Reserve Study
Background
- Reserve studies for condominiums were not required by FL statute until, in response to the Chamberlain Towers collapse, legislation was passed in May 2022.
- In 2023, the Florida legislature rewrote the statue to fix "glitches".
- As a result the new law requires a Structural Integrity Reserve Study (SIRS) be conducted
- Any budget adopted on or after December 31, 2024 must include:
- the funding specified in the SIRS
- members cannot vote to waive or reduce funding of the SIRS reserves, or vote to use the SIRS reserves for any other purpose except for the components in the SIRS.
- After the initial study, a SIRS must be completed at least every 10 years.
Chalet Reserve Study History
- Chalet Boards have caused Reserve Studies performed by Sedgwick (and its predecessor) starting in 2005.
- Studies were done in 2005, 2007, 2011, 2013, and 2022 (the last 4 reports are posted in the CondoControl Library)
- Several former members of the Board and former Treasurers have reported that the Chalet was often complemented because its Reserve Budget was in such good shape compared to most similar condominiums in the area.
- Sedgwick is currently working on the SIRS update required by the new statute.
What are Reserve Budgets Supposed to do?
- For greater details on this question, see the entries below.
- Very simply stated:
- The primary goal of the Reserve Budget is to assure that condominium associations will save enough funds each year for each line item in the Reserve Budget so that at the end of its projected life, sufficient funds will be available to replace or repair the item.
- Sedgwick is a well established company that provides reserve study services to condominiums and HOA. They (and predecessors) have been engaged by the Chalet to conduct reserve studies in since 2005.
- Their description of the process is provide below.
Sedgwick Reserve Analysis
- What the 2022 Update says about what items of the Chalet Facilities need to be replaced — sorted by near-term at the top
- This gives an idea of what new Projects are likely to be needed in the near future.
- Sedgwick is in the process of completing a 2024 Update that should be available before 1 May 2024.
What Is a Reserve Study? [Click + to view document]
What Is a Reserve Study?
Source: https://www.gabvalue.com/reserve-studies.asp
A reserve study is a budgetary planning tool that identifies a property's necessary major repairs and/or replacements and establishes a funding plan to insure that adequate monies are available for planned expenditures. A reserve study has two primary analyses: the physical analysis and the financial analysis. The physical analysis consists of a component study that identifies the major replacement or repair components of a property, their estimated costs and their estimated useful and remaining lives. The financial analysis is a funding study that incorporates information from the component study into a budget plan to fund the anticipated future expenditures.
What makes a Sedgwick | Valuation Services Division Reserve Study Superior?
Expertise & Credibility
Sedgwick | Valuation Services Division has been providing professional services for more than 40 years. This demonstrates to our clients our financial stability and longevity.
Our reserve specialists are professionals with years of experience in valuing and developing funding analyses for multiple property types.
Our team has in-depth experience in statute requirements for establishing reserve budgets, as well as in-depth experience with market standards for reserve budget analysis in multiple property types.
All Sedgwick | Valuation Services Division's reserve studies are completed by a Community Associations Institute designated Reserve Specialist.
Detailed Data Collection
The Sedgwick | Valuation Services Division Reserve Specialist compiles detailed data about your property from a thorough on-site inspection, field measurements, and examination of building construction plans provided by the client. Appropriate and accurate component sizes and counts are derived from these data sources. Without accurate factual data, the accuracy of the analysis will be compromised.
Repair/Replacement cost information is taken from a variety of sources, including national and regional cost estimating indexes, interviews with developers, builders, consultants and contractors, as well as actual costs from similar properties within multiple market areas. Furthermore, an association's actual historical reserve expenditures are carefully considered in every Sedgwick | Valuation Services Division reserve study.
State-of-the-Art Software
Sedgwick | Valuation Services Division utilizes a nationally recognized reserve study software program in completion of all reserve studies. This software provides in depth breakdowns of each and every components' cost, total and remaining useful lives, as well as a year by year schedule for all planned reserve expenditures. Also provided is an annual summary of beginning reserve fund balances, ending reserve fund balances, planned expenditures, cumulative interest income, and graphical information.
What is Involved in a Sedgwick | Valuation Services Division Reserve Study?
A full consultation with a representative of the property to identify the major replacement or repair components to be included in the study
In-depth on-site inspection of the property by a reserve specialist
Examination of all construction plans and a review of historic information available on components included in the reserve study
Establish a useful life, remaining useful life and current replacement cost for each of the components identified
Develop the estimated future replacement cost and replacement schedule
Develop a funding study that will estimate the annual funding needed to meet the required replacement reserve amount
What Type of Funding Analysis Methodology is Utilized?
Sedgwick | Valuation Services Division reserve studies employ two separate and distinct analysis methodologies to calculate reserve contributions; the Component Funding Analysis and the Cash Flow Analysis methodologies.
The Component Funding Analysis method is a straight-line accounting procedure that calculates the annual contribution amount for each individual line item component and then sums these components to calculate the total annual contribution rate for this analysis.
The Cash Flow Analysis is a method of calculating reserve contributions where contributions to the reserve funds are designed to offset the variable annual expenditures from the reserve fund. Unlike the Component Funding Analysis, which is essentially a snapshot for one fiscal year, the Cash Flow Analysis is a long term reserve analysis that considers such factors as interest income, construction cost and/or inflationary increases for individual components, and an association's preference with regard to minimum reserve fund balances during the study period. In many cases, conversion to the Cash Flow Analysis method provides full reserve funding at a lower annual contribution rate compared to the Component Funding Analysis method.
