Lessons Learned from the Tragic Surfside Collapse

Video Transcript:

Alan Tannenbaum:

I'm here with my partners, Salvatore Scro and Jon Lemole. Our presentation today is on Surfside Incident, Lessons Learned. So, I've been a construction defect lawyer for, going on 43 years. I've also assisted associations around the state in major repair projects, which is the basic substance of our practice. I've been fearing the type of thing that happened in Surfside, a couple of months ago.

It's a product of several factors. Let's start with the fact that it's a common ownership of property, which is problematic in itself. Remember that there weren't condominiums in Florida until the early '60s. And the idea of having many people operating one piece of property that they own, especially a building, is problematic to begin with because, they have to make joint decisions about potentially its maintenance and repair.

You have volunteer boards, many of whom are not experienced in management or building construction, who are responsible for maintaining millions of dollars worth of property, and protecting the people who've occupied the buildings. So, there's an expertise gap.

And then, you have all sorts of pressures on board of directors, you have the owners who show up at the meetings with the primary thought of, they want to keep their assessments down to a minimum, who exert substantial pressure on the board. You have people with different economic pressures in the community, who pull on the board's heartstrings about spending money on major repair projects. You have people that could even be on the board who are looking to sell their unit, and all they're concerned about is setting up a scenario that puts them in the best position to sell their unit this year or next year.

And you have investors and renters who maybe thinking short-term, maybe look at their property more as a real estate investment than as some place that they live. So, you have all these disparate interests all putting pressures on the board, to make decisions that may be contrary to the longterm interest of the building. So, this is something that I certainly have been aware of and our firm has been aware of, as a potential.

There have been buildings in Florida that over the course of the last couple of decades were near collapse, and fortunately didn't. There surely have been instances of portions of buildings that have collapsed, but Surfside was really the most dramatic example of what happens when deferred maintenance and repairs are put off to such an extent that you have the potential for tragedy.

So, I'm going to lay the ground rules again. Stay on mute. Any questions that you have, send them through chat. This is not a CEU course, so the managers are not going to get CEU credit for today. We have an outline. I'm going to turn the program now over to my partner Salvatore Scro, who's going to... Remember, this is lessons learned, so let's go back to original construction. What did Surfside, Sal, tell us about original construction defects and building vulnerability?

Salvatore Scro:

Good morning everyone. Thanks for joining us. Let me start with, I'm going to share some photos with you here to start out. Let's see if I can get this going right. Let's see here. Okay, I'm assuming everybody can see this.

Alan Tannenbaum:

Yes.

Salvatore Scro:

So, here's a condominium with a balcony. Some of you may have seen this before. I apologize, but I have some others here. But here's the balcony, it looks fine. From the street, everything's fine. Now, this building at the time in this photo was probably 45-50 years old. Let's see. So, we're going to look at this area right here, which is the top of the balcony. I just want to show you, there was a little hole here, but the other balconies had no hole. But this is what brought their attention to it.

Under that hole is the cantilevered steel that holds the balconies up, one above the other. That steel goes all the way into the building, and that's what holds up the steel. Now, that can't be seen. This is what it looks like throughout. That's what was holding up the balconies.

Here's another condominium. This is a wood frame condominium. It looks like it's in good condition. I want to show you a few things here. This was built in 1988 I believe. So, we're going to look at areas around the balconies, and we're going to look at areas around these support beams here. This is what you're going to see was behind in the walls. This is what's holding the building up. And you can see, that's the structure. So, it looks beautiful on the outside. And then, here's part of more support around this is what's holding that building up.

Now, these are the support beams we talked about. These beams aren't even touching the ground. So basically, this building was held together by glue of the stucco. That was that particular building. Here, a lot of the newer buildings they have, this is a pool room area, and you will see that here you have all water seeping through the concrete. They tried to seal it up, but you have water seeping through the concrete, and you do have this water intrusion. It's not necessarily a big deal right now, but it will be later.

Some of you may have seen these photos as well. This was a condominium building also. This is all wood frame. We did some investigation of the building and started to take apart areas. And beneath, that is what you found. Now, this was a fairly new condominium, so it did not take long for this to happen. These are the photos of what can happen if you don't address these issues, to start out.

Here's another area around the windows. Again, now, if you look and do your investigation the wrong way, this is what you're going to find. Nothing. But just inches below is where all the problem is. Why? Because you have flashing issues here. So, anytime there's a change in materials, change in direction, you're going to find issues that should be addressed.

