SB 154 Reserve Funding and Exceptions

By Ken Kmet

Ref:  718.112, bylaws, (2), (f) Annual Budget, 2.a.

The new law, SB 154, passed in 2023, the following language was enacted, “In a budget adopted by an association that is required to obtain a structural integrity reserve study, reserves must be maintained for the items identified in paragraph (g) for which the association is responsible pursuant to the declaration of condominium, and the reserve amount for such items must be based on the findings and recommendations of the association’s most recent structural integrity reserve study. With respect to items for which an estimate of useful life is not readily ascertainable or with an estimated remaining useful life of greater than 25 years, an association is not required to reserve replacement costs for such items, but an association must reserve the amount of deferred maintenance expense, if any, which is recommended by the structural integrity reserve study for such items.”

Let me say before I get started, if your association does not qualify for this phrase, ”In a budget adopted by an association that is required to obtain a structural integrity reserve study”, then you only have to comply with reserves items and funding that are NOT part of paragraph g. You won’t have a SIRS inspection and report to use as your guide to funding those items, unless you want to voluntarily hire someone to provide that to you.

The law actually reads as follows.  “This paragraph does not apply to buildings less than three stories in height; single-family, two-family, or three-family dwellings with three or fewer habitable stories above ground; any portion or component of a building that has not been submitted to the condominium form of ownership; or any portion component of a building that is maintained by a party other than the association.”

However, the reserve voting requirement has changed for ALL Florida condominium associations. Even those that don’t require a SIRS, and which paragraph g does NOT apply, and that must fund their reserves, now have to obtain a vote in favor to waive reserves, either in total or in part, by a majority interest of all the owners of a condominium entitled to vote.

So, the standard is associations that are required to have a SIRS, cannot waive fully funding those reserves in a budget beginning 2025.  Until then, by a vote of the majority of the total voting interest at a duly called meeting of the members, they can vote to waive funding reserves either in part or totally.  That is an upgrade, since prior to this change, only a majority vote of those at a proper meeting (with a quorum present either in person or by proxy)  could waive funding reserves in any manner.  Doing the math, the new law change will require more votes to waive, depending on the size of your association, but still possible until January 1, 2025.

Further the law requires the following conditions.   The association may adjust replacement reserve assessments annually to take into account an inflation adjustment and any changes in estimates or extension of the useful life of a reserve item caused by deferred maintenance. 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 by this subsection. 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 by this subsection for items listed in paragraph (g), except that members of an association operating a multi-condominium may determine to provide no reserves or less reserves than required by this subsection if an alternative funding method has been approved by the division.

There are two clear exceptions.  The first, for which an estimate of useful life is not readily ascertainable.  This phrase leaves grey areas, undefined intent, and will result in arguments and debates, and some associations challenging the law based on their interpretation.

Briefly, during a visual inspection (Phase one), some conditions are NOT “readily ascertainable”.  The most obvious reason is they are “hidden”.  Some examples are electrical conduit inside a wall, reinforcing structural steel inside a concrete floor, wall, or roof, and other utilities and structural components which are “inside” something making it not readily accessible, requiring invasive demolition in order to lay eyes on it, apply testing equipment to it such that its condition, expected life, and cost to repair can be determined, and also reserved for, if any .

This is the example that will most likely lead to the need for a phase two inspection.  Depending on your engineer’s analysis of the limited phase one inspection, this phrase “readily ascertainable” will most likely be the catalyst for your engineer to insist on and require a phase two inspection.

Let me say right here and now, as clear and strongly as I can say it, in my experience, it is literally impossible for an engineer to both “readily ascertain”, and easily estimate conditions of structural steel in concrete in a building of any age or location without performing invasive demolition and testing to any degree of accuracy. And even if he or she is allowed to perform demolition, even then there will a margin of error given as an estimate of remaining life and replacement cost.  In my opinion, this phrase “readily ascertainable” is undefined, lacks intent, will be widely interpreted, probably misused and abused, and opens to door to adding corruption to the integrity of this process and its compliance.  It should have never been added to this law language.  It weakens it considerably.  Let me dare say, in pure speculation, with no evidence to support it, it is so out of place with the remainder of this new law’s requirements, it makes me wonder if it was installed as a back door to those in the industry to offer them an “out”, or a way to lessen the financial impact in certain cases the result of their inspection reports. That is a lot said I know, and I hope that the best intentions were used by adding those two words, but it is what it is, and, whether intended or not, we will see how it plays out with intended and unintended consequences.

