Helping to Alleviate Condominium Unit Owner Reservations About New Statutory Reserve Requirements
The unanimous passage of Florida Senate Bill-4D was met with jeers, cheers and fears to some degree by nearly every Floridian who owns, manages, insures or advises a condominium property in the State. Among the most anticipated of the statutory changes to Chapter 718, Florida Statutes (The Condominium Act) in the aftermath of the Champlain Towers South Surfside tragedy is the new requirement in Section 718.112, F.S., that certain condominium associations (those existing on or before 7/1/2022 and are three stories or higher in height) obtain every ten years a “structural integrity reserve study” (“SIRS”) for specified components of the condominium property, including but not limited to the condominium floor, foundation, fireproofing and fire protection systems, plumbing, electrical systems and windows. In conjunction with the requirement to obtain the SIRS is the new limitation on condominium unit owners’ ability to waive the funding of reserves through unit owner assessments for the association’s future repairs and replacements of each of the components identified in the SIRS.
In theory, and with the exception of several new budget line items, these requirements should not present a drastic change for those condominium associations that have been diligent in remaining compliant with the previous statutory requirement that unless expressly waived by membership vote, the association adopt annually a budget including “fully funded” reserve accounts for various common elements, namely the roof, exterior, asphalt paving, and any other items with a deferred maintenance or replacement cost of $10,000 or greater.
Realistically speaking, however, and given the current inflationary climate, a large percentage of condominium associations have found it increasingly difficult in recent years to maintain a reasonable yearly assessment amount to cover even the day-to-day operational needs of the association, much less the reserves for some uncertain repair to be needed at some point in the future. The fact that many, if not most, condominium unit owners will be forced to pay an unavoidable special assessment in the coming years to compensate for years of underfunding will result in increased financial pressures on owners and further restrict access to housing in a state that welcomed over 2.7 million new residents in the last decade, according to the 2020 US Census, and is estimated to add almost 1,000 new Floridians a day.
Affected condominium associations will have until December 31, 2024, to comply with the new SIRS requirements; but should immediately begin having the necessary conversations with unit owners, managers, counsel and other vendors to avoid the consequences of non-compliance by the deadline (including but not limited to the inability to obtain association insurance and individual board member liability for breach of fiduciary duty). Below are helpful considerations for boards of affected condominiums regarding the impending changes.
A. Immediately identify and determine the availability of necessary vendors, including reserve study analysts and licensed engineers or architects, and whether there are restrictions or provisions in the governing documents regulating the association’s hiring of such professionals.
Because many condominium associations throughout the state will be impacted by the new requirements, it will soon become increasingly difficult for associations to find qualified, competent local engineers or architects to complete the necessary inspections underlying the SIRS along with the reserve analysts to prepare the actual reserve study.
Pursuant to Section 718.3026(2), Florida Statutes, there is no statutory requirement that a condominium association competitively bid contracts for services by accountants, architects or engineers (Note: Reserve study advisors and analysts are not a category of professional specifically exempt from the statutory competitive bidding provision contained in Section 718.3026(1), Florida Statutes, which requires the association competitively bid any contract for the purchase, lease, or renting of materials or equipment or, for the provision of services which requires payment by the association exceeding 5 percent of the total annual budget of the association, including reserves). Notwithstanding, association counsel should also review the association’s governing documents (namely the Declaration and Bylaws) to identify whether there are any competitive bidding requirements imposed upon the association therein.
B. Remember To Consider Statutory Conflict of Interest Disclosure Requirements Prior to Entering into Contracts.
For those boards with the great fortune of having a director or officer who also happens to be qualified to provide any of the relevant services (or who has a family member or spouse who can), it is important for the board to comply with the statutory disclosure requirements applicable to Association transactions presumed by statute to be a conflict of interest. Sections 617.0832 and 718.3027, Florida Statutes, regulate any transaction or activity between the Association and the current directors and officers of the Board (or the relatives of the directors or officers) that “may reasonably be construed to be a conflict of interest”. Section 718.3027(1), F.S., provides that there is a “rebuttable presumption” that a conflict of interest exists if any of the following occurs without prior notice:
(a) A director or an officer, or a relative of a director or an officer, enters into a contract for goods or services with the association.
(b) A director or an officer, or a relative of a director or an officer, holds an interest in a corporation, limited liability corporation, partnership, limited liability partnership, or other business entity that conducts business with the association or proposes to enter into a contract or other transaction with the association.
While Section 718.3027(1), F.S. does not prohibit or prevent the association from entering into transactions with the directors and officers of the board (or their relatives or affiliated companies), it does contain specific disclosure requirements and allows the membership the opportunity to vote to cancel the board approved contract at the next regular or special meeting of the members after the contract is executed.
C. Identify Association Authority to Obtain a Loan or Other Financing for Reserves
The Condominium Act is silent as to a condominium association board’s authority to obtain a loan or other financing on behalf of the association in order to meet its reserve funding obligations. Section 617.0302(7), Florida Statutes, of the Not-For Profit Act, generally authorizes any not for profit board established in the state, which include most condominium associations, to “[m]ake contracts and guaranties, incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds, and other obligations, and secure its obligations by mortgage and pledge of all or any of its property, franchises, or income.” Accordingly, a condominium association may have the option to consider obtaining financing to assist with meeting its reserve funding obligations, unless there is a specific provision or restriction in the association’s governing documents prohibiting the association from doing so. In nearly all cases, association counsel will be required to provide an opinion of counsel letter to the financing institution confirming the association’s authority to enter into the transaction pursuant to law and the association’s governing documents.