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2023-01-23 07:00 by Karl Denninger
in Housing , 73 references
[Comments enabled]  
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Oh this has got people upset....

Last May, Florida Gov. Ron DeSantis passed legislation mandating emergency reserve funds for condominiums statewide after the tragic collapse of the 12-story Champlain Towers South in Surfside.

Well actually DeSantis signed legislation -- the Legislature passed it.

The bill provides a statutory requirement for condo boards to maintain reserves for structure inspections and a good chunk of potential repairs that might be needed, with the inspections starting after a given period of time post-constructing and continuing to make sure that there isn't another Surfside collapse.

Which, in any high-rise building, is something you sort of have to do on a regular basis because all things made by man deteriorate over time; that is the nature of entropy and only through putting in more input over time do you stave that off.  There are no exceptions; this is a natural law and you cannot evade it.

The basic problem here is that anything that has a (1) reasonable or greater probability of occurring and (2) is a material expense, if you're running an organization with responsibility to others, has to be reserved against.  To not do so is to violate your fiduciary responsibility to said people.  In this case that's the condo owners who voted you onto the board to protect the common interests of all of the owners and, by being on said board you accept that fiduciary responsibility which, in the case of an individual condo owner likely is into the six figure range each or more.

The screaming being heard in the media now about this being "terrible" is really an admission that across the state many boards did not meet this responsibility, on purpose, and thus are under-reserved.  They have no reserves against such events because although they know full well they are likely to arise to some degree and the inspections may disclose trouble the cost of the inspection, although known, isn't being reserved for.

This of course has elevated the value of said condo sales -- after all, if you have to pay a $100/month reserve for this every month then that's $1,200 a year that is imputed back against the value of the condo.  In a decade that's 12 large before inflation.  Hmmm.... do you see the incentive here yet to not do that if you can get away with it?

And get away with it you might -- or might not.  But if "not" then it gets really nasty because there is either a huge special assessment to pay for that work or worse, there's an incentive to hide things you see that should draw an inspection and potential corrective costs because if you investigate you have to get the money to do the investigation and fix whatever you find.

Pinion explained how this could financially hurt landlords and Airbnb hosts, who may now have to pay additional housing costs under the new law.

"You're talking about people who have the Airbnb that they thought, ‘Oh, all these people with their Airbnb business, this would be great, I was going to rent this property or I'm going to own this property, and then the actual income is going to eclipse what I have to either pay for that monthly rent or that monthly mortgage,’" the CEO explained.

Oh, so you mean that person who bought an investment property didn't bother check the books to see if there were adequate reserves for what was an entirely reasonable and expected set of expenses over time?  Who's fault is that and why is it so terrible?  I guess it is terrible because the AirBNB owner won't be the one laying in the bed when the building collapses and they're buried under 4,000 tons of debris?

Somehow I am having trouble discerning what the problem is with Florida shutting this garbage down and forcing as a matter of statute compliance with what has always been a reasonable and expected accounting requirement, never mind the fiduciary responsibility of the condo board to the owners -- something that, until this law passed, appears to have only been enforceable if and when an owner brings suit, and then they'd have to pay both sides since the board will assess the owner(s) to pay for the lawyers to defend the suit!

I get it that plenty of people are "shocked" that suddenly their outside patio has to be redone and the bill is going to be $30,000 to do it - per unit.  Yes, right now that concrete cracking may look cosmetic but once salt air and water gets into the attachments or rebar it won't stay that way and the only way to know that hasn't happened is to remove all the spalled concrete and look.  I'm sorry that costs a lot of money but someone has to pay for the work and if you don't pay then what happened at Surfside will happen again, whether its as dramatic (and deadly) as Surfside or just "your" balcony collapsing on the head of someone underneath your unit.

The shock of "catch up" payments required under this law is going to hurt plenty of people but your ire ought to be aimed at the condo boards who did not properly reserve against these inspections and expected lifetimes of the elements of the building before refurbishment and mitigation would be required on a reasonable and fiscally-sound basis.  They didn't do that because to do so would have made your monthly assessment much higher over the previous years and that would have depressed prices for the units themselves.

Years ago I got into it with the Okaloosa County School Board over exactly this issue.  They wanted a sales tax increase to cover replacing chillers in the cafeterias in the schools.  My question to them, at their meeting, was why they weren't all in prison for violating their fiduciary responsibility to the taxpayers since chillers all have an expected service life and they should have had a sinking fund running for the previous 20 years so when the present ones wore out they had the funds.

The vote put on the ballot was defeated.  Good.  Unfortunately the handcuffs did not come out and they should have.

That Florida has taken one tiny little step to put a stop to this in a place where its not just a drip of water coming in when it rains but a collapsed structure that can kill people is, in my opinion, a good thing.

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