel] at the rate of $100 per night, and the owners just
learned they would need to invest funds to renovate your
room and all the other hotel rooms next month due to 10 to
15 years of significant wear and tear. You were just unlucky
in that you checked in when the renovation bill came due
today.
The folly in this example is apparent as it relates to a
hotel, but it exemplifies the pervasive (and perhaps even
reckless) behavior of condominium associations. Most
condominium boards and management companies operate under
this premise: Live/fund for today, don’t establish adequate
reserves for maintenance and replacement requirements, and
don’t worry about paying the bill until its identified in
the future — and even then, kick that can down the road for
a few years until the board and the residents come to the
realization there is no further road to kick the can down.
Then they find themselves under the gun and must line up
funding via special assessments, lines of credit or both.
That’s the situation in which the Champlain Towers’ board
and association members found themselves.
On July 29, the New York Times published an op-ed written by
David Haber, a Florida attorney specializing in condominium
law. In the article, Haber reviewed the practical business
reasons that led to the Champlain Towers board’s failure to
fund repairs and what, in hindsight, the public now knows:
There were immediate and necessary repairs that could have
reduced the likelihood of catastrophic failures at the
Surfside oceanfront condominium.
We leave it to the engineering experts to forensically
reconstruct precisely how the disaster occurred, while
municipal officials throughout South Florida are now
scrambling to identify and assess any crack or fissure in
high-rise apartment complexes. We would suggest, as Haber
did, that the real fissures and failures in this story are
the lack of adequate disclosures in most condominium
association financial statements. Specifically, these
failures are found in the massive reserve deficits that
continue to exist today among condo boards throughout
Florida, as compared to the significant levels of funded
reserves actually needed to meet basic, known maintenance
and replacement requirements.
Compounding this issue is the vast numbers of condominium
units/owners in Florida — 1.5 million of them, the largest
number of condo owners in any state. Recent data from the
Florida Department of Business and Professional Regulation
reveals there are over 26,800 condominium associations and
over 12,900 homeowner associations throughout the state. We
have proposed practical and simple changes for these
associations to fix the financial failures that led to the
tragedy in Surfside.
Make reserve funding required
Florida should immediately require every condominium
association and board, both those currently in existence and
any formed in the future, and including developer-controlled
condominium associations and boards, to conduct a structural
[top to below ground] engineering review combined with an
asset reserve study prepared by a licensed, insured and
bonded professional qualified and experienced in such
matters.
That asset reserve study would do two things. First, assign
a lifespan to every significant asset (including the main
building structure, balconies, pool(s), landscape, and other
large dollar value assets), and then, from a prudent
financial and accounting position, pair those assets with a
targeted cash reserve fund account(s) to be funded ratably
over the expected useful life of each asset.
Ideally, funding each of these targeted reserve accounts
would begin once the building is completed and before the
developer turns over the association to the residents. That
way, on the day residents take control, the accounts are in
place and can continue to be funded by the residents to
conform with the asset values found in the study. In
addition, the developer and unit owners would be required to
disclose to potential buyers an estimate of the future
reserve-funding requirements in total (including common area
maintenance expenses) and estimates of how much each unit
owes in future reserve funding.
Don’t perform your own surgery
Of course, we don’t live in an ideal world. Hundreds of
condominium associations have already been turned over by
developers to the unit owners, and unit ownership has
changed hands many times over. In some cases, major assets
are either near or past their expected useful life without
reserves set aside in cash in an account waiting to be used
for either maintenance of those assets or replacements.
For these latecomers, we recommend the condominium
association establish a line of credit with a bank, which
can be timely used for asset maintenance and replacement
requirements, taking in consideration predictable future
inflation. This would allow a board to stage assessments and
increases in monthly maintenance to be paid by the unit
owners over a reasonable time period, so that no unit owners
are hit with a sudden, large assessment.
It is vital that skilled and educated professionals oversee
targeted reserve fund accounts and the respective funding.
Simply imposing fiduciary responsibilities over lay board
members has proven to be an experiment whose failure cannot
be permitted to occur ever again. Just because a board has
been given the fiduciary duty to oversee condominium
finances does not make board members professional
fiduciaries. You don’t perform your own surgery, and as the
old saying goes, people who represent themselves in court
have fools for clients. Similarly, reserving fiduciary
authority over targeted reserve funds to skilled and
experienced fiduciaries will result in safety and security
for all condominium residents.
Unintended consequences
Mandatory reserve funding would result in a drop in the
value of each unit, which, in turn, would have a significant
negative effect on local and county property taxes. In other
words, large special assessments and/or increased monthly
maintenance fees invariably drive down the value of the
units in a building, resulting in a consequential reduction
in property values and resulting in lower property tax
assessments and corresponding lower local and county
property tax revenues.
To offset this, the state of Florida should provide
statewide tax credit initiatives to cities and counties,
which must then pass them on to condo unit owners. That way,
they are incentivized to fund special assessments and
increase monthly maintenance fees to a level necessary to
properly fund appropriate and adequate reserves.
The offset, while not on a 1:1 ratio, should be significant
enough to incentivize a drive to raise special assessments
and monthly maintenance fees so that every association
reaches targeted funding within a sufficient time to meet
critical asset maintenance and replacement requirements. The
effect of the tax credits should offset the devaluation in
unit values and the negative effect on local and county
property tax revenues.
In order to develop a framework for the changes we propose,
we suggest convening a special commission composed of
insurance, financial, banking and legal professionals;
developers; and a bipartisan group of political leaders.
Working together, we can develop real-world, practical and
workable solutions that will result in avoiding the failures
that caused the Champlain Towers catastrophe. Reining in the
discretion presently afforded to condo associations will
provide them with more protection in the future.
Ira Lampert is a business advisor. David
Weiss is president of the Hawks Landing Property Owners
Association and a business executive and attorney.