By Deborah Goonan, Independent American Communities email@example.com
HOA bills that address building safety inspections, infrastructure repairs, reserve studies — and how to pay for them — have been introduced in five states. Here’s a status report.
Companion condominium building safety bills in FL House and Senate die in committee as 2022 legislative session ends
The intent of Florida’s HB 7069 — and SB 1702, the House Committee Substitute bill — was to prevent another catastrophic building failure, like the sudden collapse of Champlain Towers South in Surfside, FL, in June 2021, which resulted in the death of 98 occupants. According to the state’s legislative website, last week HB 7069 was ”indefinitely postponed and withdrawn from consideration.”
Although several other HOA and condo bills that had been filed for 2022 had been stalled (more on that in a future post), it had appeared that members of both the Florida House and Senate were concentrating their attention on mandating statewide building safety requirements. The comprehensive bills moved quickly through committees, amended several times. In addition to adding requirements for structural integrity inspections, the legislative provisions mandated public disclosure of structural inspections, as well as strict requirements for funding of reserve studies to pay for those repairs.
Before I provide a few more details about these now-defunct bills, allow me to explain why condominium building safety legislation is so important.
The future of the condominium regime, both residential and commercial associations, is at risk
Building safety legislation is urgently needed in light of new Fannie Mae and Freddie Mac guidelines, which require condominium association sellers to truthfully answer specific questions about the structural integrity of multifamily buildings, as well as the association’s fiscal health, including the level of reserve funding in relation to looming costs for structural maintenance and repair.
First and second mortgage loans are often denied by lenders, when condo sellers (associations) fail to answer these questions. Fannie and Freddie do not lend money to buyers and unit owners, but the majority of qualified condo and home loans are sold to both entities. The problem is, many older buildings with deferred maintenance and low or nonexistent reserve funds don’t qualify. Since Fannie and Freddie won’t buy these condo loans, unit owners can only sell to cash buyers, and are not able to obtain home equity loans they may need to pay special assessments.
As a result, international trade group, Community Associations Institute (CAI), has suddenly made building safety a priority, with its Legislative Action Committees is now advocating for new statewide laws and federal policies that will force unit owners to pay for long-neglected maintenance of 20, 30, and 40 year old buildings. The new legislative push is ironic, because, historically, CAI lobbyists have opposed a plethora of statewide building safety bills in Florida (and other states). Those bills — many of them killed thanks to CAI lobbyists — would have required mandatory reserve contributions, and compliance with fire safety upgrades (addition of sprinkler systems).
California has been the rare exception. Three and four years after a tragic balcony collapse killed 6 people, the legislature enacted new requirements for balcony safety inspections, despite objections of HOA industry professional trade groups.
Previous to 2021, CAI’s stated objection to mandatory safety inspections and reserve funding has mirrored that of many homeowners: mandating inspections and reserve funds will significantly increase the costs for condo owners.
As you’re reading this post, you might think that an organization that claims to advocate for homeowners in community associations would be primarily concerned with residents’ long-term safety. You might expect CAI to set aside its discomfort over unit owner objections to gradually increasing assessments to pay for future repair and replacement of worn out structural components of mid- and high-rise buildings.
Unfortunately, prior to the fateful condominium collapse in June 2022, those reasonable assumptions would have been wrong!
The HOA industry has known about the pervasive dual problems of deferred maintenance and inadequate reserve funding for more than a decade.
For many years, one of CAI’s most prominent Reserve Specialists, Robert Nordlund, has been publicizing the fact that 70% of condo and homeowners associations have less than 30% of needed reserve funds. The issue was highlighted in a 1994 article published in the New York Times. Since the, 28 years have passed. The HOA industry, like the homeowners they serve, has continued to kick the can down the road. Their legislative activity has contributed to the decline and failure of common ownership buildings, occupied by millions of people from the U.S. and foreign nations. Deferred building and infrastructure maintenance has become the rule, not the exception. This is true even in buildings with high income unit owners.
In the months following the collapse of the condo building in Surfside, FL, reports of structural deficiencies in buildings in the Sunshine State and across the U.S. began to pop up, from coast to coast. (Check out these examples from Chicago to Atlantic City.)
In more recent years, insurance providers have dropped high-risk condo and HOA policies, and have exponentially raised premiums on their remaining community association clients. It’s now a pervasive problem in the U.S. and Canada, particularly for multifamily housing communities, and especially in locations where buildings are regularly pounded with damage from salt spray, storm surges, sinkholes, floods, wildfires, and seismic activity.
For better or worse, the partial collapse of Champlain Towers South has been a wake up call for unit owners, condominium buyers, and the HOA management, insurance, and legal industry. In addition to the loss of 98 lives and 136 residential condos, the industry is bearing the steep legal costs of reimbursing surviving owners and heirs for their losses.
