Florida homeowners may see some limited relief from two new laws that were enacted in a Special Legislative Session this year. The relevant bill numbers are SB 4-D (building safety) and SB 2D (property insurance). This post summarizes both bills, which were signed by Governor DeSantis last week.
Building Safety law for condos and co-ops: Milestone Inspections + Structural Integrity Reserve Studies
SB 4-D applies only to condominium or cooperative buildings of three or more stories.
The intent of this legislation is to force building owners to timely repair structural deficiencies, in order to prevent another catastrophic building failure, such as the partial collapse of Champlain Towers South, a 12-story condominium in Surfside, FL. That disaster resulted in the deaths of 98 residents. The remainder of the building was immediately evacuated and demolished shortly after the sudden collapse, displacing another 50 unit owners.
Two similar building safety bills had been proposed in the regular legislative session, but members of the House and Senate had failed to agree on legal requirements for reserve funds. However, the failure of Florida to pass a building safety bill drew harsh public criticism, prompting lawmakers to revisit the issue in a special session authorized by Governor Ron DeSantis. Legislators began working on a property insurance bill, when they decided to also add inspection and reserve study requirements to a bill that originally contained amended code requirements for roof repairs.
Several important provisions may help prevent the failure of old, dilapidated buildings.
First, the new building safety law creates new requirements for periodic ”milestone inspections” which must occur when any existing condo or co-op building reaches 30 years of age, 25 years for buildings located within 3 miles of a coastline. Inspections must be repeated every 10 years thereafter.
Each milestone inspection report must be conducted by a licensed engineer or architect. The report must be sealed, and a copy provided to the community’s HOA board, each unit owner, and the local building code officer. A copy of the report must also be posted in a place where all residents can read it. (Such as the building’s common area bulletin board or the community association’s website.)
In addition to periodic building inspections, the new law also requires all condo and co-op owners to contribute to — and maintain — a reserve fund to pay for repair and replacement of structural building components. The reserve fund is determined by a reserve study, which includes a visual inspection by a licensed engineer or architect, plus a report. The reserve study report is based upon the most recent visual inspection. It is a financial analysis of the remaining useful life of each structural component and the cost to repair or replace at the appropriate time in the future.
Owners of existing buildings must conduct their first structural integrity reserve study by December 31, 2024. Owners Associations of all condominium and co-op buildings three stories and higher must establish and fund a reserve account for these structural components, and owners can no longer vote to waive or reduce funding of reserves. The same requirements apply to new communities, whether under developer control or owner control. (Interesting fact: none of these requirements apply to rental apartment buildings). The first structural integrity reserve study of a new build must occurs at turnover of developer control to owners, then every 10 years thereafter.
A structural integrity reserve study must include the following building components:
a. Roof.
b. Load-bearing walls or other primary structural members.
c. Floor.
d. Foundation.
e. Fireproofing and fire protection systems.
f. Plumbing.
g. Electrical systems.
h. Waterproofing and exterior painting.
i. Windows.
j. Any other item that has a deferred maintenance expense or replacement cost that exceeds $10,000
Unsafe buildings, serious consequences
When the regular Legislative session ended, many Floridians were outraged by their elected leaders’ apparent apathy toward protecting human lives from catastrophic building failure.
The consequences of deferred maintenance for Champlain Towers South residents, survivors, and heirs has been enormous.
At the time of this post, Florida Judge Michael Hanzman is taking on the unenviable task of allocating $1 billion in legal settlement funds to the estates of 98 victims of the Surfside partial condo collapse last June. Hanzman also recently allocated a separate $83 million settlement to 50 surviving unit owners, who ultimately lost their homes when the remainder of Champlain Towers South was demolished. Some of the survivors sustained injuries when evacuating the building on the night of the collapse. Others are being treated for mental health conditions brought on by the stress of the disaster and its aftermath.
Beyond that, the issue of keeping condo and co-op buildings structurally sound is of great important nationwide. In addition to the critical issue of public safety, lenders are now shying away from underwriting mortgage loans for owners of units (and their community associations) in potentially unsafe buildings. The main reason that lenders are refusing loan applications: Fannie Mae and Freddie Mac will no longer purchase condominum and cooperative mortgages in community associations in need of critical repair.