Source: https://www.gabvalue.com/reserve-studies.asp
A reserve study is a budgetary planning tool that identifies a property's necessary major repairs and/or replacements and establishes a funding plan to insure that adequate monies are available for planned expenditures. A reserve study has two primary analyses: the physical analysis and the financial analysis. The physical analysis consists of a component study that identifies the major replacement or repair components of a property, their estimated costs and their estimated useful and remaining lives. The financial analysis is a funding study that incorporates information from the component study into a budget plan to fund the anticipated future expenditures.
What makes a Sedgwick | Valuation Services Division Reserve Study Superior?
Expertise & Credibility
Sedgwick | Valuation Services Division has been providing professional services for more than 40 years. This demonstrates to our clients our financial stability and longevity.
Our reserve specialists are professionals with years of experience in valuing and developing funding analyses for multiple property types.
Our team has in-depth experience in statute requirements for establishing reserve budgets, as well as in-depth experience with market standards for reserve budget analysis in multiple property types.
All Sedgwick | Valuation Services Division's reserve studies are completed by a Community Associations Institute designated Reserve Specialist.
Detailed Data Collection
The Sedgwick | Valuation Services Division Reserve Specialist compiles detailed data about your property from a thorough on-site inspection, field measurements, and examination of building construction plans provided by the client. Appropriate and accurate component sizes and counts are derived from these data sources. Without accurate factual data, the accuracy of the analysis will be compromised.
Repair/Replacement cost information is taken from a variety of sources, including national and regional cost estimating indexes, interviews with developers, builders, consultants and contractors, as well as actual costs from similar properties within multiple market areas. Furthermore, an association's actual historical reserve expenditures are carefully considered in every Sedgwick | Valuation Services Division reserve study.
State-of-the-Art Software
Sedgwick | Valuation Services Division utilizes a nationally recognized reserve study software program in completion of all reserve studies. This software provides in depth breakdowns of each and every components' cost, total and remaining useful lives, as well as a year by year schedule for all planned reserve expenditures. Also provided is an annual summary of beginning reserve fund balances, ending reserve fund balances, planned expenditures, cumulative interest income, and graphical information.
What is Involved in a Sedgwick | Valuation Services Division Reserve Study?
A full consultation with a representative of the property to identify the major replacement or repair components to be included in the study
In-depth on-site inspection of the property by a reserve specialist
Examination of all construction plans and a review of historic information available on components included in the reserve study
Establish a useful life, remaining useful life and current replacement cost for each of the components identified
Develop the estimated future replacement cost and replacement schedule
Develop a funding study that will estimate the annual funding needed to meet the required replacement reserve amount
What Type of Funding Analysis Methodology is Utilized?
Sedgwick | Valuation Services Division reserve studies employ two separate and distinct analysis methodologies to calculate reserve contributions; the Component Funding Analysis and the Cash Flow Analysis methodologies.
The Component Funding Analysis method is a straight-line accounting procedure that calculates the annual contribution amount for each individual line item component and then sums these components to calculate the total annual contribution rate for this analysis.
The Cash Flow Analysis is a method of calculating reserve contributions where contributions to the reserve funds are designed to offset the variable annual expenditures from the reserve fund. Unlike the Component Funding Analysis, which is essentially a snapshot for one fiscal year, the Cash Flow Analysis is a long term reserve analysis that considers such factors as interest income, construction cost and/or inflationary increases for individual components, and an association's preference with regard to minimum reserve fund balances during the study period. In many cases, conversion to the Cash Flow Analysis method provides full reserve funding at a lower annual contribution rate compared to the Component Funding Analysis method.
2023 Update to Florida Statute Requiring Reserve Study for Condominiums. [Click + to view document]
Florida Condominiums Have New Building and Reserve Funding Requirements
Written by Ana Goodman on November 29, 2023
Source: https://warrenaverett.com/insights/condominium-requirements/
The State of Florida has mandated building inspections and increased reserve funding requirements for condominiums and cooperatives exceeding three stories in height. These measures aim to enhance safety and financial stability in multi-story residential properties. Here’s what associations need to know to stay compliant.
Milestone Inspections
Condominium associations must have a milestone inspection performed for each building that has three or more stories by December 31 of the year in which the building is 30 years old 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.
Structural Integrity Reserve Studies
Associations existing on or before July 1, 2022, must have a structural integrity reserve study (SIRS) completed by December 31, 2024, for each building on the condominium property that is three stories or higher in height. After the initial study, a SIRS must be completed at least every 10 years.
A structural reserve study includes at a minimum, a study of the following items:
· Roof
· Structure, including load-bearing walls and other primary structural members
· Fireproofing 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
A structural integrity reserve study must contain the following:
· Each item in the list above that is on the condominium property must be identified and visually inspected.
· The estimated remaining useful life and the estimated replacement cost or deferred maintenance expense is calculated for each item.
· A reserve funding schedule is provided with a recommended annual reserve amount that achieves the estimated replacement cost or deferred maintenance expense of each item.
Florida statutes do not allow for the waiving or partial funding of the structural integrity reserves studies. However, membership can still vote to waive or reduce funding for nonstructural (non-SIRS) items.
Implications
These changes can introduce a set of challenges that affect an association’s reserve funding schedule in various ways. One particular challenge may be allocating existing reserve funds, particularly the funds that were previously pooled.
With the new legislation, there may be a need to reassess how these funds are segregated between SIRS items and non-SIRS items, ensuring that they align with the updated regulations and guidelines.
In addition, if the officers or directors of an association willfully and knowingly fail to complete the milestone inspection and/or or the structural integrity reserve study, such failure is a breach of an officer’s and director’s fiduciary relationship to the unit owners.