Multimillion dollar settlements follow lawsuits filed against HOA industry professionals
According to a recent news report in Huffington Post, former owners and heirs of Champlain Towers South Condominium will divide $55 million in insurance settlements from three different contractors.
Becker, a prominent condo/HOA law firm (with notable CAI member attorneys) that represented Champlain Towers South, will pay $31 million, although the firm will not admit that it bears any direct responsibility for the condo board’s failure to act more quickly in response to an alarming structural inspection report completed in 2018. Ditto for the expert who completed that 2018 inspection, the condo association’s engineer. Morabito Consultants will pay $16 million to settle legal claims. DeSimone Consulting Engineers, the contractor that was managing a disruptive construction project for the condo property adjacent to Champlain Towers South, has also agreed to an $8.5 million settlement.
An AP report claims there is another pending proposed $83 million legal settlement with additiona legal defendants — including builders and developers. A court hearing is scheduled for March 30th.
The bottom line for the HOA industry is this: Allowing condo and HOA boards to drag their feet on paying for deferred maintenance, or correcting latent defects and faulty design or construction, is far more costly than advising condo boards of the hard truth they don’t want to hear. Condo and homeowners associations have two choices: raise assessments needed to make prompt repairs, or risk a catastrophic loss of their homes, their investments, and, possibly, even their lives.
Details of failed condominium and multifamily building safety bills
For the past several weeks, Senate Bill 1702 and House Bill 7069 had both been discussed at length. The legislative proposals had been amended several times, in response to hearings and public commentary. By end of session, both bills contained identical language, and HB 1702 deferred to SB 7069. It was assumed SB 7069 would move on to the Governor’s desk.
But, in the end, legislators could not agree on details, and the bill died. Since it’s likely to resurface next year, I will summarize the major points that were considered this year.
The bill contained several important new requirements intended for the benefit condo and co-op consumers, but its critics say the bill also fell far short in protecting owners from future financial risks.
Read the bill:
SB 1702 (GENERAL BILL by Rules ; Regulated Industries ; Bradley ; (CO-INTRODUCERS) Rodriguez ; Garcia
Building Safety; Defining the term “milestone inspection”; specifying that the purpose of a milestone inspection is not to determine compliance with the Florida Building Code or the firesafety code; requiring certain associations to periodically have a study conducted relating to required reserves after a specified date; requiring associations to provide for the maintenance, repair, and replacement of condominium property; authorizing boards to adopt a special assessment or borrow money for certain reasons without unit owner approval; revising certification and education requirements for directors of association boards, etc.
Feb. 24, 2022 Legislative Analysis)
SB 1702 & HB 7069: New mandates: ’milestone’ structural inspections, reserve studies, consumer disclosures
To summarize, these new building safety bills mandated statewide structural inspections, standards for inspection reports, disclosure requirements, and timely repair requirements for all multifamily buildings of more than 3 units, and with 3 or more stories of living space. The bills would have applied to residential apartment buildings as well as condominiums and housing cooperatives.
Specifically, by 2024, condo and co-op developers and unit owners would have beem required to conduct reserve studies of structural components, and distribute reports to owners. In addition, HOA boards would have faced mandates to review their association’s reserve funds annually, and provide unit owners with an update on the status of their association’s reserve fund in relation to actual financial need for required repairs and replacements.
For inland properties, the first milestone structural inspections was to occur 30 years after initial building construction, then every 10 years thereafter. Properties within 3 miles of Florida’s coastlines — and exposed to corrosive salt spray — would have been required have their first milestone inspection at age 20, then every 7 years thereafter.
One of the provisions would have required condo and co-op board members to attend HOA board member training and sign an affidavit that they have read the governing documents, agreeing to uphold their fiduciary duties. Current law allows board members to simply sign a certificate (not an affidavit), without attending any formal board member training.
The value of such HOA board member training is debatable, as it depends on who is providing the education. Board member training in Florida is supplied by HOA-industry lawyers as well as homeowner advocacy attorneys, generally free of charge.
Both bills failed to offer comprehensive consumer protection
Earlier versions of the House and Senate bills would have eliminated the ability of a majority unit owners to vote to waive contributions to reserve funds — at least for line items earmarked for structural components. However, those provisions were later removed to maintain the status quo, allowing owners to avoid funding the reserves, but merely requiring condo associations to prominently disclose the risk of future special assessment to all current unit owners and potential buyers.
The concept of mandating reserve fund contributions remains controversial among HOA-industry professionals and homeowner advocates alike, for different reasons.
Historically, developers and builders of condominium and co-op multistory buildings have not supported legislation that requires them to invest their money on future maintenance costs. Similarly, as previously noted, some prominent Florida HOA management attorneys have argued that mandatory reserve fund payments make condo homeownership too costly for their clients on fixed incomes.
