If you’re a board member for a high-rise condo association in Florida, you’re no doubt aware of the rising tide of challenges facing the high-rise world today. The last few years have seen unprecedented challenges for condo boards, including spiking insurance costs, high interest rates, seawater intrusion at beachfront properties, and rising costs of both the labor and goods needed to operate and maintain these complex properties.
Driven by the 2021 tragedy in Surfside, the Florida legislature has enacted new regulations around reserve funding for critical systems and infrastructure, as well as a statewide inspection plan that builds on the existing Miami-Dade County and Broward County 40-year inspection requirements. Those rules and regulations are meant to save lives and preserve property values, but they come with a hefty price tag that many condos didn’t foresee and don’t have the resources to address.
The problem is so severe that some condos are considering dissolving and selling the building to developers who will replace it with construction that meets current building standards and the demand for luxury properties. But that comes with the risk of displacing long-time residents. It’s a complex situation, one that is quite tricky to navigate. Read on for a dive into the factors that are affecting high-rise boards today and how to thrive in the current climate.
Regulatory Overhaul
Both Senate Bill 4D and House Bill 1021 from the Florida legislature are meant to prevent another building collapse like the one in Surfside. Together, they impose requirements for funding reserves and require both milestone inspections and Structural Integrity Reserve Studies (SIRS). It’s important to note that, although they are related, SIRS and the milestone inspections are not the same thing - it’s a common confusion, and a lot of the firms who perform both talk about them as they are the same. They aren’t.
First, let’s talk about milestone inspections. The initial statewide requirement was a mandatory 30-year inspection for any building that is 3 stories or taller and 30 years old located anywhere, OR within 3 miles of the coastline and at least 25 years old. That has since been simplified to simply state all buildings over 30 years old. Boards must conduct follow-up inspections every 10 years after the initial one. These inspections are modeled on the stringent 40-year inspections already in place in both Miami-Dade and Broward counties. A 30-year milestone inspection, also known as a recertification process, is a comprehensive structural inspection of a building, including an inspection of load-bearing elements and the primary structural members and primary structural systems. The purpose of the inspection is to determine the building's structural condition as it affects life safety, and to determine if any maintenance, repairs, or replacements of structural components are necessary.
All buildings that have three or more stories must have a SIRS completed at least every ten years. Associations existing on or before July 1, 2022, which are controlled by unit owners, must complete a SIRS by December 31, 2024.
While a traditional reserve study focuses on every major system in your building, SIRS focuses on several specific areas: roof; structure, including load-bearing walls; fireproofing and fire protection; plumbing; electrical; waterproofing and exterior painting and windows and exterior doors. Your regular reserve study will include systems that are less critical to life and safety, such as elevators, HVAC, and your pool.
These inspections and studies are complex, and yes, expensive. Then there’s the work that comes out of them. “We manage a building in St. Petersburg that's about to approve a $50 million special assessment,” says Bobby Knuth, regional director of high-rise at FirstService Residential. “They were expecting to have a $10 to $12 million project over the next 4 to 5 years when they initiated the study because the insurance company required it.” The building is nearly 50 years old, and the inspection revealed work no one anticipated that’s much more complex than originally planned for. Knuth says he expects more stories like that from buildings that are 50 to 70 years old and have never undergone these detailed kinds of structural inspections.
The right professional property management partner is essential to helping you manage the process and even find ways to help cover the costs. “FirstService Financial is a great resource we’re able to offer our boards,” says Knuth. “Bringing them in early gives the board some confidence that they can get through it, and that there are options out there that they can use to finance these projects.”
Geographic Disparities
As noted above, milestone, or recertification, inspections have been required in Miami-Dade and Broward counties for years. “Our boards are just looking at moving their timelines up,” explains Chris Hevia, vice president, South Florida High-Rise Division at FirstService Residential. “It’s some financial pressure, but not the shock that it may be in other areas.”
Some buildings in other parts of the state didn’t wait until the law required action. “Some of this got jump-started after the Surfside collapse with insurance companies and lenders wanting buildings to have inspections done in order to get loans or decent insurance rates or get any insurance at all,” explains Knuth. “So even before the law was passed to require this, we worked with a lot of the older buildings we manage to get studies done.”
The Insurance Crisis
The insurance market has been extremely challenging for the for the past several years, specifically securing property insurance in South Florida. “Many carriers have left the market or issued non-renewals, causing capacity problems for wind coverage,” explains Hevia. Insurance companies purchase reinsurance. The reinsurance market is impacted by global events including mudslides, earthquakes, wildfires, flooding, and of course, hurricanes. This puts pressure on reinsurers which ultimately causes higher insurance premiums. Hevia notes he has seen insurance increases for associations as high as 50% to 150% recently.
Climate change, catastrophic losses, and litigation in South Florida have driven carriers out of the Florida market. Many insurers are looking for best-in-class risks, including properties with updated roofs, impact glass windows or shutters, or newer construction. Hevia mentions “older properties that are not updated will be left with fewer options that are typically more expensive.” Some of those carriers may not be able to provide full limits of insurance, causing potential conflicts with condo docs and lender requirements.
“There is a light at the end of the tunnel,” Hevia says. “We are seeing some companies expand into the Florida market and hope that a correction is coming soon. In the meantime, it’s definitely putting increased pressure on association budgets.”
The Rise of Condo Terminations
Some owners simply cannot afford the increased assessments required for maintenance and structural upgrades. That’s leading some boards to consider condo terminations. What does that mean? “The membership can vote to dissolve the association and sell the property to a developer,” explains Hevia.
“The entire association doesn’t have to agree - a vote of 80% of the owners is enough, which may leave some homeowners unhappy.” Most developers will then tear down the older structure and replace it with new construction.
“Of course, we don't want to see that happen," he says. "It displaces owners, many of whom invested in these units years ago for their retirement. This is their home. Our goal as a management company is to assist associations in navigating these financial issues before termination becomes a consideration. We collaborate with FirstService Financial, find contractors who provide the best value, and help them optimize their budgets to manage all these factors.”
A quality property management partner can help high-rise boards get through difficult financial times with the right resources and expertise. To learn more about how your board can navigate these challenges, contact FirstService Residential today.