In response, an HOA-industry trade group, Community Associations Institute, has published its official guide on how to respond to lender questionnaires, to avoid being put on Fannie Mae and Freddie Mac borrower blacklists.
Essentially, the legal experts of this new guide advise condo and co-op boards to avoid directly answering questions about their building’s infrastructure. Instead, CAI suggests providing lenders with documentation of structural inspection reports, reserve studies, and other relevant records of the community association, and allowing loan officers to make the call as to whether or not to approve loans.
Unfortunately, once a lender blacklists a condo or co-op building, none of the residents or future buyers will be approved for new purchase, refinance, second mortgage, or reverse mortgage loans. The reality is, poorly-maintained, unsafe buildings also threaten the health of Florida’s condominium market. There will be few willing buyers for units in distressed community associations, with the exception of cash-buying bulk investors, who are often eager to exploit a tragic situation for profit.
These are among the reasons why it’s critically important to identify unsafe buildings at risk of failure, and take swift action to restore those properties.
Criticisms of SB 4-D
Unfortunately, although homeowner and community association advocates generally favor periodic building safety inspections, many are concerned that a large number of unit owners won’t be able to pay special assessments and much higher monthly HOA fees that are on the horizon.
As noted in previous posts, I, too am concerned that owners will be unable to stay current on their condo or co-op fees. Late or missing payments could lead to an increase in HOA foreclosures against owners. Associations could also find themselves unable to collect the money they need to perform major repairs, risking insolvency. Financially distressed condo associations are a favorite target of investors seeking a hostile takeover of the community, for the purposes of converting to rental apartments, a short-term rental community, or tearing down old structures for future real estate development.
But I have several additional concerns.
For starters, I think the new hastily-written statutory requirements are confusing and inconsistent.
For example, what if a condo building is less than 25 or 30 years old? No milestone inspection is yet required, only a structural integrity reserve study, by 2025. In my opinion, the difference between the visual inspection for milestones versus structural integrity reserve studies remains somewhat vague and unclear.
What if the 10-year reserve study inspection is not as thorough as a Phase One (visual) milestone inspection? In practice, does an engineer or architect, who is conducting an inspection for determining the remaining useful life of building structural components, have any less duty to report on the ”life safety” status of the structure? For all practical purposes, I would hope not.
What if, during the course of a reserve study, the engineer or architect discovers a life safety issue? The statute makes no mention of the inspector’s duty to report to the condo association, unit owners and residents, and the local building code agency. Those strict reporting requirements only apply to milestone inspection.
Do red flags that appear during a reserve inspection trigger a requirement for a deeper inspection? The statutes doesn’t say. If a Phase One (visual) milestone inspection reveals potential trouble, a Phase Two (invasive) inspection is required.
So, if big problems aren’t discovered or further investigated by reserve inspectors, then by the time a condo or co-op association conducts its first required milestone inspection, unit owners may find that their community needs to raise millions of dollars to make repairs AND catch up on their reserve funds.
To complicate the issue further, the vast majority of Reserve Study Specialists work for, and alongside, the HOA-management industry. Indeed, most are certified by CAI. So, how will the state of Florida prevent community association management agents, reserve specialists, and construction vendors from colluding to inflate the cost of repair and replacement contracts? The new building safety law does not address the potential for conflicts of interest as unit-owner controlled board navigate the inspection-reserve study process.
Very puzzling, given Florida’s reputation for insurance fraud.
Insurance ’reform’ law prevents policy cancellations
The insurance industry in Florida has long complained about an excessive amount of claims for wind, storm, and hurricane damage — and fraudulent claims. In recent years, homeowners and their HOAs have seen astronomical rate increases for insurance premiums, as many companies have stopped writing insurance policies in the Sunshine State.
SB 2-D applies to owners of detached and attached homes. Among other things, it prevents companies from cancelling property insurance policies, unless owners agree to replace their roof when it’s 15 years old. If the roof has been installed or replaced under 2007 hurricane code standards, an owner can have the roof inspected at 15 years old, to determine its remaining useful life. Bottom line: Insurance companies can no longer require every owner to replace their roof every 15 years.
