This year, hurricanes, with record rain, storm surges and winds, have resulted in severe damage to both commercial and residential buildings, mold contamination, and significant interruption to businesses in the impacted areas. Several Caribbean islands have been wiped away, Key West is unrecognizable, and Houston may have lost more than 150,000 homes. For most of us, luckily, the damage was less severe. My wife and I have leaks in our roof and elsewhere and lost a window (but gained an indoor tree). We lost power for about four and a half days. Friends in South Miami are still without power as of the writing of this post.

The legal implications of the hurricane aftermath extend well beyond mere rebuilding. Mold contamination and water intrusion must be addressed and properly remediated. Design and construction defects may be alleged to have exacerbated the extent of the damage from the hurricane. Employers may face workers’ compensation claims from employees and also may have vacation and lost wages concerns. Insurance coverage may be at issue. Construction costs may have escalated causing losses to builders or developers. Building permits and development approvals may expire due to delays caused by the hurricane. Condominium associations may not have sufficient reserves to act on emergency repairs. Construction licensing regulations may affect the ability to commence repairs and provide penalties for failure to engage properly certified contractors.

So what to do?

  • Make sure you and your family, employees and customers will be safe in your home or building.
    • Are there electrical system damage and risks?
    • Is the water safe to drink?
    • Is there a risk to the structural integrity of improvements?
    • Other Physical Hazards (don’t panic, but snakes and scorpions like piles of debris).
    • Contamination? Such as leaking petroleum tanks, chemical spills and the like.
  • Address potential health risks, whether mold or risky property conditions.
  • Secure your property and protect it from potential or further loss of property value.
  • Deal with Insurance.
  • Deal with Government Agencies such as FEMA
  • Deal with FP&L’s reimbursement programs.
  • Check with your mortgage lender. The lender may have the right to collect insurance proceeds and disburse the funds as repair and rebuilding proceed.
  • Only then commence to restore your property. Use only licensed and insured contractors. Where required by law, obtain all necessary permits and approvals. If you are part of a condominium or property owners’ association, make sure all Board approvals are obtained.
  • Get on with your life

Our lawyers have assisted clients in resolving insurance disputes, negotiating agreements in connection with assessment and remediation services, resolving design and construction defect claims,  implementing programs for addressing employee benefits, preparing hurricane and disaster response plans, and in finding their way through myriad environmental regulations.   In one recent example,  we resolved an insurer’s denial of coverage for water damage based on a theory that the building envelope was defectively designed or constructed and that the damage was not caused by a windstorm (as provided in the policy). By engaging the proper experts, a successful argument was made that the building envelope was properly designed and constructed and that it was indeed the hurricane-force winds that caused the water intrusion.

In another example, we assisted a client in requesting an extension of the expiration date for various development approvals that could not be met due to the direct delays of the hurricane, the difficulty in obtaining materials and the need to redesign to address increases in construction costs.

In addition to helping guide our clients in making proper recovery efforts, we are also focusing our clients’ attention on preventative measures to avoid future repeat damage and liability. We have found that many building and business owners have been hesitant to expend significant sums in prevention, in part to the belief that the recent hurricane landfalls in Florida were merely a fluke.  Whether global warming or a regular climatological cycle, it appears that the Atlantic hurricane season has been on an upswing that may continue for a decade or more. Proper preparation can lessen the business impacts and speed up recovery efforts.

 

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        It’s that time of year again. Property owners, whether office, retail, apartments and residential have received or will shortly receive by mail the Truth in Millage Act (TRIM) notice for 2016 ad valorem real property tax assessment. The purpose of the TRIM notice is to advise you of what the county property appraiser has determined to be the value of your real property and advise you of the minimum and maximum tax rates that will then apply.  As the tax millage rates are determined by action of the local government agencies, such as the county, municipality and improvement districts, the only means of contesting those rates is at the voting booth. However, assessed value may be challenged.

            Some basics:

  • Ad valorem real property taxes are based on the value of your real property on January 1st of each year. So, taxes for 2016 are based on the value of the property determined as of January 1, 2016.