Here's another project. You can see they started to mask over some of the cracks in the stucco. This area here is this area right here in the buildings. They're little, they call them pot shelves sometimes, because you lay a pot on them. So, it looks fine. As you open it up, this is what you're finding beneath. So, these are things... And again, here's another area. This is your framing issues that you cannot see, whether or not things are properly strapped. So, those are just a few photos.

Now, the commonality of all the damages in these photos... I'm going to ask a question, what all these photos have in common. Anyone know what it is? I know you're probably not going to answer this in this format, but I'm going to ask it anyway. The commonality is that, no one could see it happening. The other commonality about all these photos is that, they all had an opportunity to discover the defects and prevent this from happening. So the lesson to be learned here is, what you don't see can ultimately hurt you.

So what's the importance of a thorough turnover engineering study? You look at these buildings, the way they sell them, they sell nice clubhouses, they make everything look like it's new and fresh. But especially in new units, you need to take a look at these things. So you need a trained eye to identify the potential areas of the defective conditions. They may be small problems now, but they can result in bigger problems over time. So, it's like brushing your teeth. Today, it may not be a problem if you leave it alone, but over time, you're going to have problems. You're going to have cavities. So you need to address the things that you can't see.

So, what do these trained professionals look for? They will walk the site, they will look at areas where there is a change in direction, a change in materials, to make sure that the construction is performed properly so that they can identify if they need to do a further investigation. And all these investigative works that we've done, that we looked into, these engineers walked out there, they saw the same thing you saw in those photos. They saw a nice building, something that appeared nice. But, their trained eye can see something that we can't. And when you open it up, you find these things.

One of the other things to keep in mind is that, whether or not you want to pursue claims to create a fund to rectify the problems. So, the cost to correct these problems sometimes can be substantial, and it typically won't increase over time if it's not addressed. So it's better to address these things earlier than later. So obtaining a proper study of the building components by a qualified expert, typically we recommend an engineer together with a good team of construction defect attorneys, so that they can direct what should be looked for, is a way to develop an avenue to recover from the liable parties enough funds to use towards correcting the defective conditions.

If you wait too long, not only will you need the funds to correct the defective conditions, but also the funds to correct the consequential damages from the defective conditions, and you may lose your opportunity to recover from those parties as well. You also have the issue that, if you're doing repairs over a period of time, you may be destroying evidence. So it's best to have your properties looked at now at any point. So regardless of the study of the building, regardless, a study of the building components is a good idea. And here's why. If it's not to take advantage of inspecting as work was done, so if you weren't there to inspect the work as it was performed, or if you didn't have somebody competent to inspect the work as it was performed, then you may want to consider investigating the work now.

Another reason is, if it's just old, you may need to inspect the condition periodically. And then the other is identifying the longterm maintenance needs, which leads us to the next area, which my partner, Jon Lemole will be addressing.

Alan Tannenbaum:

All right. Thank you, Sal. So Jon, again, the lessons of Surfside, let's talk about budgeting and reserve funding. What lessons did we learn?

Jon Lemole:

Okay. Well, I think we learned probably what will be the most obvious area for the Florida legislature to address, some change in how condominium and HOA budgets are handled. Because right now in the statutes, as you probably all know, there's a presumption in favor of full funding .

There's a statutory presumption of a full funding of reserves, and especially for condominiums. And yet, you have this opportunity for the membership to determine, at least in condos and in HOAs, it depends on what the documents say, but you have the opportunity for reserves to be waived or reserves to be used for purposes other than for what they're supposed to be used for. So, that's probably the most likely area where we're going to see some change because, I think what we've learned from Surfside is that, buildings and especially high rise condominiums, they're very technical, highly technical structures to maintain. And leaving the line long-term maintenance and repair of them in the hands of well-meaning folks but folks who may have their own and interests in mind, their own short term interests in mind, was probably not the best thing for ensuring the safety of everybody in the building, and ensuring the integrity and the longterm integrity of the building.

So let's talk about reserve studies. Look, I get being a board member is probably one of the hardest things to do because, you've got to make some really difficult decisions that may not be in the particular short-term best interests of everybody in the community or in the building. And you've got to see these folks every day, and you've got to deal with people that are the squeaky wheels at your board meetings, and it's a very hard job. But, like any kind of fiduciary of an organization, it doesn't matter what organization, you talk about a public company, the board of directors has a duty to ensure the long-term viability of that company, and to frankly maximize shareholder value.