Homeowner advocates in Florida, including Jan Bergemann of CCFJ, and former House Rep. Julio Robaina, not only understand the importance of healthy reserve funds for condominium and cooperative associations. They also stress the importance of imposing strict fiscal controls that safeguard reserve funds, so that money collected from unit owners over many years is available for its intended purpose when needed.
Both HB 7069 and SB 1702 lacked several critical homeowner/housing consumer protections:
The bills contained no legal requirements to safeguard the HOA’s ownership and control over deposit accounts or collection or disbursement of funds in Reserve Accounts, leaving condo associations vulnerable to fiscal mismanagement and/or theft and embezzlement of funds.
Additionally, the bill sought to expand the emergency power of condo and co-op boards to make structural repairs without first obtaining a vote of owners. This provision was admittedly a two-edged sword: it untied board members’ hands to address a true building safety emergency, but it also granted rogue board members free license to declare less urgent structural projects ’emergencies’ in need of immediate repair, without providing adequate notice or participation of unit owners — the ones who ultimately pay for major construction projects.
Too little, too late?
Unfortunately, for many condominium associations, it’s already too late, and practically impossible, to catch up their reserve accounts and fund structural repair and replacement of worn out or defective infrastructure components. The proposed new statutes provided only a vague reference to ’alternative’ or ’non-assessment’ financial resources and assistance to help owners of long-neglected communities to save their homes. The Legislature provided no specific definition or description of acceptable or affordable ’alternative’ funding sources for distressed condo and co-op associations.
Presumably, these provisions were added to conform to CAI National’s federal legislative advocacy goals. In addition to CAI’s attempt to convince federal policy makers to delay implementation of Fannie and Freddie’s new Condominium Questionnaire until 2023, the trade group’s federal goals include hitting up FHA and HUD for low interest reconstruction loans and Community Development Block Grants for long-neglected and/or poorly designed and constructed condo and co-op buildings.
Your tax dollars at work?
Call me a skeptic. But I think it’s highly unlikely that the majority of U.S. voters and elected members of Congress will be in favor of funding community association projects that won’t meet Fannie and Freddie guidelines for lenders, for potentially unsafe buildings that cannot be affordably insured.
In my opinion, regardless of when or IF similar building safety legislation is enacted in the future, cash buying investors will exploit financially distressed condo and co-op associations. They will target rundown properties in desirable locations for condo termination, deconversion to rental communities, or demolition and redevelopment.
Read the bill:
HB 7069 (Condominium and Cooperative Associations
GENERAL BILL by Appropriations Committee ; Pandemics and Public Emergencies Committee ; Perez ; Toledo ; (CO-INTRODUCERS) Buchanan ; Byrd ; Caruso ; Casello ; Duran ; Fabricio ; Fernandez-Barquin ; Geller ; Rizo
Condominium and Cooperative Associations; Revises & provides laws for condominium & cooperative associations relating to disciplinary action, official records, reserve accounts & studies, recertifications & phase 2 inspections, written recertification & phase 2 inspection reports, transfer of control of association, information that must be provided to potential buyers, & information included in prospectus or offering circular. APPROPRIATION: $500,944
Similar legislation in other states
Hawaii: HB 1784 Relating to Building Inspections.
According to the official summary, ”Requires periodic inspections of certain walls and appurtenances of buildings five or more stories in height.”
Requires building owners, including condominium associations, to conduct the first exterior structural inspection by 2026, then every 7 years thereafter. If the owner/association has completed a full renovation of the building’s exterior within the 7-year timeframe, a waiver of the next scheduled inspection can be requested of state council, with regular inspections to resume thereafter.
The bill includes specific and clear requirements for the inspector’s professional qualifications, what is to be included in the inspection report, and timeframes for notifying building owners and the State Building Code Council of any unsafe conditions in need of immediate attention. Condo associations would be required to begin the process of correcting unsafe conditions within ten days, and the professional engineer or architect would reinspect the building in two weeks. Building owners, including condo associations, would be able to apply for an extension of up to 90 days to complete repairs, if needed due to certain uncontrollable circumstances.
This straightforward bill does not address reserve studies or reserve funding requirements for condominiums.
Notably, the bill does not address enforcement of building inspection and repair requirements, should a condo association fail to comply.
The bill has passed the House, and is currently under consideration in the Senate. The effective date of the bill has been changed to Jan. 1, 2050, “to encourage further discussion.”