Written by Ana Goodman on November 29, 2023
Source: https://warrenaverett.com/insights/condominium-requirements/
The State of Florida has mandated building inspections and increased reserve funding requirements for condominiums and cooperatives exceeding three stories in height. These measures aim to enhance safety and financial stability in multi-story residential properties. Here’s what associations need to know to stay compliant.
Milestone Inspections
Condominium associations must have a milestone inspection performed for each building that has three or more stories by December 31 of the year in which the building is 30 years old 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.
Structural Integrity Reserve Studies
Associations existing on or before July 1, 2022, must have a structural integrity reserve study (SIRS) completed by December 31, 2024, for each building on the condominium property that is three stories or higher in height. After the initial study, a SIRS must be completed at least every 10 years.
A structural reserve study includes at a minimum, a study of the following items:
· Roof
· Structure, including load-bearing walls and other primary structural members
· Fireproofing 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
A structural integrity reserve study must contain the following:
· Each item in the list above that is on the condominium property must be identified and visually inspected.
· The estimated remaining useful life and the estimated replacement cost or deferred maintenance expense is calculated for each item.
· A reserve funding schedule is provided with a recommended annual reserve amount that achieves the estimated replacement cost or deferred maintenance expense of each item.
Florida statutes do not allow for the waiving or partial funding of the structural integrity reserves studies. However, membership can still vote to waive or reduce funding for nonstructural (non-SIRS) items.
Implications
These changes can introduce a set of challenges that affect an association’s reserve funding schedule in various ways. One particular challenge may be allocating existing reserve funds, particularly the funds that were previously pooled.
With the new legislation, there may be a need to reassess how these funds are segregated between SIRS items and non-SIRS items, ensuring that they align with the updated regulations and guidelines.
In addition, if the officers or directors of an association willfully and knowingly fail to complete the milestone inspection and/or or the structural integrity reserve study, such failure is a breach of an officer’s and director’s fiduciary relationship to the unit owners.
Research and Background Reading on Reserve Studies
Florida Statutory Requirements for Condominium Reserves.
Florida Reserve Study Requirements
Florida state law governs when and how often an association must have a reserve study performed. Chapter 718 of the Florida Statutes governs condominium associations and Chapter 720 governs homeowners’ associations.
Condominium Associations
Condominium associations are required to budget for capital expenditures and deferred maintenance (Florida Statute 718.112). The statute requires reserves for roof replacement, building painting, pavement resurfacing, and for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000.
Even though Florida law does not specifically state the need for a reserve study, reserve contributions must be established using a formula which is based upon the remaining useful life and estimated replacement cost of the reserve items. In short, condominium associations need to annually review and amend their reserve fund and ongoing fund contributions.
After the initial study, a SIRS must be completed at least every 10 years.
Time to Pay the Piper: New Mandatory Reserve Requirements for Florida Condominiums
Kevin M. Koushel
Florida law requires every condominium’s annual budget to include both operating expenses and reserves for capital expenditures and deferred maintenance. Operating expenses are those incurred during the day-to-day operations of the condominium (e.g., landscaping, pool maintenance, and management fees). Capital expenditures and deferred maintenance, on the other hand, are those incurred during the sporadic repair or replacement of major components of the condominium property (e.g., the roof, parking lot, and exterior painting).
To properly budget for reserves, condominium associations must conduct a reserve study. A reserve study is a long-term financial planning tool that analyzes the physical condition of major components of the condominium property, and their estimated repair or replacement costs. By determining these factors, condominium associations can then accurately budget for capital repair and replacement expenditures over time. For example, if a condominium needs $1 million to replace its roof in 10 years, its next annual budget should include $100,000 in reserves. Ideally, the association will continue to reserve $100,000 each year for the next 10 years in order to raise the necessary $1 million by the time the roof needs to be replaced. A reserve study takes this general formula and applies it to every major component on the condominium property.
The Problem
Because long-term repair and replacement is inevitable for all condominiums, one would think that every association would conduct a reserve study and regularly set aside reserves. But this has not been the case. Until recently, Florida law did not require condominiums to conduct reserve studies, and, despite annual budgets being obligated to include reserves for capital expenditures and deferred maintenance, associations were previously allowed to waive or reduce reserve contributions through a membership vote.
Unit owners often exercised this ill-advised option to keep assessments as low as possible and/or to avoid paying for major components scheduled to be repaired or replaced, which they contemplated would be after the sale of their units. Continuing with the example above, if unit owners contemplated selling their units in less than 10 years, and therefore would not directly benefit from the new roof, they were likely to vote to waive or reduce the $100,000 in reserves. By doing this, the unit owners simply kicked the can down the road for themselves, or they literally passed the financial burden of the new roof on to the subsequent unit owners. Either way, this practice illustrates why so many condominiums are severely underfunded.
The “Solution”
Senate Bill 4-D (“S.B. 4-D”), which was enacted in May 2022 in response to the collapse of Champlain Towers South, attempts to address the foregoing problems. It amends the Florida Condominium Act (“Act”) in two significant ways with respect to condominium reserves. First, condominium associations must now have a structural integrity reserve study (“SIRS”) completed every 10 years after the condominium’s creation for each building on the condominium property, that is three stories or higher in height.[1] The Act defines a “structural integrity reserve study” as:
[A] study of the reserve funds required for future major repairs and replacement of the common areas based on a visual inspection of the common areas. A structural integrity reserve study may be performed by any person qualified to perform such study. However, the visual inspection portion of the structural integrity reserve study must be performed by an engineer licensed under Chapter 471 or an architect licensed under Chapter 481. At a minimum, a structural integrity reserve study must identify the common areas being visually inspected, state the estimated remaining useful life and the estimated replacement cost or deferred maintenance expense of the common areas being visually inspected, and provide a recommended annual reserve amount that achieves the estimated replacement cost or deferred maintenance expense of each common area being visually inspected by the end of the estimated remaining useful life of each common area.
