The catastrophic collapse of the Champlain Towers South Condominium in Surfside, Florida earlier this year has caused industry-wide norms to be revisited, particularly as it relates to potentially unsafe conditions effecting condominium projects. Unsafe conditions do not relate solely to the physical conditions of the property, but also include the financial health of an association since availability of funds primarily determines when and what maintenance, repair, and replacement projects are completed. In October, Fannie Mae issued a notice of new requirements taking effect January 1, 2022, for new loans secured by condominium units. These new regulations will have wide-ranging impact.
First, loans secured by units in a project with “significant deferred maintenance” or unsafe conditions are ineligible for Fannie Mae loans. Unsafe conditions may be evidenced by a directive from a governmental agency to make repairs. The notice also provides the following with respect to significant deferred maintenance:
Significant deferred maintenance includes deficiencies that meet one or more of the following criteria:
full or partial evacuation of the building to complete repairs is required for more than seven days or an unknown period of time;
the project has deficiencies, defects, substantial damage, or deferred maintenance that is severe enough to affect the safety, soundness, structural integrity, or habitability of the improvements;
the improvements need substantial repairs and rehabilitation, including many major components; or
impedes the safe and sound functioning of one or more of the building’s major structural or mechanical elements, including but not limited to the foundation, roof, load bearing structures, electrical system, HVAC, or plumbing.
Second, lenders will now be required to review any current or planned special assessments for a determination of acceptability. The lender must include in the loan file: 1) the reason for the special assessment, 2) the total amount assessed 3) documentation supporting the assessment does not negatively impact the financial stability, viability, condition, and marketability of the unit, and 4) if the borrower’s portion of the assessment is outstanding.
Further, if the special assessment is to address safety, soundness, structural integrity, or habitability, the loan is ineligible until the repairs are fully completed. Perhaps most notably, the notice states “if the lender or appraiser is unable to determine that there is no adverse impact, the project is ineligible.”
Third, the option to fund reserves below 10 percent of the annual budget amount has been suspended. While the best practice is to obtain a reserve study, update it every few years, and fund reserves accordingly, projects that budget less than 10 percent of the annual budget are at a significantly increased risk of deferred maintenance and special assessments.
The notice goes on to provide recommendations for lenders to comply with the new requirements. This includes review of the past six months of the association’s meeting minutes and any documentation related to maintenance or repair that could impact safety or structural integrity. Additionally, Fannie Mae recommends lenders review available inspection or engineering reports within the last five years to identify potential deferred maintenance items.
Lenders have already begun implementing procedures to comply with the new requirements. For example, our office was provided a revised lender questionnaire that asks the following questions:
Is the HOA and/or management company aware of any conditions or project-wide deferred maintenance within the project that may negatively impact the safety, structural soundness, habitability, or functional use of the project as a whole or any individual units?
If yes, describe and provide supporting documentation, e.g., architect’s and/or engineer’s reports, insurance inspections, notices of pending or active building code violations, fines or liens from local building authority, special assessments levied for repairs related to these issues, reserve study prepared by an independent third party.
Our office is working with our boards and community association managers to respond to these questions. As always, if you have a specific question about your association and how to answer a lender questionnaire, do not hesitate to contact our office for guidance.
As a final note, boards must be cognizant of the impact these requirements have on budgeting, particularly as many budgets are currently being drafted and approved. An association’s proper funding of reserves and ability to address potentially unsafe conditions is more important now more than ever.