Well, a condominium really isn't that much different. The board has an obligation, a fiduciary obligation to ensure the long-term viability of the buildings, and to ensure that everybody's equity in the building is maximized. And so, that means that you've got to take care of the building. Now, a lot of folks who come down to Florida, typically come from up north, somewhere in the Midwest, they're used to owning a home, a single family home somewhere, and they've decided to move down to Florida, and move into a condo because they don't want to have all the maintenance responsibility. They don't have to mow lawns, they don't have to paint, they don't have to do all the things that they used to do when they owned it at home.

And sometimes I think when they move into a condominium or a Home Owners Association environment, they forget that, even though they don't have to do some of those maintenance things, they're still responsible for them. They still have a financial responsibility for it. And so, that kind of amnesia about doing those things is where you have a lot of problems with members who don't want to have to pay for those things. And so, they show up at meetings, they they're vocal, they try to elect board members who agreed with them.

I think that's going to change. I think we're going to have... It's got to change. I think we're going to see the Florida legislature step in here and create some guardrails or some curbs around how that's done. But again, let's talk about, I kind of got off the track, reserve studies. So if you're in a newer... Let's say you just turned over. What happens if, in a condo, let's talk about condominiums, you just turned over, the developers just turned over the condominium, they hand an engineering report that probably has also a reserve study attached to it, and you get a bunch of assumptions about the longterm life expectancy of all of the elements that have to be addressed in that report?

Frankly from my viewpoint, that's like buying a house and letting the seller give you a home inspection report. Why would you ever do that? So there's a huge benefit here to an association periodically, at least out of the gate, getting their own study done, getting their own reserve study done, getting their own engineering study. That goes back a little bit what Sal was talking about before, having the buildings looked at. But also, periodically getting reserve studies to know that you're funding reserve's at the right level, and that you're making sure that you're keeping up, and that the life expectancy assumptions that may have been made at the very beginning, haven't somehow changed.

That's very likely to happen in Florida especially, and with older buildings because, this is a harsh environment. We have a tendency to assume that buildings are constructed well, and that they're constructed with state-of-the-art technology. But think about a building that may be 50 years old. What was state of the art 50 years ago? And how has that held up in a harsh environment like Florida, especially in a harsh environment that's on the coast? So that's why it's important to do those studies periodically and update them, and make sure that you've got accurate numbers and accurate assumptions to reserve.

You've got to resist the urge to not fully fund reserves. Board members I think coming out of this, and management companies that are looking at Surfside, I think they're going to really have to rethink how they're dealing with requests and efforts to waive funding of reserves. I know that's hard. It's going to be very hard to do, and I think the legislature is hearing, the Florida legislature is hearing about that. Again, that's going to be an area where I think some protections are likely to be put in place.

Now, what do you do if you're in an older building and the over the years, reserve funding has been neglected? Now, all of a sudden you've got a problem, and you've got to deal with it. How do you do that? Well, there's a couple of different ways. You're either going to have to pass through a big assessment, a special assessment. Who's going to pay for that? Is it going to be letting the unit owners go out and deal with that? Maybe they have to get refinancing on their unit so that they can cover that, or is the association going to consider attaining its own lines of credit?

One option is for an association to fund that through some borrowing. That may not be available to all associations because, they may have problems with default rates. You have to generally have under a 5% default rate on assessment collections in order to get a lender to provide the association with a line of credit. So, these are some hard choices that are going to have to be made. But, I think there's help that's going to be on the way. I think, again, I think the Florida legislature has to act here and create some guard rails around the whole reserve issue.

Alan Tannenbaum:

Jon, one misnomer that I think people have about the reserve requirements of the condominium actually, there are three particular areas where there's required reserve funding, which is roof replacement, building painting, and pavement resurfacing. There are a number of condos around the state that only reserve for those three items. But, there's additional requirement under the reserve section. It says, "And any other item of the building that has deferred maintenance or replacement costs greater than $10,000." That's where this bonded stucco or cantilevered slabs that are going to need to be repaired or other structural issues in the building, at the pool level, the pool deck and so forth, those items also need to be reserved for under the provision of the statute that talks about replacement costs of greater than $10,000.

So it was a little bit misleading when the legislature created that statute because, it highlighted roof replacement, building painting, and pavement resurfacing, really to the neglect of structural issues, re-piping, which was going to be coming down the road for many buildings. A lot of major expenditures that were not picked up or were not subsumed within those three categories. So that's been a misnomer.