Second, beginning in 2025, members of a unit owner-controlled condominium association may not elect to provide no reserves or less reserves than required for the following building components: (1) the roof; (2) load-bearing walls or other primary structural members; (3) floors; (4) the foundation; (5) fireproofing and fire protection systems; (6) plumbing; (7) electrical systems; (8) waterproofing and exterior painting; (9) windows; and (10) 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 one or more of the components above, as determined by a licensed engineer or architect performing the visual inspection portion of the SIRS.
The changes to the Act are intended to prevent another tragedy, but some of the newly identified building components are questionable at best. No one doubts, for example, that a foundation is vital to a building’s overall structure. But performing a visual inspection of this component is extremely difficult or practically impossible without substantial destructive work. The new legislation ignores this reality and arguably requires the inspector to assign it a useful life in the SIRS so the association can, in turn, establish it as a reserve amount. Equally elusive may be determining the useful life of the condominium’s floors, load-bearing walls, or other primary structural members.
The new legislation also adds windows as a SIRS item, but in many condominiums unit owners are responsible for replacing and repairing the windows that are considered part of the units. This exemplifies the potential discrepancies that may now exist between a condominium’s governing documents and the new legislation. These ambiguities not only burden the condominiums, but also the licensed architects and engineers that are supposed to perform SIRS inspections for determining mandatory reserve contributions.
Conclusion
At this point, the only thing that seems certain for many condominiums, is that assessments are going to increase. Even if the legislature addresses S.B. 4-D’s technical problems, it is unlikely that the structural integrity reserve study and mandatory reserve requirements will go away. This means, at the very minimum, condominium associations will have to pay for structural integrity reserve studies, and they will have to begin setting aside reserves for the new components listed above, as well as make up for any underfunded reserves that were previously waived or reduced.
The new legislation is truly a “time to pay the piper” moment for older condominiums where skipping a reserve study, and/or waiving or reducing reserves has been an annual tradition. Also, when these new reserve requirements are tacked onto other association expenses, such as repairs for substantial structural deterioration and/or rising insurance premiums, some condominiums may learn that the price tag of continuing on is simply not achievable.
[1] A condominium’s initial SIRS must be completed prior to turnover from the developer, or for unit owner-controlled associations existing on or before July 1, 2022, by December 31, 2024.
https://www.bilzin.com/insights/publications/2022/11/new-mandatory-requirements-for-florida-condos
Florida Condominiums Have New Building and Reserve Funding Requirements
Written by Ana Goodman on November 29, 2023
Source: https://warrenaverett.com/insights/condominium-requirements/
The State of Florida has mandated building inspections and increased reserve funding requirements for condominiums and cooperatives exceeding three stories in height. These measures aim to enhance safety and financial stability in multi-story residential properties. Here’s what associations need to know to stay compliant.
Milestone Inspections
Condominium associations must have a milestone inspection performed for each building that has three or more stories by December 31 of the year in which the building is 30 years old 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.
Structural Integrity Reserve Studies
Associations existing on or before July 1, 2022, must have a structural integrity reserve study (SIRS) completed by December 31, 2024, for each building on the condominium property that is three stories or higher in height. After the initial study, a SIRS must be completed at least every 10 years.
A structural reserve study includes at a minimum, a study of the following items:
· Roof
· Structure, including load-bearing walls and other primary structural members
· Fireproofing 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
A structural integrity reserve study must contain the following:
· Each item in the list above that is on the condominium property must be identified and visually inspected.
· The estimated remaining useful life and the estimated replacement cost or deferred maintenance expense is calculated for each item.
· A reserve funding schedule is provided with a recommended annual reserve amount that achieves the estimated replacement cost or deferred maintenance expense of each item.
Florida statutes do not allow for the waiving or partial funding of the structural integrity reserves studies. However, membership can still vote to waive or reduce funding for nonstructural (non-SIRS) items.
Implications
These changes can introduce a set of challenges that affect an association’s reserve funding schedule in various ways. One particular challenge may be allocating existing reserve funds, particularly the funds that were previously pooled.
With the new legislation, there may be a need to reassess how these funds are segregated between SIRS items and non-SIRS items, ensuring that they align with the updated regulations and guidelines.
In addition, if the officers or directors of an association willfully and knowingly fail to complete the milestone inspection and/or or the structural integrity reserve study, such failure is a breach of an officer’s and director’s fiduciary relationship to the unit owners.
What Is a Reserve Study?
Source: https://www.gabvalue.com/reserve-studies.asp
A reserve study is a budgetary planning tool that identifies a property's necessary major repairs and/or replacements and establishes a funding plan to insure that adequate monies are available for planned expenditures. A reserve study has two primary analyses: the physical analysis and the financial analysis. The physical analysis consists of a component study that identifies the major replacement or repair components of a property, their estimated costs and their estimated useful and remaining lives. The financial analysis is a funding study that incorporates information from the component study into a budget plan to fund the anticipated future expenditures.
What makes a Sedgwick | Valuation Services Division Reserve Study Superior?
Expertise & Credibility
Sedgwick | Valuation Services Division has been providing professional services for more than 40 years. This demonstrates to our clients our financial stability and longevity.
Our reserve specialists are professionals with years of experience in valuing and developing funding analyses for multiple property types.
Our team has in-depth experience in statute requirements for establishing reserve budgets, as well as in-depth experience with market standards for reserve budget analysis in multiple property types.