Maryland: HB0107 – Cooperative Housing Corporations, Condominiums, and Homeowners Associations – Reserve Studies – Statewide, Sponsored by Delegate Holmes — and —
HB1061 — Local Government – Condominium and Homeowners Associations – Repair and Rehabilitation Funds, Sponsored by Delegate Holmes
HB0107 mandates that certain common interest communities (condominium, cooperative, and homeowners associations) conduct reserve studies every five years, and authorizes the board of a condominium, cooperative of homeowners association to levy assessments required to fund the reserves, as recommended in the reserve study.
The Fiscal Note explains that current law only mandates these measures for HOA-governed communities in Montgomery and Prince George Counties. This bill would create statewide mandates for reserve studies and maintaining adequate reserve funds.
The bill appears to be languishing in House committee, with little progress.
HB1061 had its first hearing earlier this month. The bill offers homeowners the opportunity to partially deprivatize certain HOA, condominium, or cooperative services, with cooperation from their County or Municipal government. A legislative fiscal analysis notes that this bill is intended to provide public assistance for community roads and stormwater maintenance facilities, not private community recreational amenities.
County and Municipal services to HOAs would be funded by up to 25% of current property tax revenues collected from owners of property in these private, common interest communities. In essence, HB1061 proposes to reduce the double taxation of owners of HOA-governed homes, by redirecting a portion of their property tax revenues to these private communities to help pay for much-needed maintenance and repair of roads and stormwater facilities.
While this isn’t a building safety bill, it does address deferred infrastructure maintenance, which is a growing problem in planned communities that include one or many separate condominium, cooperative, or homeowners associations.
Per the official bill summary: ”Authorizing a county or a municipality to establish a certain fund for the purpose of providing support for the repair of infrastructure in a community subject to a condominium association or a homeowners association; and requiring that certain property tax revenues be assigned to a fund created under the Act.”
Note the obvious relationship of these two separate bills. Clearly, CAI is seeking additional funding sources in order to reduce the burden of mandated reserve funds that will require significant increases in HOA fees and, possibly, special assessments to cover the gap in funding.
New Jersey: SB 580 Building safety inspection program for older buildings-establish, Sponsored by Senator Samuel Thompson
This carry-over bill from the previous legislative session would establish a state building safety program under the Department of Community Affairs. The DCA would be required to conduct a structural safety inspection for all 40-year old non-federal multifamily buildings, including condominiums and cooperatives, and provide a report to building owners.
In the bill as drafted, building owners would be required to make modifications or repairs within 150 days of receipt of the inspection report. Older buildings would be re-inspected every five years. The bill was introduced in January, and has not yet been addressed by a committee.
Virginia: SB 740 Common interest communities; standards for structural integrity and reserves for capital components.
Introduced by: Scott A. Surovell
A bill to “establish a work group to study the adequacy of current laws addressing standards for structural integrity and for maintaining reserves to repair, replace, or restore capital components in common interest communities. The bill directs the Department to report the work group’s findings and provide recommendations, including any legislative recommendations, to the Chairs of the House Committee on General Laws and the Senate Committee on General Laws and Technology no later than April 1, 2023.”
The bill has passed both chambers of Legislature. According to the most current version, “B. The work group shall be composed of representatives of (i) the Common Interest Community Board, (ii) local governments, (iii) local and state building officials, (iv) common interest community property owners, (v) developers and builders, (vi) common interest community managers, (vii) community association attorneys, (viii) reserve specialists, (ix) professional engineers, (x) auditors, (xi) representatives of financial institutions, (xii) insurance professionals, (xiii) attorneys with experience representing individuals with property or personal injury claims; (xiv) the Office of the Common Interest Community Ombudsman; and (xv) volunteer community leaders.”
It’s encouraging to see that the work group will not consist solely of members of the HOA management industry. This is a bill to investigate the need for legislative reform, with input from stakeholders in the real estate industry as well as advocates for homeowners. If the work group is established, it will take at least another year or two to draft and enact legislation to address structural integrity of common interest communities, including condominiums and planned communities.
Building safety reform will take several years to implement
As you can see, building safety reform legislation will not be easy to enact. Everyone can agree that it’s important to prevent another tragedy, such as the sudden partial collapse of Champlain Towers South Condominium. But finding consensus on how to do so will take several years.
One of the most controversial considerations is how to implement policies that will create affordable ways for HOA-governed communities — including planned communities, condominium, and cooperative associations — to finally address many years of inadequate of deferred maintenance, complicated by subpar design and construction methods.
Consumer advocates might also consider opening up an important conversation about how homeowners can unravel the dysfunctional privatized HOA community governance model, in favor of de-privatized solutions for providing essential public services.
In my opinion, it’s time to reduce community infrastructure maintenance and covenant enforcement burdens of private homeowners, and transition back to a more traditional, Constitutional local governance of planned communities and multifamily housing. The HOA industry has proven, in the past 50 years, that it is generally unwilling to build and maintain affordable residential housing and communities that withstand the test of time.