Where Old Condos Go To Die

Will you still need me, will you still feed me,

When I'm sixty-four?

…The Beatles

 

            In 2005 we published a treatise entitled "The Uncertain Future of Common Interest Developments." We worried about the inability of condominium boards to fund reserves for future repairs and maintenance. In addition, political pressure from individual owners was keeping assessments artificially low. While this pleased the then-owners, it underfunded reserves and robbed future owners of the resources for long-term maintenance.

 

            In the following years, we noticed and added another factor to the under-funding equation—damage unseen during routine inspections, which eventually required unexpected and unfunded repairs. At first, these problems—rot in wall cavities hidden for years, gradual soil problems, slow deterioration of framing elements—required spot repairs but often led to large-scale reconstruction later. Unfortunately, some of that hidden damage eventually caused catastrophic failures of building parts or entire buildings and loss of life.

 

            After studying this phenomenon for several decades, we have concluded that these failures and the lack of funding that leads to them result from a fundamental flaw in the condominium business model. Allowing critical funding decisions to be made by a majority vote of owners with disparate interests invariably defeats most fund-raising efforts by the board of directors. This makes funding voluntary. Condominium repair and maintenance are determined not by experts but by laypeople whose interests in the project are mostly short-term. But the managing corporation's interests are long-term. Thus, an inherent conflict.

 

            The consequences of voluntary funding are seen in the gradual deterioration of many older condominium buildings. Newer owners resent that they have been saddled with the cost of decades of deferred maintenance while past owners escaped unharmed. Repairs or restoration that the association could have done inexpensively twenty years earlier, if found in time, now require six-figure special assessments or bank loans, again the responsibility of current owners. Reserve funds were kept artificially low by past votes against higher assessments, did not keep up with the rate of deterioration, and promoted increasing reserve deficits.

 

            So, what's the end game? What happens when current owners either balk at paying for reconstruction to keep a building watertight and safe or lack the financial capability to address these problems? State and local entities have learned of the potential for injury or death from failed building components due to poor maintenance. They can and will condemn buildings considered unsafe or uninhabitable. Insurance companies that provide liability or property damage coverage are also aware of these conditions and, for now, have raised premiums to account for it. But they may deny coverage altogether. Boards of directors have been sued by current owners who reject the idea that they should bear responsibility for many decades of deterioration. And then, there is the possibility that all or a part of the building will fail due to inadequate maintenance, construction defects, or natural disasters.

If any of these factors are present, the project may be at the end of its service life. That's not what a community association's governing documents intend, but that's the reality. Buildings destroyed, unsafe, or cannot be adequately maintained for habitability can no longer function as planned, and the owners must consider an "end of life" outcome. Some outcomes can be chosen, but some cannot be addressed in time to save the project. Here are a few.

Do Labor and Materials Shortages Impact Construction Quality of New Homes?

 

            During periods of high housing demand, as we experienced over the past five years, supply chain disruptions affected the availability of building materials. Everything from insulation to plumbing fixtures to framing lumber has been scarce[1]. Not unknown before the pandemic, labor shortages in the construction industry only intensified with the Covid virus. In addition, falling birth rates, a slowdown in legal immigration, and early retirements created a labor crisis.[2] Demand for new homes was at an all-time high. So, how did these shortages and delays impact the quality of home construction?

 

            The prevalence of construction defects in new housing often accompanies periods of high demand. When sources of trained labor dry up, builders must obtain workers from unconventional sources—sometimes from the parking lot at Home Depot. The same is true for building materials in short supply. As a result, there are substitutions or changes in accepted installation practices. In addition, builders substitute lower-quality materials for traditional building products. Each factor can negatively influence construction quality. 

 

            The most acknowledged result of shortages in materials and labor is the cost of new housing. Builders raise the price of new homes to compensate for the expense of hard-to-get materials and delays caused by the lack of labor. But there are other consequences—some may not be discovered until after the home's sale. For example, forensic investigations of new housing often expose the shortcuts taken during construction. These are quality-control issues often not visible on the exterior of a completed building. But reports of leaks or mold, for example, in a new home will trigger intrusive inspections that reveal poor construction methods. 

A Guide to Construction Defect Claims for Community Managers and Boards of Directors

A Guide to Construction Defect Claims

Introduction

By Tyler P. Berding, J.D., Ph.D. and Julia Hunting, J.D., P.E., S.E. and Anna P. Fabiano, J.D.

For decades, litigation over the defective construction of multi-family projects has been a frequent component of a property manager's portfolio. Low-rise, wood frame condominiums, apartments, and townhouses have long been susceptible to construction mistakes which lead to disputes with contractors and developers. High-rise projects can also exhibit poor construction. Community associations and owners of apartment buildings have found many reasons to sue builders. What leads to construction defects? Often it is a shortage of skilled labor in times of high real estate prices and demand. When there is strong sales potential, builders are eager to supply inventory, but good construction takes time and talent; when time and talent are in short supply, substitutions are made, which can lead to poor quality and subsequent claims.

Construction defects may be noticed almost immediately by new buyers, or they may lurk within a building for years before the damage they cause is detected. These problems can be as obvious as an actively leaking roof, or they can be as subtle as cracking caused by soil problems that develop several years after purchase. They can be easy to fix or potentially catastrophic, and their severity will strongly influence whether or not the builder or contractor will make repairs without the compelling force of litigation.

Here we cover construction defects in new construction. Defective repairs in new and older buildings are a topic covered in our companion book: “A Property Manager's Guide to Reconstruction Projects.”¹ Property managers must have a basic understanding of the elements of a construction claim, so they can adequately advise their clients, retain or recommend appropriate professionals, and monitor the claims process. That information follows. We hope this resource will be useful to both you and your clients.