All Sedgwick | Valuation Services Division's reserve studies are completed by a Community Associations Institute designated Reserve Specialist.
Detailed Data Collection
The Sedgwick | Valuation Services Division Reserve Specialist compiles detailed data about your property from a thorough on-site inspection, field measurements, and examination of building construction plans provided by the client. Appropriate and accurate component sizes and counts are derived from these data sources. Without accurate factual data, the accuracy of the analysis will be compromised.
Repair/Replacement cost information is taken from a variety of sources, including national and regional cost estimating indexes, interviews with developers, builders, consultants and contractors, as well as actual costs from similar properties within multiple market areas. Furthermore, an association's actual historical reserve expenditures are carefully considered in every Sedgwick | Valuation Services Division reserve study.
State-of-the-Art Software
Sedgwick | Valuation Services Division utilizes a nationally recognized reserve study software program in completion of all reserve studies. This software provides in depth breakdowns of each and every components' cost, total and remaining useful lives, as well as a year by year schedule for all planned reserve expenditures. Also provided is an annual summary of beginning reserve fund balances, ending reserve fund balances, planned expenditures, cumulative interest income, and graphical information.
What is Involved in a Sedgwick | Valuation Services Division Reserve Study?
A full consultation with a representative of the property to identify the major replacement or repair components to be included in the study
In-depth on-site inspection of the property by a reserve specialist
Examination of all construction plans and a review of historic information available on components included in the reserve study
Establish a useful life, remaining useful life and current replacement cost for each of the components identified
Develop the estimated future replacement cost and replacement schedule
Develop a funding study that will estimate the annual funding needed to meet the required replacement reserve amount
What Type of Funding Analysis Methodology is Utilized?
Sedgwick | Valuation Services Division reserve studies employ two separate and distinct analysis methodologies to calculate reserve contributions; the Component Funding Analysis and the Cash Flow Analysis methodologies.
The Component Funding Analysis method is a straight-line accounting procedure that calculates the annual contribution amount for each individual line item component and then sums these components to calculate the total annual contribution rate for this analysis.
The Cash Flow Analysis is a method of calculating reserve contributions where contributions to the reserve funds are designed to offset the variable annual expenditures from the reserve fund. Unlike the Component Funding Analysis, which is essentially a snapshot for one fiscal year, the Cash Flow Analysis is a long term reserve analysis that considers such factors as interest income, construction cost and/or inflationary increases for individual components, and an association's preference with regard to minimum reserve fund balances during the study period. In many cases, conversion to the Cash Flow Analysis method provides full reserve funding at a lower annual contribution rate compared to the Component Funding Analysis method.
2023 Florida Reserve Funding Updates
Source: https://reservestudyfl.com/2023-florida-reserve-funding-updates/
The 2023 Florida Legislative Session made some changes to Senate Bill 4D, which was passed in 2022. Senate Bill 4D brought sweeping changes to how condominiums and cooperatives that are 3 stories or taller must fund their reserves. The 2023 updated bill, Senate Bill 154, was essentially a glitch bill that ironed out some of the problems from the previous bill in 2022.
The following are the main takeaways and what is needed to be known going forward from the new bill:
Structural Integrity Reserve Studies for Condominiums/Cooperatives, 3 stories or taller:
· Structural Integrity Reserve Studies (SIRS) must be performed for each building on the property at least once every 10 years and the first one must be completed by December 31, 2024 in almost all cases. It should be noted that this does not apply to nonresidential condominiums that are 3 stories or taller, which are exempt from SIRS.
· Structural integrity reserve study means a study of the reserve funds required for future major repairs and replacement of the condominium property. The structural items consist of:
o Roof
o Structure, including load-bearing walls and or other primary structural members and primary structural systems
o Fireproofing and fire protection systems
o Plumbing
o Electrical Systems
o Waterproofing and Exterior Painting
o Windows and Exterior Doors (that are association responsibility)
o 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 items 1 – 7.
At a minimum, a structural integrity reserve study must identify each item of the condominium/cooperative property being visually inspected, state the estimated remaining useful life and the estimated replacement cost or deferred maintenance expense of each item 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 of each item being visually inspected by the end of the estimated remaining useful life of the item.
· The structural integrity reserve study may recommend that reserves do not need to be maintained for any item for which an estimate of useful life and an estimate of replacement cost cannot be determined, or the study may recommend a deferred maintenance expense amount for such item.
· The structural integrity reserve study may recommend that reserves for replacement costs do not need to be maintained for any item with an estimated remaining useful life of greater than 25 years, but the study may recommend a deferred maintenance expense amount for such item.
· 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.
SIRS can have the visual inspection portion of the report performed by a professional engineer, licensed architect, reserve specialist (a designation from the Community Associations Institute), or a professional reserve analyst (a designation from the Association of Professional Reserve Analysts).
Any budget adopted on or after December 31, 2024 must include the funding specified in the SIRS and members cannot vote to waive or reduce funding of the SIRS reserves, or vote to use the SIRS reserves for any other purpose except for the components in the SIRS. Members in buildings 3 stories or higher may still vote to waive or reduce reserve funding for nonstructural (non-SIRS components) reserve items. Also, the voting threshold was changed to waive or reduce reserve funding to a majority of the voting interests (an increase from the previous requirement of a majority of a quorum).
Prior to May 2022, there was no requirement that any association had to have a reserve study of any kind. It also should be noted that the pooled method or component method is allowed for SIRS, but the pooled method can only pool the SIRS reserves together and not the non-SIRS reserves (the non-SIRS reserves can be pooled together).