Jon Lemole:

Yeah. And again, what is likely to be more than 10,000 may change over time too because, as your building ages, and you may have environmental impacts, climate impacts that are accelerating some things, that now may become more pressing repair and maintenance areas. And so again, that's just another reason why routine studies of your buildings are going to be a thing of the future. A thing that every board and every association has to consider is, not set it and forget it, and maybe you'll do 30 or 40 years down the road, you'll do a study. Maybe if you're in a particular municipality, or county, or city that is going to require you to do that, so you'll do it.

But I think what every association needs to look at is periodic studies. Whether they have to do them or not by law or ordinance, doing it solely for the purposes of understanding what the current condition of their building is, and what their ongoing reserve funding obligations and efforts should look like.

Salvatore Scro:

I just want to address one thing here. One of the questions here was, so what was the lessons... Okay, I'll state what it says here. "What were the lessons learned from original construction of Surfside?" I guess since that's what we're talking about here, we're focusing at this point on investigating your property. Don't just let the... Don't judge a book by its cover. Surfside had investigations later on that showed issues. Don't ignore them. So the lesson, the main lesson from Surfside in my opinion is, if you do what you're supposed to do as a board, do not ignore what you find. Take action on it. Don't worry about the cost, or what the value of your properties, which is always a big concern. That's not your duty to make sure that you have a high value.

Your duty as a board, as a manager of the board, is to make sure that you're performing your fiduciary duties for the association that's there, and that will be there in the future. So the lesson learned from that is, get the studies and don't ignore the studies.

Alan Tannenbaum:

Yes. And Kevin, it's a good question, and I want to follow up with Sal. We don't know why Champlain Tower South came down, and it's going to probably be a couple of years of study. It may not be able to pinpoint one precise issue. But my A claim from what I've seen is, it looks like there were original design and construction defects in that building, which if they would have been corrected at the outset, let's say within the first couple of years, the likelihood of the eventual conclusion would have been lessened, of the building having to collapse 40 years later.

So, we have seen situations where buildings have had problems 20, 30 years down the road. And usually, there's a component of original construction defect that contributed to it. That if those items had been corrected and then the building properly maintained, then it would have been there. Maintenance is a misnomer because, if you have underlying construction defects that you don't repair, you're putting a band-aid on a problem and not necessarily getting to the guts of it. A good example is stucco cracking. Well, you can patch the stucco, you could even re-stucco. But if the issue, let's say in a wood-frame building, is the actual structure behind the sheeting, that's causing the distress, that's leading eventually the stucco cracking, you haven't really gotten to the problem.

So, the first thing that comes is correcting construction defects. And then, you're talking about longterm maintenance strategy once you've corrected the defect. But if you don't correct the defect, it is going to come back to bite.

There's a question about the life expectancy of a reinforced concrete multistory building, four or five floors. There is no discrete number that you could put on the life expectancy. There's probably some buildings that are reinforced concrete buildings that are going to last 60 or 70 years, and there are reinforced concrete buildings that because of original construction defects or poor maintenance, are not going to make 25 years. So, there's going to be a broad discrepancy. I would say that, based upon the studies that were done in the '80s, reinforced concrete buildings, even well-maintained, were certainly not going to last a century. And again, the one study that came out of it was the early 1980s, said an average life expectancy on the coast, of a high rise, reinforced concrete building, to be 50 years. But to put a precise number on a particular building would be very difficult.

Norman asked a question about reserves. What do you think? The far left says you will require full funding. Well, every year the board's got to come up with a budget that reflects full funding of reserves. The problem in the statute is that, the owners and many times it's at the suggestion of the board, then have to vote when the budget's adopted, to either waive the reserves in their entirety or reduce the reserves with full funding. Potentially, the legislature will, as they have done at some stage, will remove the waiver alternative for the owners, and the full funding be required.

But it goes back to the board having an appropriate reserves study that covers more than just the three designated areas of the statute. It covers any other item that's going to have greater than $10,000 replacement costs, That's going to include piping, it's going to include elevators, it's going to include structural window replacement. Those things are often left out when it comes to reserve funding. So the next segment.