However, if a phase two inspection is not required, and the reserve study folks or the engineer is willing, they may recommend that your association comply the other provision in the new law which is, must reserve the amount of deferred maintenance expense, if any, which is recommended by the structural integrity reserve study for such items. They will then provide you with a cost of replacement, and that amount will have to be fully reserved for in your budget beginning 2025.  That cost may be significantly less than what a phase two inspection might require, and if “deferred maintenance” is recommended, that phrase implies a lesser degree of cost, since replacing something, especially hidden structural building components,  always costs less than simply maintaining it.

The second exception is as follows for any item mentioned in “paragraph G”,  “with an estimated remaining useful life of greater than 25 years”.  This exception opens another cans of worms, as they say, since it offers little more to explain how to manage the result.  If you have ten items, for example, to reserve for, as a result of your phase one or phase two inspection, or both, and one of these items has an expected life greater than 25 years, do you simply not fund anything for that item?  Will the report say how many years of life expectancy it does have?  We may not know how to manage this provision or exception until the reports start coming in, and there is an industry  standard established. In any case, this provision may be subject to much discretion and judgement of your inspector.

Who you hire to do your phase one inspection is important, because this is a new thing in the industry.  Inspections are not new of course, but providing them in accordance with the new law is.  So, some of what is required and expected will be made up as we go.  The results of your phase one and phase two inspections can and probably will have a very significant financial impact on your association.  During your interview of your phase one and phase two inspection companies, I recommend you ask what the above terminology means to them and how it will be managed by them.  So, I say again, emphasis implied, who you hire to do your phase one inspection is important!

One final word on this new law.  In my humble opinion, there are some things that need more detail and clarification before they can be completed.  I fully expect there to be at least a “glitch” law passed in the next session of the Florida legislature, at least of the phrases mentioned above (and there is more in my opinion) , before the professionals can know how they should be accomplished.  Also, there are some associations that, because of simply being three stories or more in height, have to comply, that an honest engineer would say they do NOT and should not have to comply the same way a ten-story high rise should.  I am hearing of associations that must comply with this law, for example, that have no structural steel, they are complete wood structures. This broad-brush law creates a hardship to smaller communities to a disproportionate way than to a large community. A building (SIRS) inspection service has minimum charges, and base fees.  For example, if an inspection and report costs $20,000 to a 100 unit high rise, that same company has to charge minimums to a ten unit wood structure, three story condominium association, costing them a much greater cost per door than a larger community.  During the next legislative session, it is my hope that, added to the glitch bill language, there can be added language that speaks to a cap limit on what these services can charge, and that the charge be calculated as a per door rate (not to exceed), rather than a bulk random fee.  The free market may take into account if a building has less to inspect, their fees will be less, but there should be safeguards in the law to make sure this is so.  And since this law makes this service mandatory, has a time limit on its completion, and their on a limited number of available qualified companies to service this demand, the legislature has to build in safe guards to make sure reasonable (uninflated) fees are charged proportionately to the number of units in a condominium.  This legislative mandate could cause sever inflation to the condominium industry for many reasons.  Great volumes of repairs and replacements will result from these inspections and reports, again with not enough ready service companies and supply companies to satisfy the demand.  This is a set up for inflation the likes of which Florida condominium associations have never seen.  Monthly maintenance fees could double and even triple as a result.  Check out my videos on this at my Youtube channel Condotube.  It is incumbent upon the legislature during its next session to have a deep dive look doing whatever they can to reduce the inflation their mandate will cause this industry.

Here is paragraph g, in its entirety.

(g) Structural integrity reserve study.—

1. A residential condominium 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 as determined by the Florida Building Code which includes, at a minimum, a study of the following items as related to the structural integrity and safety of the building:
2. Roof.
3. Structure, including load-bearing walls and other primary structural members and primary structural systems as those terms are defined in s. 627.706.
4. Fireproofing and fire protection systems.
5. Plumbing.
6. Electrical systems.
7. Waterproofing and exterior painting.
8. Windows and exterior doors.
9. 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 sub-subparagraphs a.- g. as determined by the visual inspection portion of the structural integrity reserve study.