Condominiums/Cooperatives, one or two stories:
Members may still vote to waive or reduce reserve funding for one or two-story buildings. They have to include the reserve schedule and funding for paving, painting, roofing and any reserve component where the replacement cost exceeds $10,000. This is essentially unchanged from how it has been for many years and there is no requirement to have a reserve study. However, the voting threshold to waive or reduce the reserves has changed to a majority of the voting interests, which is an increase from the previous requirement of a majority of a quorum.
All Condominiums/Cooperatives:
The passage of Senate Bill 154 formally allows for the use of inflation in reserve schedules. However, it is not mandated to be used. Previously in recent years, there was an informal ruling by The Division of Professional Regulation (DBPR) Division of Condominiums, Timeshares, and Mobile Homes that interpreted the language in Florida Statutes 718 and the Florida Administrative Code that yearly increases in the cash flow reserve schedule could be a violation. It was the case that different heads of the DBPR legal departments had interpreted this differently over the years. This is now written into the statutes and should bring clarity to the issue.
Florida Reserve Study Requirements
Florida state law governs when and how often an association must have a reserve study performed. Chapter 718 of the Florida Statutes governs condominium associations and Chapter 720 governs homeowners’ associations.
Condominium Associations
Condominium associations are required to budget for capital expenditures and deferred maintenance (Florida Statute 718.112). The statute requires reserves for roof replacement, building painting, pavement resurfacing, and for any other item for which the deferred maintenance expense or replacement cost exceeds $10,000.
Even though Florida law does not specifically state the need for a reserve study, reserve contributions must be established using a formula which is based upon the remaining useful life and estimated replacement cost of the reserve items. In short, condominium associations need to annually review and amend their reserve fund and ongoing fund contributions.
After the initial study, a SIRS must be completed at least every 10 years.
Time to Pay the Piper: New Mandatory Reserve Requirements for Florida Condominiums
Kevin M. Koushel
Florida law requires every condominium’s annual budget to include both operating expenses and reserves for capital expenditures and deferred maintenance. Operating expenses are those incurred during the day-to-day operations of the condominium (e.g., landscaping, pool maintenance, and management fees). Capital expenditures and deferred maintenance, on the other hand, are those incurred during the sporadic repair or replacement of major components of the condominium property (e.g., the roof, parking lot, and exterior painting).
To properly budget for reserves, condominium associations must conduct a reserve study. A reserve study is a long-term financial planning tool that analyzes the physical condition of major components of the condominium property, and their estimated repair or replacement costs. By determining these factors, condominium associations can then accurately budget for capital repair and replacement expenditures over time. For example, if a condominium needs $1 million to replace its roof in 10 years, its next annual budget should include $100,000 in reserves. Ideally, the association will continue to reserve $100,000 each year for the next 10 years in order to raise the necessary $1 million by the time the roof needs to be replaced. A reserve study takes this general formula and applies it to every major component on the condominium property.
The Problem
Because long-term repair and replacement is inevitable for all condominiums, one would think that every association would conduct a reserve study and regularly set aside reserves. But this has not been the case. Until recently, Florida law did not require condominiums to conduct reserve studies, and, despite annual budgets being obligated to include reserves for capital expenditures and deferred maintenance, associations were previously allowed to waive or reduce reserve contributions through a membership vote.
Unit owners often exercised this ill-advised option to keep assessments as low as possible and/or to avoid paying for major components scheduled to be repaired or replaced, which they contemplated would be after the sale of their units. Continuing with the example above, if unit owners contemplated selling their units in less than 10 years, and therefore would not directly benefit from the new roof, they were likely to vote to waive or reduce the $100,000 in reserves. By doing this, the unit owners simply kicked the can down the road for themselves, or they literally passed the financial burden of the new roof on to the subsequent unit owners. Either way, this practice illustrates why so many condominiums are severely underfunded.
The “Solution”
Senate Bill 4-D (“S.B. 4-D”), which was enacted in May 2022 in response to the collapse of Champlain Towers South, attempts to address the foregoing problems. It amends the Florida Condominium Act (“Act”) in two significant ways with respect to condominium reserves. First, condominium associations must now have a structural integrity reserve study (“SIRS”) completed every 10 years after the condominium’s creation for each building on the condominium property, that is three stories or higher in height.[1] The Act defines a “structural integrity reserve study” as:
[A] study of the reserve funds required for future major repairs and replacement of the common areas based on a visual inspection of the common areas. A structural integrity reserve study may be performed by any person qualified to perform such study. However, the visual inspection portion of the structural integrity reserve study must be performed by an engineer licensed under Chapter 471 or an architect licensed under Chapter 481. At a minimum, a structural integrity reserve study must identify the common areas being visually inspected, state the estimated remaining useful life and the estimated replacement cost or deferred maintenance expense of the common areas being visually inspected, and provide a recommended annual reserve amount that achieves the estimated replacement cost or deferred maintenance expense of each common area being visually inspected by the end of the estimated remaining useful life of each common area.
Second, beginning in 2025, members of a unit owner-controlled condominium association may not elect to provide no reserves or less reserves than required for the following building components: (1) the roof; (2) load-bearing walls or other primary structural members; (3) floors; (4) the foundation; (5) fireproofing and fire protection systems; (6) plumbing; (7) electrical systems; (8) waterproofing and exterior painting; (9) windows; and (10) 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 one or more of the components above, as determined by a licensed engineer or architect performing the visual inspection portion of the SIRS.
