COAs must prepare budgets operationally and financially for new legislation by Jim Weaver, Market President – First Federal Bank

It would seem in today’s world the life of many Condo Associations are financially battling a 3–headed dragon known as Insurance, Milestone Inspections and Structural Integrity Reserve Studies. Alone, any one of these could result in a substantial financial blow to an Association but being impacted by all three could result in a financial crisis. To dissect this “dragon” from a Banker’s perspective, let’s look at a high–level overview of each of these:

Insurance:

Many Associations (and homeowners in general) are aware of the growing insurance crisis in the State of Florida and anticipated their premiums to increase but not to the levels many have experienced in 2023. After discussions with several property managers, most Associations were told in 2022 that they should expect increases in the neighborhood of 25% – 50% year over year. Although, at the time, these appeared shockingly high, the reality for many in 2023 has been increases of 100% to as much as 400% of their 2022 premiums. It is safe to say that even the most conservative of budgets and the best prepared Associations were not financially prepared for this hike. Many Associations have been forced to either finance their premiums through their insurance company or look to their bank partner for lines of credit to supplement what they had assumed would be sufficient reserves. While legislation is pending to assist with this problem, it is unlikely a return to the “old normal” will ever occur and financing of insurance premiums will become the “new norm”.

Milestone Inspections:

A milestone inspection is an on-site review of all the primary structural components within the condominium building(s). The inspections must be completed by a licensed architect or engineer. The initial Phase 1 inspection is a thorough visual examination. If no signs of “substantial structural deterioration” is found, no further investigation is needed. If there are signs of “substantial structural deterioration”, a Phase 2 milestone inspection must be performed. This inspection will be as limited or extensive as required to complete the investigation into the problem areas as identified in the Phase 1. If necessary, the inspector could require destructive testing on portions of the structure to complete the report. Upon completion of the Phase 2, the report should provide guidance for remediation/repair of distressed areas of the building.

Milestone Inspection reports are required for all condominiums three or more stories in height which aged 30 or more years by July 1, 2022; the initial milestone inspection must be completed by December 31, 2024. If the condominium reaches 30 years of age on or after July 1, 2022 and before December 31, 2024 the initial inspection must be completed before December 31, 2025. All others must have their initial inspections completed in the year in which the reach 30 years old and in all cases, every 10 years thereafter.

While the cost for these inspections may not present a financial crisis, the cost of needed repairs could. Well reserved and monitored Associations may have little or minor needs for additional funds, but others may have an immediate need to raise significant funds for near term required repairs.

Structural Integrity Reserve Study:

All condominium buildings of 3 stories or more are required to perform a Structural Integrity Reserve Study. This is performed to ensure proper availability of funds at the time of anticipated needed structural repairs or replacement as per the study. This study must cover the following:

Roof

Structure including load bearing walls and all primary structural members

Fire proofing and fire protection systems

Plumbing

Electrical Systems

Waterproofing and exterior painting

Windows and Exterior Doors

Any other item that has a deferred maintenance expense or replacement cost that exceeds $10,000 and the failure to replace or maintain such item negatively affects the items listed above.

At a minimum the study must:

1) Identify each item of the condominium being visually inspected

2) State the estimated useful life and estimated replacement cost or deferred maintenance expense of each item of the property being visually inspected

3) Provide a funding reserve schedule with a recommended annual reserve amount that achieves the estimated replacement cost or deferred maintenance expense of each item.

As of December 31, 2024 it is mandated that Associations may not vote to waive or provide for reserves in an amount less than full funding for those items included within the Structural Integrity Reserve Study.

For many Associations who have historically partially funded or waived reserve funding, the requirement to fully fund for items included in the study will have an immediate and impactful shock to their financial structure moving forward. Depending upon the findings, Associations may need to raise large sums of reserves in a relatively short period of time. Fortunately for most Associations, the full impact will not be felt until the 2025 budget; however being proactive in 2024 will help prepare for the inevitable impact.

Disclosure: The commentary above should not be considered a legal opinion and does not encompass the full requirements of the legislation of Senate Bill 154 as discussed above. It is strongly suggested that any Association confer with their Attorney and/or CPA to understand the full requirements and impact of the legislation well in advance of any deadlines specified in the bill.

Authored by:

Jim Weaver

Market President

First Federal Bank*

Weaverj@ffbf.com

*First Federal Bank is available to serve financial needs of their local markets. Visit FFBF.com/locator to find the nearest location.

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First Federal Bank is a community-based bank offering consumer and commercial banking solutions, services, and loans through banking offices in Florida’s Panhandle, North Central and East Florida, and coastal South Carolina.

Mortgage, SBA and USDA customers are served through lending offices across the Southeast and Midwest.

First Federal is headquartered in Lake City, Florida with assets totaling over $3.6 billion. First Federal has received a “5-Star, Superior” financial rating from BauerFinancial, Inc., of Coral Gables, Fla. for more than two decades and was recognized by Newsweek as “Best Small Bank in Florida” in 2020 and 2021. For more information, visit http://www.ffbf.com.