 

  • Tax rolls close in June of the tax year and TRIM notices are mailed in August.

 

  • Tax bills are mailed in November with taxes being delinquent after March 31st of the following year. Paying early can yield up to a 4 percent discount on the base tax amount, with the discount declining by 1 percent per month. The tax bills are essentially paid in arrears; taxes billed in November 2016 and payable through March 2016 represent 2016 real estate taxes.

 

            If you believe that you may have been over-assessed, there are several procedures to challenge the assessed value set forth in the TRIM notice.  A property owner may request an informal conference with the county property appraiser at any time during the year. An informal conference is most often successful if there is critical information that may not have been available to the property appraiser’s office prior to determining value (such as damage that may have substantially reduced business income from the property).

            The most common approach is to file with the clerk of the county Valuation Adjustment Board a petition challenging the valuation.  You have 25 days from the county’s mailing date of the TRIM notices to file a petition to administratively contest this year’s assessment. The county-specific filing deadline is noted on the TRIM notice itself.  The deadlines in South Florida for filing a petition this year are:

  • Broward County:              September 19

 

  • Miami-Dade County:       September 19

 

  • Palm Beach County:         September 15

 

With a relatively short appeal period, it is important to file the petition to avoid missing the opportunity of the administrative process. The alternative if the deadline is missed is to file a civil action; a much more expensive procedure.

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        Some things are quite predictable. The Cubs will swoon in June. The stock market will drop on seemingly irrelevant factors. And hurricanes will wander the Atlantic and the Gulf of Mexico; regularly threatening the Continental US.

         While the weather person alarms for tropical storms and potential hurricanes are expected, the path of, and the potential havoc and destruction wrought by hurricanes and tropical storms are not quite so predictable. The record-setting number of hurricanes in 2004 far exceeded any predictions.  Katrina devastating New Orleans and its residents – well, that was predicted, but who could have guessed that FEMA would have been proven to so inept at its basic function?

             During the past decade, hurricanes have devastated Haiti and other Caribbean islands. Regardless of the impact of climate change on the strength of hurricanes, building and property owners may suffer serious damage and property loss from wind and rain even from a more moderate storm. Wilma crossing the state and extensive damage far was in excess of any predictions for a Category 1 storm, rendering 51,000 residential units in Palm Beach County, Florida at least temporarily uninhabitable.

             Dr. Philip J. Klotzbach of the Tropical Meteorology Project at the Department of Atmospheric Science at Colorado State University recently updated the 2016 Atlantic cyclone activity forecast in the “Extended Range Forecast Of Atlantic Seasonal Hurricane Activity And U.S. Landfall Strike Probability For 2016” on June 1, 2016 to provide for an average number of potential hurricanes and tropical storms in the Atlantic basin. The predictions for this hurricane season:

 Named Storms:                        12

Named Storm Days:                50

Hurricanes:                               5

Hurricane Days:                        20

Major Hurricanes:                     2

Major Hurricane Days: 4.4

       Of course, if few or none of these storms make landfall, the sheer number of hurricanes becomes less important. Can landfall be predicted? Predicting landfall on the continental United States cannot be determined by El Niño patterns, water temperature or the Long Island Medium.  The late Dr. William M. Gray had this to say based on historical patterns:

         The 2006 season was only the 12th year since 1945 that we have witnessed no hurricane landfalls along the United States coastline.  Since 1945, we have had only two consecutive-year periods where there were no hurricane landfalls.  The The dearth of landfalls in 2000 and 2001 was especially impressive considering that both of these seasons had above-average hurricane activity.  From Hurricane Irene in 1999 to Hurricane Lili in 2002, 21 consecutive hurricanes developed in the Atlantic basin without a single U.S. landfall. [see Extended Range Forecast Of Atlantic Seasonal Hurricane Activity And U.S. Landfall Strike Probability For 2007]