Jon Lemole:

Because, we talk about life expectancy of buildings, and I think we put too much emphasis on... It takes away from what we really should be thinking about because, we tend to rely on, "Well, 50 years? I can sit tight for a little while." The three of us I'm sure, me, you, Sal, we can all point to examples of newer buildings that have had structural problems because, there's been a defect in the waterproofing that you may not see. I can think of two right now that we're dealing with where, there's been significant concrete spalling, and corrosion, and post-tensioning, and other effects on structural concrete, and they're frankly very recent buildings. But if the waterproofing, the latent waterproofing structures are defective, are not well performed, you're going to have a problem.

And so, 50 year life expectancy in that situation is meaningless. So that's why Sal, me, Alan, we constantly beat this drum. Get your buildings inspected. It doesn't matter how old they are.

Alan Tannenbaum:

Yeah. And probably at least every five years for a major structural mechanical inspection would be a good starting point. So, I'm going to get into the next segment, which is, we called it, nipping problems in the butt. So I think you've heard enough about water intrusion. In Florida, the biggest problem other than original construction defect, is the impact of water on the structure. If anywhere on your structure you're allowing water to get in, it can come through the roof, the windows, as Sal indicated, any change of building surface are areas of vulnerability. You're allowing that water to come in, it's going to create rot, it's going to create mold. You're going to have a pretty serious issue developing. So, the biggest target of maintenance in Florida is stopping water from getting beyond the outside surface on the building, and that's the ultimate struggle.

Somebody asked about plumbing. So, there's a lot of cast iron portable water systems or piping, you have your sewage piping, and again, not intended to last forever. The other thing that happens in the construction industry is, somebody comes up with a great idea about using a particular product or material, and 20, 30 years down the road, it doesn't look like such a good idea anymore. I think that is often discovered. I remember many years ago, somebody came up with the brilliant idea of using lightweight concrete fill as a roofing installation. The stuff got poured all over Florida, it was great. Great at energy reduction, you can slope it easily. The only problem was that, after a few years, they discovered that under the Florida sun, that the moisture from the concrete went up into the asphalt roofing that was applied to it, and you had asphalt roofs ever deteriorating well before their time, as a result. So you do learn things.

Now, what I've heard from plumbers or the plumbing companies, because there's companies out there that are doing pipe relining to extend the life of piping and buildings, and I've heard from more than one expert who has said, it's a viable approach, but not if you have allowed your piping to reach the point of deterioration, where it really can't be lined anymore. So, it's a great example of jumping on problems when they first become evident. Because, you're sitting on a piping system in your building, you get it inspected, there's some rust and deterioration. And then, the board sits on it for five years, six years, seven years, finally gets it studied after seven years of the problem first coming.

One of the companies that was going to be doing the pipe-lining shows up and says, "Look, the piping here is far too deteriorated to use our system or our process. The only thing that you can do at this juncture is a full replacement." So, one of the consistent themes that we've seen in buildings is, if you get at a problem quickly, you have the opportunity of correcting it cost-Effectively. If you allow problems to exacerbate, then the repair is likely to be much more expensive, much more difficult, and much more impactful on unit occupancy and so forth. So, get on those problems quickly.

So Sal, what I'm going to ask you to do in the next segment, we have a lot of topic areas that we were going to have you cover, but we've answered a lot of questions and so forth. So, why don't you give a fairly brief synopsis of contracting for repairs?

Salvatore Scro:

Okay. So, many times the defects that you encounter, the problems you encounter are because of poor instructions. You wouldn't buy a desk for example, that had to be put together, and just start putting it together, if it had all these parts. You read the instructions. Well, it's no different with putting together a building or repairing a building. You want to have proper instructions. So initially, you want to have that investigation. I know there was a question in there, Nancy asked, the inspection you recommend five years is separate from our reserve study? Yes. Reserve studies typically just look at the buildings. They don't do any investigation as to what the extent of the repair needs to be.

Alan mentioned cracked stucco. If you have cracked stucco, it may be a stucco problem, but it could be the framing beneath. It could be a lot of different things. So, you want to have an investigation to determine exactly what needs to be done. Because, just patching and painting the stucco, it may be damaged the next day. It won't solve the problem. You need to know what that problem is. So you want to know what the problem is. You want to get on point specifications as to what needs to be done.

To correct and avoid the defective construction, how will you know... How do you know what to do? And how do you know if the appropriate to work is in the plans or in the specifications? A couple of things. Number one, you should have an attorney review the contract, somebody who's knowledgeable in dealing with construction defect matters, and also have a good owner's rep, somebody who's knowledgeable, or engage the services of your own engineer to review those plans.

