Condos’ reserve funds, delayed repairs under new scrutiny since Surfside tragedy | Nation/World

TALLAHASSEE, Fla. — The deadly collapse of Champlain Towers South in Surfside has brought a little-noticed loophole in Florida law to the attention of lawyers, condo management companies, Realtors, insurance companies and consumer advocates.

Called the “kick the can down the road” provision by one attorney, Section 718.112 of the Florida Condominium Act allows condominium associations to waive the rule that their boards set aside adequate cash reserves to pay for needed building improvements. All it takes is a simple majority vote of the condo unit owners who show up at a condo board meeting to postpone the need for expensive set-asides.

But amid reports that the Champlain Towers South had just over $777,000 in reserves to pay for what was estimated by inspectors as a $16.2 million repair bill, and concerns raised by structural engineers about the upkeep of the building, questions have emerged about whether the legal loophole is allowing maintenance to be dangerously deferred, especially in the state’s most aging high-rises.

Now, many interest groups and public officials want the law to be updated.

“Going forward, unit owners should not be allowed to completely waive the funding of reserves — that’s giving them a rope to hang themselves with,’’ said Eric Glazer, of Glazer and Sachs, P.A., a Fort Lauderdale law firm that specializes in condominium law and trains condo boards to understand their legal and financial obligations.

The challenge, several experts said, will be how to strike a balance between mandating reserves and maintenance to prevent tragedy and giving associations discretion over decisions that will cost homeowners more money.

“I am not saying we take away the power or the discretion of the board totally, but we may have to make it more precise, more specific so the board members know what they have to do to protect the lives of their residents,” said William Sklar, an adjunct professor at the University of Miami School of Law and the chair of a task force assembled by The Florida Bar.

The Florida Bar on Friday convened the Safety Task Force of the Bar’s Real Property, Probate, and Trust Law Section to come up with recommendations for legislation and regulations that could help prevent a future condo tragedy.

A similar task force is being created by engineers. Also calling for stronger reserve requirements is the Community Association Institute, the organization that represents condo boards and managers, as well as Realtors and insurance companies.

Miami-Dade County Mayor Daniella Levine Cava has assembled a group of subject matter experts to analyze what more the county should do to prevent a future tragedy, and Miami-Dade State Attorney Katherine Fernandez Rundle will lead a grand jury investigation into broader building safety issues.

For condominium activist and former state legislator Julio Robiana, however, the attention to the issue he spent eight years pursuing as a state legislator is welcome, but bittersweet.

Robaina, a North Miami Republican, worked to change the law to ensure that condo associations, which are composed of condo owners, are required to conduct more regular safety inspections of their buildings and set aside enough money to make needed repairs. But the measures were repeatedly opposed, often by many of the same organizations now calling for change.

“A lot of groups lobbied against it — [a] lot of law firms, even some property management companies,’’ Robaina recalled last week. “Because, at the end of the day, they didn’t want to put any burdens on the decision-making of the board members who would have had to make those decisions that would have probably prompted special assessments.”

Glazer explained that one of the most frequent opponents to the law change was “attorneys who represent developers, because when the maintenance is more [expensive], it’s harder to sell units. And so the Legislature cares about giving developers the ability to sell units.”

In 2008, Robaina sponsored a condominium reform bill. For two years, Florida had a reserve requirement in place. Robaina said he believes if it hadn’t been repealed in 2010, it might have prevented the Surfside tragedy that left at least 94 dead and dozens of others missing as of Monday.

“They would have a grasp and an understanding of where that building was, and it would have made it easier to understand the need to sock away money in the future,’’ he said. “If they would have had funds in a fully funded reserve when they were alerted to the need for repairs a couple of years ago and they had the funds sitting there, I don’t think this board would have been so hesitant because they had no reason to hesitate.”

Imposing mandatory reserves was one of several reforms vigorously sought by a group of condo activists after former Gov. Jeb Bush, a Republican, and the Florida House convened two working groups nearly 20 years ago that made a series of recommendations on strengthening homeowner rights.

“It wasn’t my idea,’’ Robaina said, but grew out of demands from condo owners who attended hearings held across the state. “Their No. 1 concern was there wasn’t enough maintenance being done on their buildings.”

The challenge was that raising funds to pay for the improvements had become a tug of war between owners, who often lived in the building and saw the need for improvements, and absentee owners who often relied on the property for investment purposes, he said.

Rather than mandate that reserves be set aside, Robaina, who chaired the House select committee, recommended requiring that any condominium building greater than three stories in height conduct an inspection every five years “attesting to required maintenance, useful life, and replacement costs of the common elements.”

Condominium associations would be required to prepare an annual financial report that included an estimate of what it would cost condo owners to pay for the maintenance issues uncovered in the inspection reports. The financial report was also required to show whether the condo association’s reserves were being funded at a level sufficient to prevent the need for special assessments and, if not, specify the amount of assessments necessary to bring the reserves up to the level necessary to avoid the special assessments.

In 2008, the Florida House and Senate unanimously passed Robaina’s bill, HB 995.

Then-Gov. Charlie Crist signed the bill into law. But two years later, as the Great Recession roiled the real estate market, legislators repealed the five-year inspection requirement — and the requirement that the annual budget reflect the reserve needed — in two separate bills.

Former state Rep. Gary Aubuchon, a Naples real estate broker, tucked the repeal of the five-year inspection language onto page 101 of HB 663, a 102-page bill that addressed a host of other building safety issues such as abandoned property and smoke alarms.

A separate bill, SB 1196, filed by former state Sen. Mike Fasano, now the tax collector in Pasco County, also removed the language that required condo associations to rely on inspection reports when disclosing whether their reserves were funded at a “level sufficient to prevent the need for a special assessment.”

