Managing risks for unit
owners and association boards
Some condo owners receiving special assessment fees may be faced
with the need to sell their units in Florida’s weak real estate market with rising insurance costs.
By Sarah Warhaftig, J.D., CRM
In the pre-dawn hours of June 24, 2021, the south tower of the Champlain Towers condominium building collapsed, killing 98 of its residents.
Condo buildings across Florida weren’t technically required to be inspected by a licensed architect or engineer after being built and occupied. Miami Dade County, the location of the Champlain Towers, did have a requirement that buildings be inspected once they reached 40 years old. The Towers, built in 1981, was 39 years old and counting at the time of its collapse.
At that time, Florida law did not require condominium associations to conduct reserve analyses and studies to determine long-term capital needs of their buildings. In fact, they were allowed to “waive” their reserves and not maintain reserves at all.
The condominium laws allowed associations to defer maintenance until a time of dire need—the funding of which was typically handled through assessment of unit owners, usually determined by their percentage of ownership or square footage of the individual units. The Champlain Towers association had approved a $15 million assessment to make repairs shortly before the collapse.
The tragic and catastrophic event, the third-deadliest non-deliberate structural engineering failure in United States history, stirred the Florida legislature to take a hard look at the current laws and lack of safeguards related to multi-storied condominium buildings. In May of 2022, Governor Ron DeSantis signed Senate Bills 4-D and 2-D into law.
Here are some major provisions of the laws:
- Requires condominium and cooperative association buildings that are three or more stories in height to have a “milestone inspection” of the buildings’ structural integrity by an architect or engineer by December 31, 2024, if the association existed before July 1, 2022 and when a building reaches:
o 30 years of age and every 10 years thereafter, or
o 25 years of age and every 10 years thereafter if the building is located within three miles of a coastline.
- Requires a phase two milestone inspection if there is evidence of “substantial structural deterioration” as determined by a phase one inspection.
- Requires that new board directors take four hours of training on inspections, recordkeeping, financial literacy and similar topics, and complete an hour of continuing education each year.
- Establishes stronger disclosure requirements for condo owners who sell their units, including providing the potential buyer with the condo association’s annual financial statement and financial report.
- Eliminates the practice of waiving reserve contributions and instead requires associations to collect funds necessary for future repairs based on the 10-year Structural Integrity Reserve Study.
- Provides that it is a breach of a board member or officer’s fiduciary duty if an association fails to complete a structural integrity reserve study.
December 31, 2024 is rapidly approaching. While the law applies to more than half of Florida’s condominium buildings, many associations and unit owners were ill prepared or even unaware of its requirements. Associations with no reserves had no choice but to assess the owners to fund the milestone inspection. If the inspection finds critical defects, they must be repaired, which would then require another assessment to fund repairs.
To exacerbate the financial blow, the law also requires associations to maintain reserves required for future major repairs and replacement of the common elements based on the 10-year structural integrity reserve study. These reserves will likely be funded through large assessments and increased monthly association fees to unit owners.
Some condo owners receiving special assessment fees may be faced with the need to sell their units in Florida’s weak real estate market with rising insurance costs.
Take for example, SurfSide Club South in Daytona Beach, which has levied a hefty assessment per unit. Many unit owners are at a loss as to where they’ll find the money to fulfill these new obligations.
Parks Huffstetler, a snowbird who bought a condo unit at SurfSide Club South in late 2021, told WKMG News6 he had no idea about the upcoming assessment fees, and he certainly hadn’t budgeted for a six-figure bill. “It’s over $100,000 per owner,” Huffstetler said. “The hope is, once we get the restoration part done, then the units will be worth more and I can sell.”
Managing the risks associated with the assessment
As a trusted advisor, how will you assist your unit-owner clients in managing the risks of non-payment? If a special assessment isn’t paid, the consequences are usually detailed in the association’s bylaws. These may include late fees, fines, and loss of access to amenities like the pool and gym.
In certain situations, the association may file a lien against the unit and foreclose on the property using the proceeds to pay the assessment and returning any remainder to the owner, less attorney’s fees and court costs. The mortgage will still be in effect and must be discharged.
Before things get out of control, encourage your clients to look into a home equity loan or a personal loan. These options are not always available, particularly for retirees or first-time buyers.
Perhaps the association is willing to set up a payment plan. Some will do this automatically, letting the assessment be paid over a multi-year period. If your client decides to walk away, the debt still exists and typically the mortgage company will foreclose, liquidate the property, satisfy their lien, and surrender the balance.
Even a declaration of bankruptcy may not protect the client. The judge may order the sale of the unit to satisfy the client’s debts—including the assessment.
If the assessment is a complete surprise to the client or if he has questions about how the association board is managing funds because, as the situation in Florida has revealed, there are many struggling condo owners in the same boat, he may want to seek out legal advice.
As a trusted advisor, how will you advise association boards that are clients? Encourage your client to determine the likelihood that unit owners will be able to raise the necessary capital to fund the required repairs and reserves. The board should be aware of and consider the statutory fines and penalties for non-compliance, or late compliance with the legislation.
Review the board’s Directors and Officers insurance coverage with them. Make sure they understand whether it will respond for breach of fiduciary duty as defined in the bills. Advise them on defense and payment terms. Is it an indemnification policy? Will the board members be required to fund their own defenses?
Advise your client to review the land value (not the building). Can it be used to secure the necessary funds? Is the land value sufficient to provide unit owners with some return if sold?
Again, the bylaws are critical in determining if the board has the authority to sell the building outright to avoid penalties, knowing that any developer will probably raze it and construct something new.
Developers, attracted by the valuable land, may be willing to pay more for oceanfront property. The site of the Champlain Towers collapse was sold, with court approval, in May 2022 for $120 million to Dubai-based developer Damac, which is owned by billionaire Hussain Sajwani.
The board needs to determine if the unit owners must approve such a sale, and what the strategy will be in presenting it to them. What does the timeline look like? There are slightly less than three months until the inspection deadline. Is this option even accomplishable?
Remind your client that association board members have a fiduciary duty to alert owners about the potential financial implications of the law and explore all viable options. If the value of the land exceeds the value of the building, associations must communicate this to owners and coordinate efforts to secure the best possible outcome.
The author
Sarah J. Warhaftig, J.D., CRM, is the academic director of risk management programs at the Risk & Insurance Education Alliance. She is a graduate of Tulane University and Rutgers Law School. Sarah has served as a faculty member for Certified Risk Manager designation for over 20 years.
