When Time Runs Out

Part IV

What Happens to Owner Equity?

         In past installments, we discussed why condominium projects are especially prone to a shortened service life. We analyzed why the condominium “business model” allows inadequate maintenance, leading to early deterioration. Finally, we listed the signs of failure—some obvious, some hidden—that will lead to a project’s obsolescence. In this installment, we will review what can be done with a failed or destroyed condominium project and what moves by the owners could go a long way to protecting their remaining equity.

            There are two “end-of-life” scenarios for condominium projects. The first is obvious—destruction due to natural or man-made disasters—fires, hurricanes, or earthquakes. The second is more insidious but can be just as fatal—long-term deterioration of structural components, unaddressed or undiscovered for many years—that eventually renders the buildings uninhabitable. 

            We’ll take the less obvious condition first. While AOAOs are generally responsible for maintaining and repairing all the structural parts of a condominium building, that doesn’t always happen as it should. Conditions that cause long-term damage can be hidden, even during investigations to determine the reserve budget. Even if symptoms are noticed, they may not be thoroughly analyzed, so repairs can be funded and addressed before the damage does serious harm.         

Conditions like these may not completely destroy a building, but they can be harmful enough to make it unsafe and uninhabitable for its occupants. Further, the economic cost to address hidden conditions can reach the point where necessary funding is unavailable from owners or lenders. Safety is always a consideration, and if it is discovered that the means of access to the building—stairways, landings, elevated walkways—are compromised by rot or where some have collapsed, injuries to occupants or not, building departments will not hesitate to condemn the affected parts of the building. And, if, upon further examination, similar conditions are discovered elsewhere, the entire project could be shut down. If repair funding is unavailable, the building may have reached the end of its service life.

When Time Runs Out

Part III

When has a Condominium Building 

Reached the End of its Service Life?

         If you read the earlier installments of this series, you know that the service lives of condominium buildings are shortened by inspection, maintenance, and funding failures. Recognizing when a building may begin to reach the end of its service life may be easy or hard, depending on the type of failure. A catastrophic failure by fire, hurricane, or earthquake is instantaneous and needs little to recognize that its life is over. In these instances, we look to insurance, if available, significant owner funding, rarely available, and the value of any remaining assets, principally the land. 

            However, many building failures that result in an early death are not necessarily visible. The collapse of the Champlain Towers condo complex in Surfside, Florida, that killed 98 residents was not due to apparent conditions. Investigations are continuing, but it was probably due to a failure of the waterproofing that promoted corrosion of the reinforcing bar embedded in the concrete structure, over many decades. Less spectacular failures arise when moisture lives in the interior of wood-framed walls or roof sheathing and slowly rots its host until costly repairs are necessary. The problem is often discovered when work is undertaken to re-paint or re-side the exterior, exposing the underlying rot. When failing components are not intended to carry an occupant load, deterioration may continue for decades until discovered. But in parts such as balconies, elevated walkways, and staircases, a rotted structural part can fail and cause injuries, such as the collapse of a balcony in 2015 in Berkeley, California, which killed six students.

            This suggests that more intrusive inspections should be considered even when, visually, the building does not show signs of failure. Inspections that go along with reserve studies are rarely the type that would discover hidden structural damage, for example. California now requires that every exterior load-bearing structural component in new condominium buildings be inspected within its first six years and that defects that impact the safety of those parts be reported to the local building inspector. Other states are considering similar statutes. If defects are discovered in the first ten years of a building’s life, a claim can be made for the cost of repairing the defect. After that, the association, or AOAO, is on its own.

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.

When Time Runs Out

Many condominium buildings will soon reach the end of their service lives. Others are already there. Maximizing the surviving property's value may be the key to protecting owner equity.  

Introduction

         Nothing in the documents that create a condominium project predicts how long it will last. But everything about condo governance assumes it will last forever. There is no discussion of depreciation. reserve calculations are based on just those ordinarily renewable components—roofs, paint—under the false assumption that everything else—framing, foundations—never needs maintenance. Not only do condominium buildings not last forever, but most will be obsolete short of any owner’s expectations. 

What follows is a four-part series discussing the challenges condominium owners experience in the face of gradual deterioration or outright destruction, such as we saw recently on Maui. Part I deals with condominium construction and its impact on service life. Part II talks about the pitfalls of condominium maintenance funding. Part III identifies when a condominium building has reached obsolescence. Part IV offers help for preserving owner equity.

 

Part I

What Makes Condominium Buildings Vulnerable to an Early Demise?

Condominiums come in all shapes and sizes. From tall high-rises made of steel and glass to three and four-story, “low rise” buildings framed with wood. They can be on the beach or inland. They can be high-end or affordable. They may be brand new or decades old. But they all require maintenance, depend on the owners to assess themselves adequately, and on boards of directors and managers to investigate and budget for the work. Successfully identifying and funding maintenance needs results in a longer building service life. Failing to identify and fund necessary repairs can drastically shorten a building’s life. A catastrophe, like the recent Lahaina fire, can destroy a building despite its age.

Let’s take the non-catastrophic failure first. Buildings, especially those primarily wood, need regular attention to avoid deterioration. And not just paint. When water or vapor gets past the outer skin—siding, stucco, or other cladding—it can remain within the walls of the building undetected for many years. Left undetected, it will foster rot and mold, worsening until it causes framing deterioration. If the condition is in parts that support loads, like balconies, walkways, or stairs, there will be real danger to occupants. If left unaddressed for many years, it can gradually destroy the framing from the inside out until significant repairs are required. Once known, the city or county will eventually condemn those dangerous parts if the building owners cannot fund the repairs, causing a severe loss of owner equity. 

