When Time Runs Out

Part II

The Typical Condominium “Business Model” will Not

 Sustain the Buildings

         Condominium buildings are like rental apartments in their aesthetics and construction, with one significant difference—condominiums are mapped and built to be sold to individual unit owners. The ownership of rental apartments remains with one owner. Apartments are rented for a fixed period. Title to a condominium project, including individual units, is held by the unit owners, who each own an undivided percentage of the entire project in addition to their title to a specific unit.

An apartment building owner is solely responsible for the condition of the building and can set rents accordingly. The multi-party ownership of a condominium building requires a governance system that can act on behalf of all the owners—an association or AOAO—managed by an elected board of directors. The cost of maintenance is spread among all owners. A condominium association must assess the owners for the cost of necessary maintenance, but that cannot happen arbitrarily. It requires adherence to the CCRs, state law, and sometimes, owner approval.

Among the many responsibilities of a condominium association, and probably the most critical, is maintaining the project correctly. This requires hiring professionals to investigate and recommend necessary maintenance. Obtaining that information and associated costs enables the board of directors to set the association’s annual budget. That includes various operating expenses, insurance, reserves, and professional management. The principal source of revenue necessary to fund the budget comes from the assessments levied on the individual owners. This is where the problems, both political and financial, come into play.

Owners can resist even routine increases in annual assessments and push back hard on special assessments to cover budget shortfalls. This usually arises when extensive repairs are required for something unexpected by the association’s reserve budget. This happens if reserve inspections fail to look closely enough at the building components, where damage has been hidden for long periods, or where past repairs were inadequate. If assessment increases were mandatory, as with certain types of cooperative apartments, this wouldn’t be a problem. However, with the average homeowner’s association or AOAO, extensive special assessments require owner approval, which is often tricky. Even obtaining a quorum of voters can be close to impossible.

Boards sometimes avoid these political conflicts by refraining from imposing the assessment for the work recommended by its professionals. Less work, or no work, then follows. That this can happen indicates the failure of the fundamental business model of condominium projects—assessments are essentially voluntary in that owner political influence can sway a board’s decision. Voluntary assessments are like voluntary taxes—they don’t work. Most owners will reject a plea for a significant special assessment when given a choice. The problem is those owners will not likely be in residence for many more years, and the maintenance or repair issue will be passed on to future owners to deal with when it has become much worse.

The service life of a condominium building is affected by damage allowed to linger for years or decades. It can reach the point where the cost to restore the building becomes prohibitive and impossible to fund. 

We discuss this critical juncture in the next two installments.