Salvatore Scro:

The other issue is, who's going to do the work? You can go get any contractor out there, but you're only getting the people that show up on the job. So a couple of things you want to know about these contractors, one, you want to ask for references. If it's a big project, even more so, you want to ask for references. You want to know what the bond ability is, if they need to obtain a bond. And again, with bonds sometimes, those are different amounts for different contractors. So that would depend. If some contractors cannot get a bond, some would pay more than others.

The other thing you want to look for is, if a contractor is asking for a significant deposit, because they have to buy materials or whatever, that's a big issue that will raise a flag to at least do some more investigation about the contractor and what they're able to do. You want to look at what the warranties may be for the work that's going to be performed. How long will that continue?

And then the contract administration, a good owners rep. Many of the community association managers out there, they don't really expect to sign up for that. So if they are going to do that, there may need to be a separate agreement with your community association manager, as to how much and how involved they're going to be. But basically, and I did see a question in here that leads into this, one is, Tasha asked, why can't all the construction defects be addressed before the developer leaves and turns over? Couldn't developers create budgets of properly funding the HOA or condo instead of the practice of having low fees for marketing?

Salvatore Scro:

So here's the reason, my opinion. They built something for a profit. They do not want to go and be there every day to repair these things, to make sure that everything is in order. They're turning that over to you. And the thing you're going to find most is, all these construction defects, they're not defects, they're just failure to maintain. I've heard some ridiculous things in just the last week, in depositions I've been in, where people have stated that, some of the problems that are causing the defective conditions of the association, are because of lack of maintenance. So, how do you see that? And the answer is, well I see dirt on the building. That's not maintenance. You cannot maintain something that is not properly put together.

So a developer or a contractor, most of them will just want to patch the situation, get through their statute of limitations, get a signed release. So it's important that you have your own people. And we've stressed this quite a bit. Investigate these things. That your contracts are based upon what your investigation finds, not what the developer says needs to be done. If they didn't do it right the first time, if the contractor didn't do it right the first time, you have to be concerned as to whether or not they're going to do it right the second time. Did they have the proper plans and specifications? Was all the information in there? How do you know what that proper repair is going to be? And who's going to do the work? Hopefully that was brief enough for you, Alan.

Alan Tannenbaum:

All right. Thank you. So Jon, let's talk about communication with the owners. And really, tying it back to the Surfside issue, what was the challenge that that board had as far as leading the owners, or leading the group to make proper decisions about what to do with that building?

Jon Lemole:

Well, I think first of all, there was a problem with getting... With conflicting information being circulated among membership and even within the board. So, in order to communicate clearly with your members, the board has to have a clear understanding of what their role is, and what the needs of the community are, at any given point. Because remember, again, at the end of the day, the board is there to represent everybody who has an interest in that community, for the long-term viability, and security, and safety of the building, and for management, for fiscal management of everybody's assessment and need to contribute to the management, and security and safety of that building.

And so, if the board doesn't have a clear understanding at the very beginning, of what that is going to entail, then they're going to have a really hard time communicating that effectively and in a transparent way to the membership, or the community. And so, transparency is the key. And look folks, I'm a big believer in risk management. Every entity, every board, every organization wants to manage risk as best it can, and transfer as much of the risk away from itself as it can. That's always just good business practice.

So think of, most boards, they may be some very smart, well-meaning, educated people. They have great and disparate backgrounds in a lot of different areas but, how well do they really know building science? How well do they really know building, upkeep, maintenance and repair responsibility? So look, how do you manage risk in that situation? You put it on engineers. So, if you want to be transparent and clear, and manage the risks associated with managing the long-term viability of the building, you get regular investigations of your building with engineers, and let the engineers speak for themselves, and let the engineering reports speak for themselves.

And if the engineers who also have a fiduciary obligation, and a heightened standard of care as professionals, and certain statutory requirements every time they sign a report or seal a report, they're the ones whose malpractice is an issue, if they're not providing accurate information. So the easiest to me, I'm just one guy, but to me, the easiest way for a board to manage clear and transparent communication, is to periodically investigate the buildings, and let the engineers tell you what needs to be done, because they're the professionals. Don't let the tail wag the dog. You can't let the members who come from all different kinds of backgrounds, they may be short-term, they may be long-term, this may be the place they're going to stay forever, they may be only here for a couple of years, they may just be investors. You can't let them and their disparate interests and backgrounds, be the driver of the decision-making for the long-term safety, security, viability of the structure.