The changes to the Act are intended to prevent another tragedy, but some of the newly identified building components are questionable at best. No one doubts, for example, that a foundation is vital to a building’s overall structure. But performing a visual inspection of this component is extremely difficult or practically impossible without substantial destructive work. The new legislation ignores this reality and arguably requires the inspector to assign it a useful life in the SIRS so the association can, in turn, establish it as a reserve amount. Equally elusive may be determining the useful life of the condominium’s floors, load-bearing walls, or other primary structural members.
The new legislation also adds windows as a SIRS item, but in many condominiums unit owners are responsible for replacing and repairing the windows that are considered part of the units. This exemplifies the potential discrepancies that may now exist between a condominium’s governing documents and the new legislation. These ambiguities not only burden the condominiums, but also the licensed architects and engineers that are supposed to perform SIRS inspections for determining mandatory reserve contributions.
Conclusion
At this point, the only thing that seems certain for many condominiums, is that assessments are going to increase. Even if the legislature addresses S.B. 4-D’s technical problems, it is unlikely that the structural integrity reserve study and mandatory reserve requirements will go away. This means, at the very minimum, condominium associations will have to pay for structural integrity reserve studies, and they will have to begin setting aside reserves for the new components listed above, as well as make up for any underfunded reserves that were previously waived or reduced.
The new legislation is truly a “time to pay the piper” moment for older condominiums where skipping a reserve study, and/or waiving or reducing reserves has been an annual tradition. Also, when these new reserve requirements are tacked onto other association expenses, such as repairs for substantial structural deterioration and/or rising insurance premiums, some condominiums may learn that the price tag of continuing on is simply not achievable.
[1] A condominium’s initial SIRS must be completed prior to turnover from the developer, or for unit owner-controlled associations existing on or before July 1, 2022, by December 31, 2024.
https://www.bilzin.com/insights/publications/2022/11/new-mandatory-requirements-for-florida-condos
Florida Condominiums Have New Building and Reserve Funding Requirements
Written by Ana Goodman on November 29, 2023
Source: https://warrenaverett.com/insights/condominium-requirements/
The State of Florida has mandated building inspections and increased reserve funding requirements for condominiums and cooperatives exceeding three stories in height. These measures aim to enhance safety and financial stability in multi-story residential properties. Here’s what associations need to know to stay compliant.
Milestone Inspections
Condominium associations must have a milestone inspection performed for each building that has three or more stories by December 31 of the year in which the building is 30 years old 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.
Structural Integrity Reserve Studies
Associations existing on or before July 1, 2022, must have a structural integrity reserve study (SIRS) completed by December 31, 2024, for each building on the condominium property that is three stories or higher in height. After the initial study, a SIRS must be completed at least every 10 years.
A structural reserve study includes at a minimum, a study of the following items:
· Roof
· Structure, including load-bearing walls and other primary structural members
· Fireproofing 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
A structural integrity reserve study must contain the following:
· Each item in the list above that is on the condominium property must be identified and visually inspected.
· The estimated remaining useful life and the estimated replacement cost or deferred maintenance expense is calculated for each item.
· A reserve funding schedule is provided with a recommended annual reserve amount that achieves the estimated replacement cost or deferred maintenance expense of each item.
Florida statutes do not allow for the waiving or partial funding of the structural integrity reserves studies. However, membership can still vote to waive or reduce funding for nonstructural (non-SIRS) items.
Implications
These changes can introduce a set of challenges that affect an association’s reserve funding schedule in various ways. One particular challenge may be allocating existing reserve funds, particularly the funds that were previously pooled.
With the new legislation, there may be a need to reassess how these funds are segregated between SIRS items and non-SIRS items, ensuring that they align with the updated regulations and guidelines.
In addition, if the officers or directors of an association willfully and knowingly fail to complete the milestone inspection and/or or the structural integrity reserve study, such failure is a breach of an officer’s and director’s fiduciary relationship to the unit owners.
What Is a Reserve Study?
Source: https://www.gabvalue.com/reserve-studies.asp
A reserve study is a budgetary planning tool that identifies a property's necessary major repairs and/or replacements and establishes a funding plan to insure that adequate monies are available for planned expenditures. A reserve study has two primary analyses: the physical analysis and the financial analysis. The physical analysis consists of a component study that identifies the major replacement or repair components of a property, their estimated costs and their estimated useful and remaining lives. The financial analysis is a funding study that incorporates information from the component study into a budget plan to fund the anticipated future expenditures.
What makes a Sedgwick | Valuation Services Division Reserve Study Superior?
Expertise & Credibility
Sedgwick | Valuation Services Division has been providing professional services for more than 40 years. This demonstrates to our clients our financial stability and longevity.
Our reserve specialists are professionals with years of experience in valuing and developing funding analyses for multiple property types.
Our team has in-depth experience in statute requirements for establishing reserve budgets, as well as in-depth experience with market standards for reserve budget analysis in multiple property types.
All Sedgwick | Valuation Services Division's reserve studies are completed by a Community Associations Institute designated Reserve Specialist.
Detailed Data Collection
The Sedgwick | Valuation Services Division Reserve Specialist compiles detailed data about your property from a thorough on-site inspection, field measurements, and examination of building construction plans provided by the client. Appropriate and accurate component sizes and counts are derived from these data sources. Without accurate factual data, the accuracy of the analysis will be compromised.
Repair/Replacement cost information is taken from a variety of sources, including national and regional cost estimating indexes, interviews with developers, builders, consultants and contractors, as well as actual costs from similar properties within multiple market areas. Furthermore, an association's actual historical reserve expenditures are carefully considered in every Sedgwick | Valuation Services Division reserve study.