        If I was a Vegas odds maker, I would not want to take the bet for no hurricane landfalls in 2016. Historical patterns seem as good as any in addressing hurricane likelihood. While not a meteorologist. I grew up in Miami in the 1960s, which saw quite a few serious storms making landfall in Florida.  According to hurricane expert Dr. Gray, we should see an increase in storm activity through 2020. The storms are expected to cause 5 to 10 times the amount of damage on the Gulf and Atlantic Coasts than previously experienced, due to the massive increase in population and development along these coastlines:

       The hurricane activity of the next 20 years should resemble the period that began in the late 1920s and lasted through the 1940s. The increase is due to higher salinity content in the Atlantic Ocean, which alters its currents and increases average ocean temperatures, fueling more storms. Gray emphasizes that this is a cyclical trend and has nothing to do with global warming (CNN, April 22, 2000). [see Drought Cycles and Hurricane Cycles; CBS Hot Air Watch, Cooler Heads Coalition, May 17, 2000]

       Predicting climate and weather is fraught with difficulty. But given the long-term evidence, there is only one appropriate course of action, and that is preparation. If storm events cannot be predicted with accuracy, we must assume the worst case, and implement realistic and beneficial precautions based on the storm impacts of the recent three years.

        What can those in the real estate industry do to prepare and what can they do to help building owners, contractors and other customers take the appropriate precautions?

        As a lawyer with significant experience in construction, we have seen a growing number of insurance companies denying coverage under windstorm policies for design and construction defects, or maintenance failures. For example, a client’s apartment building was damaged by water vapor, being driven by 80 mile per hour winds, penetrating the window systems and pooling inside. An expensive post-storm forensic analysis showed that the windows were properly designed, manufactured and installed. After a year-long battle, the insurance company settled. A way to address the post-storm expense is with a pre-storm season building analysis showing code compliance and proper maintenance. This may not only reduce the likelihood of a post-storm dispute, it may be a key factor in obtaining windstorm insurance at all. Working with properly licensed professionals, building owners can reduce both the cost to collect under insurance and reduce the time for repair.

 What is important to preparation? A laundry list may spark some ideas:

In the multifamily rental or commercial rental setting:

  • Preemptive testing and proof of installation of windows, flashing and other leak prone components
  • Who is responsible to install shutters?
    • Is there a right to rent abatement in a commercial lease? If not, how can the tenant keep operating?
    • Are there termination rights for extended closure? If not what is the tenant’s business plan?
    • What happens to cleanup if there is an interruption of utilities?
    • Who is responsible to repair water damage?
    • Who is responsible for mold remediation? Does the landlord have a team under retainer?
    • Insurance coverages:
      • Rental loss
      • Mold
      • Windstorm
      • Gaps?
    • HVAC maintenance and cleanup
    • Property Manager responsibility
    • Are upgrades and deductibles a CAM Cost?

The condominium setting adds a few twists the previous list:

    • Preemptive testing and proof of installation of windows, flashing and other leak prone components
      • Failure of elevators/evacuation of residents
      • Interruption of utilities, including water supply
      • Who is responsible to repair water damage?
      • Who is responsible for mold remediation?
      • Who is responsible for Common Element repair and cleanup? Mandatory access rights
        • Property Manager responsibility
        • What happens if the Unit Owner fails to repair? Is there a potential cross-contamination risk?
        • Are Unit Owners required by the condominium documents to obtain insurance?
        • How are you to be paid if there are (and there will be) delays in insurance payment/Special Assessments?
        • Snowbirds? Contact addresses
        • Reminders of responsibilities before Hurricane Season/Special Needs Occupants
        • Securing of Limited Common Elements – balconies, HVAC, etc.
        • Identify contact person with impending storm
        • Pets?

 

Projects under construction present many legal concerns:

    • Disclaimers regarding hurricane impacts and design criteria
    • Specifications regarding wind and water resistance
    • Preemptive testing and proof of installation of windows, flashing and other leak prone components
    • Responsibility for securing of project during construction
    • Who is responsible for dryout?
    • Who is responsible for mold remediation?
    • Who pays?