For a full copy of this publication, contact Jill Jackson at jjackson@berding-weil.com 

¹  Tyler P. Berding. J.D., Ph.D., Paul W. Windust, J.D., and Julia Hunting, J.D., P.E., S.E., A Property Manager's Guide to Reconstruction (2013).

The Contractual Community

Why Community Associations Are Not "Governments" 
 By Tyler P. Berding, JD., Ph.D.

Editor's note: This article was originally published several years ago. In light of the continuing debate (see post below on a similar topic) over the legal nature of a community association, it is being reprinted here.

Articles and blogs devoted to the analysis and, occasionally, criticism of community associations often discuss the concept as if it were just another subdivision of local government. It is a common mis-perception because so much discussion about this unique housing type is devoted to questions of governance. We have boards of directors, which in some respects appear to be like city councils. There are property managers who carry out many of the same functions as city staff. The property so governed has many of the same physical accouterments as a town or city--streets, utilities, parking, recreation facilities, etc.

There are controls which are seemingly analogous to municipal government, where ordinances such as zoning place restrictions on individual property rights in order to give effect to the paramount needs of the city or county--as determined by the elected policy-makers. But while these two governance systems may appear similar, their respective legal bases are really quite different. Understanding this difference may help to understand why the occasional characterization of community associations as "mini-governments" or "quasi­-governmental agencies" is particularly inapt and can lead to false assumptions about community associations.

The sovereignty of our political government is subject to the limitations imposed upon its authority by various constitutional provisions, but its continued existence, short of war or violent revolution, is assured. A community association is not a sovereign entity, even though in many cases and in many of its duties, it appears as one. Its continued existence is wholly dependent upon the collective will of the owners of the property, and it has no assurance whatever of perpetual life.

A Community Manager's Guide to Re-Construction Projects

      Every manager of multifamily projects will encounter a large re-construction project several times in his or her career. These may be planned projects or the result of an emergency. Planned projects include those that are routinely projected by building inspectors, architects, and other building professionals—re-painting; new roof coverings; re-paving of parking lots and streets. Emergencies usually involve previously unknown problems discovered in a forensic investigation or as the consequences of age.

       As residential housing gets older, construction projects become more complex and difficult. This complexity often results from those unplanned and unexpected discoveries. Age brings deterioration of components that years before would not have been considered at risk. A routine roof project, for example, may only require replacement of the roof covering when the project is say, 15 years old. But in an older project, where moisture has had years to accumulate in concealed wood components, not only the covering, but also the wood substrate may have to be replaced. The same is true with other components largely built of wood—balconies, staircases, entry decks, and framing under siding and stucco. These components may actually leak, but not enough to alert the occupants. Instead the moisture remains in the wood or in wall cavities and supports gradual decay over time. These issues add to the challenge of preparing an adequate scope of work because a good portion of the damage is concealed.

          As projects become more difficult, property managers find that they are responsible for a wider range of tasks--not only obtaining bids to do the work, but also for determining what experts to retain to investigate and determine the scope of that work; deciding who manages the contract; negotiation over the terms; and finding the funds to pay the contractor. This guide is intended to offer community and apartment managers assistance in managing a complex construction project including recommending and retaining appropriate professionals to determine the scope of work; construction contract and bid package essentials; administering the project; and handling disputes.

Read More...

Builders Report Lack of Skilled Labor

A diminished labor pool is impacting new construction--will quality suffer as a result?

Yahoo reports that the building industry is suffering from a lack of skilled labor resulting from tightened immigration policies and young workers choosing other fields. We reported on this problem in an earlier post on the Berkeley building collapse. Quality suffers when demand is high and the skilled labor pool is low.

"Unemployment in the construction industry fell in June to the lowest level since 2001, according to an analysis by the Associated General Contractors of America. That's because contractors are having a hard time finding enough qualified workers to meet growing demand, association officials said....We've lost about two-thirds of our Hispanic and South American population in South Carolina, and that has had a profound effect on labor...Local high schools have training programs, but they have been slow to churn out new workers."

So where do builders get the labor to meet demand? We need to spend more on high school and community college technical training, that's where. In the meanwhile, more and better inspections must be employed so that mistakes left behind by untrained labor won't result in construction problems and building failures.

A Community Association's Four Stages of Life

          Community associations, like people, evolve during their lifetimes. Some of it is good and some is bad, but  change is inevitable as projects, and people, age. Whether that evolution leads to a long and healthy life, or an early demise depends a great deal on the decisions made early and the ability to recognize signs of decay--both physical and political. To assist, we have outlined what we consider to be the various "stages" that an association will pass through eventually. You will note that we are not just talking about physical manifestations, but political and economic ones as well, for they each play a role in the long-term health of the project. Read about them and see which apply to your association or your client's associations. Like anything harmful, recognizing the symptoms can help with a cure.

The First Stage

A brand new project enters the first stage. The duration of that stage depends on many of the factors outlined above. Generally, during the first stage, the regular assessments will appear to cover all projected maintenance and repair costs without resort to special assessments or outside sources, and with only modest annual increases. Non-owner occupancy is at the lowest percentage it will ever be, usually 10 percent or less. Board members and professional managers are easy to find, the political climate is benign and the members are generally supportive of the board. The project looks and feels new and exciting. The membership's attitude reflects these qualities. Re-sales are brisk and values stay high with modest appreciation reflecting general market trends.

The Second Stage