Alan Tannenbaum:

Yeah. And Jon, the distinction, the board is going to have better information than an owner, but they also have the fiduciary responsibility that the owner doesn't have. So, that's really what distinguishes the board. The board is required to lead and direct. The owners are specialists in complaining and obstructing. That's what they're there for. The board can't let the complainers and the obstructors in the building dominate.

What I'd like to do really in the last 10 minutes that we have, my last segment was on termination. We do a whole presentation on that. Obviously, if a building has reached the end of its useful life, termination is going to end up being the solution. In Champlain Tower South, that condo is being terminated because, it can't be rebuilt. The owners are not in a position to do that. So, the property is going to be terminated. It was interesting that one of the discussions was, they're creating the site there as a memorial. Well, tell that to the owners who have the possibility of sharing some of the $30 million or $40 million that the land value was worth, for that to become a memorial. I think what will happen is, the property will be sold and you will see a new development in its place, with the owners sharing the proceeds of the sale of the property.

But I want to go back to really summarize what we've covered here. And again, the topic of the discussion was, The Lessons Learned. So let's summarize the lessons learned. The first lesson is, know your building. That talks about doing periodic, thorough engineering studies, covering the major structural issues, roofing, plumbing systems, mechanical systems, electrical systems, your pool, your elevators. Have the best information that's reasonably possible, so that you know and understand your building, the repairing needs and the maintenance needs of the building.

You can't plan, budgetarily, you can't plan as far as needed maintenance and repair, unless you have an appropriate baseline of information from which to proceed. In Champlain Tower South, they did have some engineering reports. Did the engineering reports cover everything about the building vulnerabilities? I don't know the answer to that question. But that's the starting point, is proper engineering investigation, so that every condo board in Florida knows the challenges that its buildings are facing. That's number one.

Number two is budgeting. It's not only looking what needs to be budgeted this year to take care of what needs to be taken care of this year, but it's funding for five years, 10 years, 20 years, potentially 30 years down the road. That takes a lot of hard work, it takes a lot of study, it takes a lot of forethought. You have to produce a budget that's going to potentially have bad news from the owners about how much their assessment is going to increase this year, in order to include a proper reserve component for future repairs. But, one of the problems that you have seen from Champlain Tower South is, the difficulty when appropriate reserves have not been collected, of then trying to go back to the owners, to collect an assessment that would have been in excess of $100,000 a unit, in order to undertake those repairs. A very, very difficult political challenge for a board of directors.

The likelihood of owners, and there were owners in that building that had just bought it a year before, and all of a sudden, the idea of having to pay $100,000 in addition for the immediate repair project, would have been very difficult news. So the idea of waiving reserves, and then facing a situation 20, 25 years down the road where, now owner's going to be assessed $25,000, $75,000, $100,000-$125,000, we've seen creates a very difficult situation. So really, the second part of it is fiscal responsibility, once you have the engineering study.

The third part of it is leadership. The board of directors has a fiduciary responsibility to undertake the associations statutory obligations to maintain and repair the common elements. So, it's a statutory obligation on the part of the association. The board's got a fiduciary duty in undertaking that statutory obligation. That translates into the board having the onus to make the very difficult decisions, that protect the long-term interest of the building and the membership. So that means that, the board's got to make the first difficult decision, which is, investing association funds to get the appropriate engineering studies.

Somebody asked a question about, how much do engineering studies cost? Well, they are costing more and more because, engineers are being deluged with requests for inspections at this juncture. So, I don't know what they're charging, but they're probably 10 or 20% more than if you would have asked for the same evaluation six months ago. But that's the pressure of the marketplace. So, it's the courage to get the appropriate engineering studies, and go to the owners for the assessments to pay for them. It's then having the courage at the appropriate time, to either with the use of reserve funds or special assessments, do repairs when they're needed and not let the problems exacerbate.

But, also maybe courage in a building that is under severe distress, of even telling the owners that, because the building is in such disrepair, that it may not be occupiable, which is also a possibility. So I would say, the combination of factors, lessons learned with Champlain Tower South, get the appropriate engineering studies, provide adequate funding to do repairs, do the repairs in a timely fashion. And for the board to understand what its obligation is, which is to protect the long-term interest and the safety of the membership, and not be concerned necessarily with owners who again, their interest may be short-term, their interest may be individual, financial difficulties, a whole slew of reasons that an owner's going to resist assessment or reserve funding. The board's got to have the leadership in order to respond to that. I'm sorry to dominate. Sal, Jon, do you have any closing thoughts?