 

Some special pre-storm preventative measures:

  • Inspect existing conditions for cracks, roof membrane, loose roof tiles, bad flashing, caulking issues
  • Check window conditions
  • Preventative testing?
  • Test fit shutters
  • Brace doors – including rolling doors
  • Trees and landscape hurricane prune
  • Antennas and masts
  • Generator risks
  • Commercial/Industrial Tenants with hazardous chemicals stored – pollution insurance coverage
  • Availability of workers to install shutters and protective equipment
  • Code compliance issues with older construction and insurance coverage v. code requirements
  • Dryout contractors engaged in advance?
  • Senior projects, health care facilities and evacuation plans
  • Special problems – EIFS and exterior drywall buildings

 

        While some of the checklist recommendations cannot be performed other than by a licensed contractor or engineer, a lawyer with practical experience in the construction industry can advise the building owner, landlord, developer or contractor in preparation and response to storm events.

           As a former Scout, the motto was “Be Prepared”. The same philosophy applies to the real estate and construction industries as well. By working in a team with attorneys, engineers, and other building experts, the members of both industries may reduce the risk of serious injury or property damage, and loss of income.

            No discussion of tropical weather should be concluded without extending our condolences to the family, friends and colleagues of Dr. William M. Gray, who is quoted in this article and was the dean of hurricane meteorologists for more than 60 years. Dr. Gray passed away on April 16, 2016. If you grew up in South Florida as did I, you cannot help but remember Dr. Gray’s sage and sane advice as storms approached.

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        During the past three meetings, the Alliance of Corporate Real Estate Executives and Specialists (ACRES) presented some of the top real estate economists and prognosticators. Brad Hunter, Jack McCabe and Eric Fixler expressed fairly similar views on the state of the South Florida real estate market for the next few years. What follows is an amalgam of their opinions and is not intended to be a restatement of the position of each expert. Each may disagree with some of the positions taken by the other two. The over-arching message of all three of our group’s speakers is that the presidential elections, world events, and exchange rates may create disruption to any of their predictions or the trends currently being seen. These predictions are their opinions of market trends and are not guaranties of future performance.

Market categories:

  • Luxury condo towers – The high-end luxury condo market on Brickell, South Beach and Sunny Isles is pretty much dead. If a project is not out of the ground, there will likely be a wait of 3 to 5 years before the next cycle. Their comments were mirrored by a recent Wall Street Journal article entitled “Another Condo Bust Looms in Miami”. The Journal, quoting a Miller Samuel, Inc. report, stated that  “In the fourth quarter of 2015, the number of Miami Beach condo transactions declined nearly 20% from a year earlier, while inventory jumped by nearly a third…” The Journal went on to note that the median sales price for luxury condo units dropped 6.6%. With exchange rates flipping in favor of the US dollar, some South American buyers may choose to abandon even 50% deposits, as that may be a “less worse” choice than closing. The silver lining for investors is that, as in past condo cycles, units will likely sell for far less than today’s sales prices.
  • Other residential – For entry-level, mid-market, and senior housing, demand has outstripped supply and will likely continue even in the face of a new recession.
  • Retail – Despite the loss of big box stores, like Office Depot and Sports Authority, core retail sales development will likely continue at an average pace. The projected average increase is 4.2% in project starts annually over the next few years.  The cautionary trend is that the cap rate spread between primary and tertiary markets is now dropping from 2012 levels. This means that there is more cash chasing investments and willing to pay more for third tier market properties.
  • Industrial – cap rates are down and rents are up. The cap rate spread between primary and tertiary markets has closed but not to the same degree as retail.
  • Office – cap rate spread has been fairly steady since 2012.
  • Multi-family – cap rates generally between 5% and 6%, although primary markets (South Florida included) have seen as low as 4 caps. New product being delivered is not substantially affecting existing inventory.

