After the Surfside condominium tragedy, our state and local leaders took a hard look at aging condominium buildings and what safety measures should be put in place to protect condo residents. Legislation was then enacted which requires extensive inspections as well as reserve account studies. Even though this new legislation and the affiliated requirements were very necessary, this additional due diligence has ultimately resulted in higher regular monthly assessments, along with special assessments being imposed, in many instances.
As some expected, the new requirements and corresponding uncertainties have resulted in the condominium resale market taking a hit. The average “days on market” for listings increased considerably, as has the inventory of active condo listings. Typically, the longer a unit is listed for sale, the more likely that the seller will utilize price drops to keep the potential buyer activity flowing. If one seller in the building is forced to sell for a significantly lower price compared to what other units in the building are currently priced at, a horrible comparable sale is created that negatively impacts all unit owners.
Even though the market is undergoing a correction as the dust settles on the new normal of condo living, the sheer number of condominium buildings coupled with the ever present and unwavering demand for the Florida retirement dream has created a unique opportunity for real estate professionals who are willing to answer the call. With that being said, let’s take a deeper dive into the present issues that are affecting the condo market.
Milestone inspections are required for residential condominiums and cooperative (co-op) associations that have three or more stories and are at least 30 years old (and in some cases 25 years old).
An owner or owners of a building that is three stories or more in height as determined by the Florida Building Code and that is subject, in whole or in part, to the condominium or cooperative form of ownership as a residential condominium or a residential cooperative must have a milestone inspection performed by December 31 of the year in which the building reaches 30 years of age, based on the date the certificate of occupancy was issued, and every 10 years thereafter.
If a building reached 30 years of age before July 1, 2022, the building’s initial milestone inspection must be performed before December 31, 2024. If a building reaches 30 years of age on or after July 1, 2022, and before December 31, 2024, the building’s initial milestone inspection must be performed before December 31, 2025. If the date of issuance for the certificate of occupancy is not available, the date of issuance of the building’s certificate of occupancy shall be the date of occupancy evidenced in any record of the local building official.
Furthermore, the local enforcement agency may determine that local circumstances, including environmental conditions such as proximity to salt water, require that a milestone inspection must be performed by December 31 of the year in which the building reaches 25 years of age, based on the date the certificate of occupancy was issued, and every 10 years thereafter.
Milestone inspections are very expensive and are ultimately paid for by condo unit owners via assessments. Also, if significant issues are found during the inspection which necessitates repairs being made, the funds required to complete such a project could easily be in the hundreds of thousands of dollars. These repair costs are typically passed on to the condo unit owners in the form of special assessments
Structural Integrity Reserve Studies (SIRS) examine the reserve funds required for future major repairs and/or replacement of the common area structural components based on visual examinations of the condominium property.
Pursuant to Florida’s SIRS requirements, an association must have a structural integrity reserve study completed at least every 10 years after the condominium’s creation for each building on the condominium property that is three stories or higher in height. These include, at a minimum, a study of the following items as related to the structural integrity and safety of the building: 1) Roof; 2) Structure, including load-bearing walls and other primary structural members and primary structural systems; 3) Fireproofing and fire protection systems; 4) Plumbing; 5) Electrical systems; 6) Waterproofing and exterior painting; 7) Windows and exterior doors; and 8) 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 in 1 through 7 above, as determined by the visual inspection portion of the structural integrity reserve study.
At a minimum, a structural integrity reserve study must identify each item of the condominium property being visually inspected, state the estimated remaining useful life and the estimated replacement cost or deferred maintenance expense of each item of the condominium property being visually inspected, and provide a reserve funding schedule with a recommended annual reserve amount that achieves the estimated replacement cost or deferred maintenance expense by the end of the estimated remaining useful life of the item. In a large percentage of cases, the SIRS findings have resulted in a reserve funding schedule that increases assessments for condo unit owners.
For condominium owners, skyrocketing insurance premiums have accompanied the uncertainty lingering in the aging condo market. As the perceived risk of insuring a building goes up, so does the premium. When you also consider the recent hurricanes and the devastation that resulted (along with other market factors), there is a good chance that many condominium associations will be dealing with another increase in their insurance premiums once the policy renewal date approaches. If condominium associations decide to get quotes from other insurance carriers, it is also possible that a lower premium could come with additional maintenance requirements and correspondingly more of a financial obligation that falls squarely on the shoulders of unit owners.
So, how can real estate professionals help buyers and sellers to navigate this storm of uncertainty?
Given the recent changes in legislation, there are now many more documents that need to be reviewed and discussed with clients in order to make sure that there is total transparency and complete understanding prior to heading to the closing table. Real estate professionals should be well-versed in the conclusions found within the milestone inspection as well as the structural integrity reserve study. Additionally, the association’s financials and the meeting minutes need to be analyzed to understand the overall state of affairs with the applicable building.
One interesting issue that is currently being discussed by legal professionals is that the applicable statute does not require the SIRS increases to be assessed until 2026 in certain instances where the 2025 budget has already been adopted. Specifically, for any budget adopted prior to December 31, 2024, SIRS reserves may be waived. For any budget adopted after December 31, 2024, SIRS reserves may not be waived.
Pursuant to section 718.112 (Bylaws) of the Florida statutes, the aforementioned waiver is accomplished in situations where the members of a unit-owner-controlled association may determine, by a majority vote of the total voting interests of the association, to provide no reserves or less reserves than required for budgets adopted prior to December 31, 2024. For a budget adopted on or after December 31, 2024, the members of a unit-owner-controlled association that must obtain a structural integrity reserve study may not determine to provide no reserves or less reserves than required. The possible inconsistent application of this statute across all applicable associations could result in uninformed buyers purchasing a unit and then getting an unpleasant surprise in 2026 in the form of increased assessments.
So, what is the light at the end of the tunnel? The institution of condo living in Florida is too big to fail. Even though buyers are sitting on the sidelines and waiting for the dust to settle, they certainly haven’t left the stadium. So how do we get them back in the game? For real estate professionals willing to put in the work to have a complete understanding of the steps that need to be taken to protect buyers in condo deals, there will be a tremendous amount of opportunity for years to come. This representation opportunity can also be analyzed in conjunction with the recent change in how the buying agent’s commission is handled. The ability to differentiate yourself as a competent real estate professional in the current condo market increases your marketability and supports buyers paying you the negotiated commission percentage even when there is no seller contribution to the buyer’s side commission.
Finally, it is worth noting that a large percentage of potential buyers in the condo market are retired and living on a fixed income. This group of buyers is the most susceptible to being harmed by buying a unit in a building that is not financially sound. Given the vulnerability of this demographic of buyers, real estate professionals that are willing to embrace the challenge have a chance to make a positive impact on the lives of many individuals by helping them to avoid an ill-advised purchase.
So, who in the real estate community is ready to step up to the plate and help the condo market to get back on track? There’s no time like the present! Let’s make it happen!