State-of-the-Art Software
Sedgwick | Valuation Services Division utilizes a nationally recognized reserve study software program in completion of all reserve studies. This software provides in depth breakdowns of each and every components' cost, total and remaining useful lives, as well as a year by year schedule for all planned reserve expenditures. Also provided is an annual summary of beginning reserve fund balances, ending reserve fund balances, planned expenditures, cumulative interest income, and graphical information.
What is Involved in a Sedgwick | Valuation Services Division Reserve Study?
A full consultation with a representative of the property to identify the major replacement or repair components to be included in the study
In-depth on-site inspection of the property by a reserve specialist
Examination of all construction plans and a review of historic information available on components included in the reserve study
Establish a useful life, remaining useful life and current replacement cost for each of the components identified
Develop the estimated future replacement cost and replacement schedule
Develop a funding study that will estimate the annual funding needed to meet the required replacement reserve amount
What Type of Funding Analysis Methodology is Utilized?
Sedgwick | Valuation Services Division reserve studies employ two separate and distinct analysis methodologies to calculate reserve contributions; the Component Funding Analysis and the Cash Flow Analysis methodologies.
The Component Funding Analysis method is a straight-line accounting procedure that calculates the annual contribution amount for each individual line item component and then sums these components to calculate the total annual contribution rate for this analysis.
The Cash Flow Analysis is a method of calculating reserve contributions where contributions to the reserve funds are designed to offset the variable annual expenditures from the reserve fund. Unlike the Component Funding Analysis, which is essentially a snapshot for one fiscal year, the Cash Flow Analysis is a long term reserve analysis that considers such factors as interest income, construction cost and/or inflationary increases for individual components, and an association's preference with regard to minimum reserve fund balances during the study period. In many cases, conversion to the Cash Flow Analysis method provides full reserve funding at a lower annual contribution rate compared to the Component Funding Analysis method.
2023 Florida Reserve Funding Updates
Source: https://reservestudyfl.com/2023-florida-reserve-funding-updates/
The 2023 Florida Legislative Session made some changes to Senate Bill 4D, which was passed in 2022. Senate Bill 4D brought sweeping changes to how condominiums and cooperatives that are 3 stories or taller must fund their reserves. The 2023 updated bill, Senate Bill 154, was essentially a glitch bill that ironed out some of the problems from the previous bill in 2022.
The following are the main takeaways and what is needed to be known going forward from the new bill:
Structural Integrity Reserve Studies for Condominiums/Cooperatives, 3 stories or taller:
· Structural Integrity Reserve Studies (SIRS) must be performed for each building on the property at least once every 10 years and the first one must be completed by December 31, 2024 in almost all cases. It should be noted that this does not apply to nonresidential condominiums that are 3 stories or taller, which are exempt from SIRS.
· Structural integrity reserve study means a study of the reserve funds required for future major repairs and replacement of the condominium property. The structural items consist of:
o Roof
o Structure, including load-bearing walls and or other primary structural members and primary structural systems
o Fireproofing and fire protection systems
o Plumbing
o Electrical Systems
o Waterproofing and Exterior Painting
o Windows and Exterior Doors (that are association responsibility)
o 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 items 1 – 7.
At a minimum, a structural integrity reserve study must identify each item of the condominium/cooperative property being visually inspected, state the estimated remaining useful life and the estimated replacement cost or deferred maintenance expense of each item 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 of each item being visually inspected by the end of the estimated remaining useful life of the item.
· The structural integrity reserve study may recommend that reserves do not need to be maintained for any item for which an estimate of useful life and an estimate of replacement cost cannot be determined, or the study may recommend a deferred maintenance expense amount for such item.
· The structural integrity reserve study may recommend that reserves for replacement costs do not need to be maintained for any item with an estimated remaining useful life of greater than 25 years, but the study may recommend a deferred maintenance expense amount for such item.
· 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.
SIRS can have the visual inspection portion of the report performed by a professional engineer, licensed architect, reserve specialist (a designation from the Community Associations Institute), or a professional reserve analyst (a designation from the Association of Professional Reserve Analysts).
Any budget adopted on or after December 31, 2024 must include the funding specified in the SIRS and members cannot vote to waive or reduce funding of the SIRS reserves, or vote to use the SIRS reserves for any other purpose except for the components in the SIRS. Members in buildings 3 stories or higher may still vote to waive or reduce reserve funding for nonstructural (non-SIRS components) reserve items. Also, the voting threshold was changed to waive or reduce reserve funding to a majority of the voting interests (an increase from the previous requirement of a majority of a quorum).
Prior to May 2022, there was no requirement that any association had to have a reserve study of any kind. It also should be noted that the pooled method or component method is allowed for SIRS, but the pooled method can only pool the SIRS reserves together and not the non-SIRS reserves (the non-SIRS reserves can be pooled together).
Condominiums/Cooperatives, one or two stories:
Members may still vote to waive or reduce reserve funding for one or two-story buildings. They have to include the reserve schedule and funding for paving, painting, roofing and any reserve component where the replacement cost exceeds $10,000. This is essentially unchanged from how it has been for many years and there is no requirement to have a reserve study. However, the voting threshold to waive or reduce the reserves has changed to a majority of the voting interests, which is an increase from the previous requirement of a majority of a quorum.
All Condominiums/Cooperatives:
The passage of Senate Bill 154 formally allows for the use of inflation in reserve schedules. However, it is not mandated to be used. Previously in recent years, there was an informal ruling by The Division of Professional Regulation (DBPR) Division of Condominiums, Timeshares, and Mobile Homes that interpreted the language in Florida Statutes 718 and the Florida Administrative Code that yearly increases in the cash flow reserve schedule could be a violation. It was the case that different heads of the DBPR legal departments had interpreted this differently over the years. This is now written into the statutes and should bring clarity to the issue.