 

Financing:

  • CMBS – still most readily available source for long-term fixed, non-recourse lending. Currently between 270 to 290 basis points above 10-year T-bills.  From a real estate litigation/real estate acquisition play, between 2016 and 2012 $1.7 trillion in CMBS loans will mature. Most are in office, hotel and some retail product. As most were made in boom times, the LTVs are high and will be difficult to refinance at same percentages. Of the $1.7 trillion, $390 billion will come due in 2017. In addition, Dodd-Frank will place pressure on the B tranche of new CMBS loans. The B holder must retain ownership in that tranche for at least 5 years. Under the new Reg AB, the CEO of the fund will be personally liable for false information in the issue.
  • Life Companies – almost 2/3rd of 2016 allocations already funded. Additional funding will be limited to Class A properties in primary markets.
  • Private Funds –  demand is increasing. Pricing still high (loans $3mm to $10mm, rates are at Libor + between 450 basis points and 600basis points; loans $10mm to $20mm, rates at Libor + between 400 basis points to 600 basis points; and loan $20mm+, rates at Libor + 300 basis points to 425 basis points) and LTVs between 75% and 60%.  Most such funds are currently looking at value add properties in areas with market growth and to borrowers with real track record.
  • Banks – still out of the mainstream. Mostly relationship loans with difficult rate lock-ins.
  • GSEs (Government sponsored enterprises) – Fannie, Freddie and HUD very active in multi-family market and are the majority funders. In 2015, GSEs funded about $90b with $17b in uncapped loans. Rates are currently around Libor + 250 basis points, although pricing is volatile. Freddie funding loans under $5mm.

 

         One key concern raised by one of our speakers is that Europe is already in  recession. Because tests are retrospective the existence of a recession will not likely be confirmed until this fall. Spain, Portugal and huge number of jobless refugees are straining the EU. This time, the recession will spread from Europe to the USA unlike the great recession.

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Sometimes, if you’re a developer, an emergency can be a good thing. At least if it’s addressed in a declaration of a state of emergency by the Governor of Florida. So far this year, Governor Rick Scott has issued numerous Executive Orders that constitute a declaration of emergency. A significant number of these declarations involve events such as severe weather, water levels, the Zika virus, Lake Okeechobee and similar issues that may create risk to a particular county or counties of Florida.

             Florida Statute §252.363 was enacted in 2011 to authorize a time extension for development orders and permits by tolling the period remaining under a permit or other authorization for the duration of the emergency plus 6 months. The time extension applies to the area covered by the Executive Order and tolls the expiration of such development orders.

             What orders and approvals constitute a “development order”? The statute tolls the expiration of:

1. A development order issued by a local government;

2. A building permit;

3. A permit issued by the Department of Environmental Protection or a water management district; and

4. The build-out date of a development of regional impact.

        A development order would include a site plan approval and conditions included in the site plan approval.The obligation to exercise the extension falls to the developer or permit holder. Within 90 days after the termination of the emergency declaration, the holder of the permit or other authorization must notify the issuing authority of the intent to exercise the tolling and extension granted. The notice must be in writing and identify the specific permit or other authorization qualifying for extension. The notice is mostly automatic as long as the permit does not fall within an exception to the protections:

 1.      The permit or other authorization falls outside of the geographic area for which the declaration of a state of emergency applies;

2.      The permit or other authorization is of a type issued by the Army Corps of Engineers;

3.      The approval has not been determined by the authorizing agency to be in significant noncompliance with the conditions of the permit or other authorization through the issuance of a warning letter or notice of violation, the initiation of formal enforcement, or an equivalent action;

4.      The permit or other authorization that is subject to a court order specifying an expiration date or buildout date that would be in conflict with the extensions granted by the statute; or

  1.         The extension of the permit will create an immediate threat to the public health or safety.

        In a year in which El Nino is shifting to a La Nina, meaning uncertain weather patterns, the possibility of further declarations of states of emergency remain for this year. Developers should be aware of the issuance of Executive Orders issued for these emergencies and the potential for an extension of a permit or development order.

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