Both bills passed with near unanimous approval, and Robaina voted for both of them. He said Friday that because the provisions were tucked into larger bills and not discussed, he did not realize what was in them. “It’s the repercussions of not reading everything.”

Crist signed the bills into law, and the repeal was not given much attention.

Some condo law experts say it was pushed by the powerful development and construction industry when the state and the nation were still recovering from the 2008 housing boom and bust. Condo sales had dropped, and many developers had been unable to relinquish control of condo associations — and state mandates that came with them — because they had yet to meet the threshold for sold units.

“All the speculative building that was happening was screeching to a halt and all these developers are now holding all of these non-performing assets,” said Charlie Jimerson, a Jacksonville-based attorney who has represented hundreds of condo associations over nearly two decades.

Now a Democrat challenging Gov. Ron DeSantis in 2022, Crist noted the near unanimous vote by the state Legislature and said in a statement that he now wants the governor and Legislature “to take swift action to require high rise condos to undergo regular, thorough inspections, to mandate financial reserves, and create low-cost loan options to pay for major structural repairs.”

He said the Surfside condo collapse “could have been avoided,” and while an investigation has yet to determine exactly what caused the collapse, “it is clear that there is not enough regulation of older condo buildings.”

For his part, DeSantis has said that he thinks Champlain Towers South “had problems from the start” but last Wednesday would not commit to any state action to address concerns about aging buildings.

An inadequate cash reserve is a common dilemma plaguing condo associations across the state, a concern that has become almost inescapable in the aftermath of the Surfside condo collapse.

Many condo associations, run by elected volunteers, can be reluctant to implement assessments that build up reserves for needed repairs and maintenance, as they come under pressure to keep required fees low to avoid fights with neighbors.

“They don’t want to create financial obligations for one another, for themselves or for their neighbors,” Jimerson said. “They approach problem-solving from a perspective of how we can get by in the most fiscally prudent way possible and that requires pinching pennies on service providers, it requires pinching pennies on reserve studies, and it results in a lot of can kicking,” he added.

To accommodate penny-pinching condo boards, Florida lawmakers adopted a provision in the Florida Condominium Act that allows them to waive the reserve requirement with a majority vote of the condo association members.

Jimerson said a “very low percentage” of condo associations he has encountered maintain adequate reserves. Oftentimes, he says it is because they were reluctant to pay for a reserve study, a blueprint for action that takes into account engineering factors and financial projections to determine how much residents should regularly contribute to prepare for future expenses.

Lawyers advising condo associations also recommend that boards approve the reserve waiver.

“If a budget with fully funded reserves is going to impose an undue economic burden on the unit owners, the best choice for the board is to call an owners’ meeting and ask that the owners vote to “partially fund” the reserves,” writes Joe Adams, a lawyer in the Fort Myers office of Becker Poliakoff on his Florida Condo and HOA Law blog.

“Certain procedures must be followed, but it is not complicated,’’ he continued. “If a majority of the owners voting at a meeting approve the partially funded reserve (which could include some “phased in catch-up” amounts if desired), that would be legally proper.”

Associations of older condominiums are more likely to keep reserves that are inadequate to pay for what is needed, Sklar said. That primarily includes buildings built before Hurricane Andrew devastated South Florida in 1992, when there were less stringent building code requirements in place and may be ”more apt to have the need for inspections to determine if there are structural issues.”

In Florida, where millions of people live in condominiums, mismanaged reserves and building maintenance can lead to injuries or homeowners’ financial ruin.

“I have a lot of horror stories, where there have been communities that just flat out did not pay attention to the symptoms of faulty construction, and they didn’t have a proactive approach to conducting inspections and reporting, so it became a real serious, life-safety type of issue,” Jimerson said.

Some homeowners were forced to forfeit their homes in foreclosures because they could not afford hefty special assessments that were imposed to make up for the lack of reserves. Other condo owners were dragged into costly court battles to come up with the money.

“Litigation is not cheap, and of course, raising money to fund the litigation is something that often merits special assessment, so that can be a challenge,” Jimerson said.

For Jan Bergeman, founder of Cyber Citizens For Justice, a property owners’ advocacy group that also runs the Florida HOA and Condo blog, the system is designed to encourage litigation, and he is skeptical deep reforms will come of the statewide review.

“You have attorneys and [condo property managers] who cheer these boards on because they know it will cause trouble and trouble makes them money,’’ he said.

By contrast, he said his organization has collected dozens of complaints from condo association members who want their boards to focus on structural repairs but instead see money spent on cosmetic improvements to their buildings.

He said the board of the Palace Condo, a 40-story high rise on Miami’s Brickell Avenue, is now assessing its members $6.8 million to replace metal railings with glass and cited as the reason, according to emails supplied to the Miami Herald, “to facilitate repair and prevent future water intrusion.”

But some members of the 200-unit condo have complained about the expense, arguing that it appears to be intended for cosmetic purposes.

“The board is now being questioned actively by a lot of owners about our railings,’’ said Alberto Bengolea, one of the owners who is among those raising concerns. “They say their engineers have determined that maybe 5% of the railings need some work, period. But the decision is to remove all the railings in the building and put in trendy glass railings. That’s crazy. … It’s always cosmetics over structure.”

One of the most common proposals emerging from the various groups is to restore the requirement removed in 2010 and force condo associations to produce reserve studies that detail how much should be held in reserves to pay for certain maintenance projects — such as roof replacement, pavement resurfacing and other large capital projects.

“The reserve issue is going to be one of the central issues in the discussion,” said Adams, the Becker Poliakoff lawyer and the member of the Florida Bar task force. “Everything is on the table.”

©2021 Miami Herald. Visit miamiherald.com. Distributed by Tribune Content Agency, LLC.

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