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.