The law also creates a 2 billion dollar reinsurance program (critics call it an insurance industry bailout) to entice insurers to stay in Florida. But, in return for keeping their companies solvent, participating insurers must offer a reduced premium to its policy holders.
The new law also creates a fund to help certain homeowners protect their property from wind damage. According to the official bill analysis, SB 2-D:
Appropriates $150 million from the General Revenue Fund to the Department of Financial Services’ My Safe Florida Home Program to provide hurricane mitigation inspections and matching grants for the performance of hurricane retrofitting on homestead single family homes with a value of $500,000 or less located in the wind-borne debris region set forth in the Florida Building Code.
Homeowners will also notice the addition of a separate ”roof deductible” that, under certain circumstances, can equal up to 2% of the policy value or 50% of the cost of a full roof replacement, whichever is less. The deductible won’t apply in certain circumstances, such as a total loss due to a hurricane or a tree falling on the structure, puncturing the roof deck.
Also, in cases where only 25% of the roof is damaged, it can be repaired rather than fully replaced. This is a big deal, because, up until now, a home or condo owner had to replace the entire roof if only a small portion of it had been damaged.
The insurance industry’s intent with this provision is to prevent bogus roof replacement claims, unless the damage is considered a total loss. On the other hand, insurers cannot require owners to replace a roof with damage to 25% or less of its surface area.
The statute seeks to limit fraud by adding transparency consumer protections. It also prohibits roofing contractors from soliciting business to be paid by insurance claims filed by homeowners, and sets limits on the recovery of attorney fees to insured parties, not third party contractors.
However, some critics of the statute say it offers very little protection for consumers, particularly when their insurance company refuses to pay for legitimate property damages.
The new law restricts attorney fees – a change the insurance industry has sought for years. Michael Carlson, CEO of the Personal Insurance Federation of Florida, says excessive litigation drives the market instability.
“We believe that homeowners should be able to sue their insurance companies if they have really been mistreated – if the insurance company has violated the terms of the insurance company,” he said. “None of the provisions in the bill will limit that. I think what is being said by some opponents of the bill and it’s being characterized as access to courts is really more access to attorney fees.”
But Amy Boggs with the Florida Justice Association says she’s worried the new laws will make it harder for homeowners to go to court for help. Part of the changes says homeowners can’t bring bad faith claims unless the insurer breaches the contract.
“We feel like the bill has very little consumer protection in it,” she said. “It’s really more of a corporate bailout for these insurance companies that mismanaged their funds and have mismanaged litigation and some other things.”
WFSU @ https://news.wfsu.org/state-news/2022-05-28/floridas-new-laws-on-property-insurance-and-condo-safety-may-not-give-homeowners-relief-and-calm-troubled-markets
Bottom line
Florida’s Legislature passed new laws in a late session this May (SB 2-D and SB 4-D), which are a step in the right direction for protecting housing consumers, especially homestead owners, from high property insurance premiums and unsafe building structures.
From this point on, new or nearly new condominium and co-op buildings must conduct regular reserve and milestone inspections, and fund reserves for structural components. These requirements apply to developer-controlled as well as owner-controlled community association boards.
However, after years of waiving reserve payments and deferring maintenance, many owners of units in existing buildings are going to see significant (huge) increases in regular assessments, as well as special assessments. Financing improvements is unlikely, given the new lender blacklists as a result of Fannie Mae and Freddie Mac restrictions on purchasing loans for buildings in need of serious structural repairs.
As for the new insurance law, critics say that it won’t immediately reduce premiums for homeowners. But several new provisions to prevent fraudulent roof replacement claims, and to provide more consumer transparency, are small steps toward reform of the property insurance industry in Florida.
Sources:
Florida Legislature passes condo law on inspection, repairs — Starting in 2025, condo boards will need to set aside reserve money to cover future repairs. By Ana Ceballos, Times/Herald Tallahassee Bureau Published May 25|Updated May 25
Read about SB4-D on FL Legislature website
Florida Senate passes property insurance package By ASSOCIATED PRESS, MAY 25, 2022
Florida’s new laws on property insurance and condo safety may not give homeowners relief and calm troubled markets WFSU | By Sarah Mueller, Published May 28, 2022 at 9:04 AM EDT