Salvatore Scro:

I think we beat everybody up enough on the thing we see every day is that, the hardest thing for a board to do is spend money. Sometimes you need to spend money to find out what's happening. It's like going to the doctor. But it's also important that you don't take this on alone. You need direction, you need somebody to advise you. And there's a lot. Boards are not ignorant people. They're very smart people. But it's important to get the advice from the professionals that look at the buildings, from the people that deal with addressing the construction defects, whether it be the construction defect attorneys to lead you through the investigation, to make sure you pick the right people, to review your repair contracts, to make sure those are right, and that everything is being addressed so that you don't have a problem later on. It goes back to the question, why can't the developer set up a fund? Aside from the fact that they don't want to spend any more money, you want to make sure that they do it right the first time, and that you're protected. So it's important to get that direction.

Alan Tannenbaum:

All right. There, I see a question from Marshall Wizof about, can associations hire directors with pay? I don't think there's a particular restriction in the statute against that. I've never actually seen it happen. It's probably very unlikely that the legislature will ever require that, or your particular documents are going to allow it. But, it does make some sense.

There's a question about liabilities of the manager when the board doesn't listen to advice. As long as a manager documents what their advice was, and it's in the record, I don't think that creates any liability for the manager in any way. Your contracts have pretty strong identification language, so I don't think there's a great concern there. I think we've covered that.

Reserve studies, all right. Somebody asked a question about personal liability of board members. In Florida, it's a very narrow window for a board, individual board liability. Frankly, unless you're stealing from the association, or giving sweetheart contracts to your brother-in-law, or using your office for vindictive purposes, it's very unlikely that there's going to be a successful suit against an individual director for maintenance and repair decisions.

Now, if a board member gets an engineering report that talks about the building that has significant problems, where there's a threat of collapse, and doesn't present that report to the rest of the board, or the board withholds that from management, there could be a potential for some liability under those circumstances. But generally, the decisions are going to be protected from individual liability. The association, under its liability policy, could have a pretty significant liability.

So, we'll look through the chat, and we'll cover some of the other questions offline. We appreciate everybody participating today. Hopefully the information that we conveyed was helpful. And we will-

Speaker 4:

I've heard Mr. Lemole mention several times, periodic inspections. Could you be a little more specific?

Jon Lemole:

Well, I don't know that I have a particular timeframe in mind, but that's going to be driven by what engineers say, and what you do in response to it. So, if you have a report that recommends... If you have an engineering study done that recommends certain repairs be made, and you do those repairs, maybe the best person to ask for when should we be following up on this, would be the engineer, just like you would do with a doctor, for example. So, no particular schedule of it, but just period... I think from time to time, you have to check the health of your building.

Alan Tannenbaum:

Yes. I'm going to answer David Baker's question. We can hang on for a few more minutes. David Baker says, a question regarding directors and officers insurance. I believe every association is obligated to carry this insurance. Actually not. It is a discretionary purchase. Is $1 million per claim inadequate? I think the bump-up of fiduciary insurance is not that great. So if you want to carry more coverage, I think the insurance people will tell you that, a bump-up over $1 million is not going to be expensive.

Now, the question of how effective is the insurance as far as providing security for board members and property managers? I don't think the fiduciary insurance that a board purchases, it covers directors and officers not necessarily management. But maybe one of the insurance people can correct me on that. The funny part of fiduciary insurance in Florida is that, it doesn't cover misfeasance and malfeasance on the part of the board. So the irony of it is, statutorily, board members have a very narrow window of potential liability, and the fiduciary insurance doesn't cover the issues of misfeasance and malfeasance.

So most fiduciary policies are really there to pay legal defense costs, where a board is actually sued for something that it doesn't have liability for anyway. I know though the insurance companies are very happy to write fiduciary coverage because, there's a very low claims incident against the amount of premiums that they're collecting for the coverage. But, just for the fact of to cover the potential defense costs, I think it's very important that the board of directors have that, but it's not an obligated request.

Yes, getting an engineering report after turnover, if we didn't beat you over the head with that, that's really important. I think we've basically covered the questions, at least the ones we were able to answer. All right. We're going to say goodbye at this point. We'll see everybody next month. Thank you. There will be a recording, and we'll provide you access to it. Thank you. 

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