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.

 

tarping up

        I recently read a bog post about woodpeckers causing unexpected damages to a condominium in British Columbia (Read Here) causing unexpected expense to the association and unit owners. The story got me to thinking about what would happen if something like that happened here in Florida. No, we don’t have a woodpecker problem (though occasionally, some woodpecker will peck on a window) and due to rigid hurricane codes, our buildings are generally concrete block construction which would break a beak or two. But we have other critters that can cause major damage, including, termites, iguanas, rats, opossum and mold spores, to name a few. And, there is the big fear, the natural disaster we all dread: hurricanes.

             F.S. Chapter 718, the Florida Condominium Act, is very comprehensive. Section 718.112(f) requires that the association bylaws must include all of the expenses set forth in section 718.504(21). That section, which deals with the developer’s offering circular, lists all of the expenses that a developer must include in its initial association budget. The expenses include reserves. Section 718.112(f) goes on to provide that, after turnover, a budget may exclude any item which is no longer applicable. However, any association that believes that reserves aren’t applicable must look at 718.112(f)(2)(a) which provides that all budgets must include reserves for capital expenditures for deferred maintenance, including roof repairs, building painting, pavement resurfacing and any other deferred maintenance expenses exceeding $10,000 based on the remaining useful life. Reserve accounts may only be used for their specified purpose unless a majority of the unit owners vote to re-allocate the reserves.

             There is no specific requirement for associations to budget reserves for emergency repairs for things like termite infestation and damage. So what is an association supposed to do when these unexpected events occur? As mentioned above, the association may request a vote of the unit owners to re-allocate reserves to cover the unexpected damage. But, it would then be prudent for the association to make up for the re-allocated funds by special assessment, either one time, or over time, as those reserves will be necessary in the future. The association can also pass a special assessment to cover the need for the emergency repair.

             In the event of larger, but not urgent repairs, the association can borrow money from an institutional lender. There are banks that specialize in condominium financing. The association need not pass a special assessment to cover new debt service. Rather the debt service can often be treated as a line item in the association budget and added into the regular assessment to the unit owners.

             Finally, as to a catastrophic loss, such as those following a hurricane, the association is required to maintain insurance on the condo. The unit owners will likely then only bear the burden of the deductible. Sometimes this burden is significant, as condo deductibles may be high to save on premiums and the number of units to share the deductibles may be low. Unit owners should be certain to maintain condo insurance and make sure that the coverage includes special assessment coverage following a catastrophic loss. In this situation, the special assessment would be covered by the unit owners’ condo policy.

             With proper planning, condo associations and unit owners can have protections against unexpected damage to condominiums. Planning involves some up front cost and adequate funding of reserves. But these costs will always be less than the potential expenses when disaster strikes if unprepared.

00185783

        After negotiating a good rental rate on a commercial lease, new tenants in Florida often get sticker shock when they calculate their monthly bill after factoring in sales tax. F.S. 212.031 assess sales tax on the consideration paid to occupy the premises. The consideration includes rent, CAM, utilities, real estate taxes and insurance. Florida is the only state in the nation to impose a state wide sales tax on rents. Tenants who have never leased in Florida previously can generally grasp the concept of tax on the rent, but they are puzzled by the tax on CAM and outraged when they are told that they pay tax on real estate taxes. Clearly, this is a double tax. Even the tax on CAM and utilities is a double tax. However, the legislature has determined, and courts have upheld, that the sales tax is a tax on the occupancy and not on the underlying goods. Therefore, there is no double tax.

             There is an exemption to payment of sales tax on utilities. If the landlord is paying taxes on the utilities, invoices CAM separately, has a separate line item for utilities on the invoice and does not mark up the price of the utilities, then there will be no sales tax due.

             Why does Florida tax rent? Simply stated, Florida has no personal income tax and its corporate income tax rate is among the lowest in the United States. Florida needs to look under every cushion to find sources of tax revenues. The state has always preferred to tax tourists and businesses as much as possible. The lease tax is aimed at business and generated $1.5 billion in 2015 and is projected to generate $2 billion in 2020. Yet there are calls to eliminate the tax. Governor Rick Scott (R) proposed a 1/2% reduction in the rate in 2014. The proposal failed. The governor tried again this year, offering a 1% reduction. Again, Governor Scott’s proposal failed. However, other bills were filed. One such bill required the total elimination by phase out of the tax by 2025. The bill never got out of committee.

             The critics of the tax are getting louder. Many business and real estate groups are calling on the legislature to take action in 2017 to phase out the tax. Leading the charge are BOMA, Florida Realtors, CCIM, Florida Gulf Coast Realtors, ICSC, Florida Restaurant and Lodging Association, Florida Retail Federation and NAIOP.

             Proponents of eliminating the tax argue that out of state companies won’t relocate to Florida because of the tax. However, their argument does not address the income tax reasons to come to Florida which could more than offset the sales tax issues, and often do. Also, opponents to elimination of the tax counter that to offset the lost revenue, real estate taxes would go up, which would be passed on to tenants. Landlords might also see the tax savings as an opportunity to raise rents.

             Perhaps a better solution to complete elimination of the rental tax would be to limit the tax to rent only and eliminate it from CAM and other charges. Tenants and industry groups would find it less offensive as the feeling of paying double tax would be off the table. The state would continue to collect the bulk of the tax and the taxpayer would receive a significant tax break. The state could more easily afford to make up this tax cut and Florida could continue to be an attractive place for companies to relocate to.

00173370

        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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