Defects in the construction of a newer building can also accelerate deterioration. Windows that leak, building paper installed wrong, and drainage around buildings that allows water under the foundation are examples of new construction defects that shorten a building’s service life. Repairing defects is typically expensive unless discovered early in the building’s life—within the first ten years. If so, it is still possible for an AOAO to assert a claim to the building developer. The AOAO’s general counsel should be consulted.

A catastrophe, like a fire, hurricane, or earthquake, can instantly render a building uninhabitable. Any remaining equity will then be determined by the amount of insurance and the value of the underlying land. Catastrophically damaged projects are beyond the standard rules of sustainability. There likely will be no reserves adequate to rebuild the building. Insurance may be inadequate or not available. Most owners will not have the financial resources to rebuild and satisfy lenders. In these instances, owners must maximize the value of what’s left—usually the land. 

In our next installment, we will discuss why the typical condominium “business model” can be inadequate to preserve and sustain these projects.

 

Why Build Houses in Shopping Centers?

 Missed Opportunities in Applying California’s Housing Law   

    Legislation in California since 1969 requires cities and counties to meet certain minimum requirements for new housing construction. The California Department of Housing and Community Development oversees these requirements. The department's website explains: 

    "California's Housing Element Law acknowledges that, in order for the private market to adequately address the housing needs and demand of Californians, local governments must adopt plans and regulatory systems that provide opportunities for...housing development. As a result, housing policy in California rests largely on the effective implementation of local general plans and, in particular, local housing elements."

    Multiple California state funding programs require compliance with this housing development law. The law requires each of the 532 local jurisdictions to inventory potential housing sites and submit a detailed "housing element" every five or eight years. The submissions must include a "land inventory" identifying vacant or underutilized land suitable for new housing, even if the site requires re-zoning for residential construction.

    Because vacant land is rare in most local jurisdictions, sites that now include commercial, governmental, and even religious buildings can be identified as "potential" sites for re-zoning to residential uses. This has brought massive pushback from residents and local governments who object to zoning changes and the loss of local amenities. As a result, most California jurisdictions subject to the law remain out of compliance.

      We reviewed the housing element prepared by one California county and were surprised to see sites with existing shopping centers, churches, and even school properties included in the "land inventory." The law does not require that the existing owners of these sites convert them to residential uses, nor could it without the exercise of eminent domain. So, the conversion of these non-residential sites to housing remains largely hypothetical. This makes the goals of the legislation suspect since, at its base, it relies on property owners to agree to convert existing uses to housing. The law has teeth only so far as forcing local jurisdictions to identify sites that would be "nice" to convert to housing. Nothing more.

    What's needed is the identification of sites that will more realistically produce a greater supply of housing, especially low to moderate-income housing. A shopping center owner isn't likely to tear down stores and build apartments just because the state would like that, not to mention the loss of valuable neighborhood amenities. So, what sites could realistically provide more housing, and what would it take to make that happen? 

Condo Survival is Up To You!

On Sunday, May 28, 2023, a six-story apartment building in Davenport, IA, collapsed. The building was old and appears to have been built from masonry, possibly unreinforced. This was an apartment building, but it could easily have been a condominium. The owners had plans to perform repairs, but the collapse beat them to it, and the building will be demolished.  This was not an isolated incident and follows the fatal collapse of a balcony in Berkeley, California, in 2015, the deadly failure of the Champlain Towers condo building in Surfside, Florida, in 2021, and in April 2023, the deadly collapse of a parking garage in New York. 

So what can be done to prevent this from occurring in your project? It's up to you. It's up to you as an owner. You cannot assume that those managing your building are ahead of looming failures. You have to ask questions. You have to be ready to fund the necessary repairs. You have to offer your time to serve on committees or the board of directors to be sure that essential maintenance is done promptly.

It's up to you as a member of the board of directors. Keeping assessments low cannot be your primary goal, regardless of the political pressure to do that. The goal should be to keep them adequate to pay for current operating expenses and fund future repairs. You have an obligation to accumulate necessary information on the condition of your building. You are responsible for raising the funds to repair and maintain it when the information you receive makes that clear.

It's up to you as the community manager. The owners and the members of the board are conflicted. They pay the assessments necessary to keep the building safe. Yet what that may cost often conflicts with their sense of what that should cost. You have to obtain that information for them, recommend investigations, and here's the hard part--you must convince them to fund repairs and maintenance adequate to do the job. The easy way out is to stay out of it and let them decide. The hard and the right way is to convince them otherwise!

Left Holding the (Sand) Bag

Who Will Pay for the Damage Caused by Flooding and Rising Sea Levels? It Could Be Your Homeowners Association!

(Editor's Note: This article was originally published a decade ago. Given the recent storms and resulting flooding, the concerns expressed below are even more compelling today.)

The San Jose Mercury News:

“From Antioch to North Richmond to Redwood City, a slowly rising Bay could endanger the properties of as many as 270,000 Bay Area residents and cause some $56.5 billion in damage by the end of the century unless measures are taken to protect them, scientists warn. But surprisingly, few cities are taking action.” 

    City of Benecia Website: 

“In the event of projected flooding, sandbags are available at the Benicia Corporation Yard. Some assistance may be available, but residents should bring shovels and plan to fill and load the bags themselves.”

The chance of flooding in cities in and around San Francisco Bay and other low-lying areas in California is not just speculation. It has happened many times and will happen again and again if climate change and sea level rise continue or a “perfect” storm joins with normal high tides. It's easy to see why. Look at any map illustrating the first areas around the bay that will flood when the sea rises. It should come as no surprise that they are the exact locations where the bay was initially filled to create housing and commercial developments. These low-lying areas—Redwood Shores, Alameda, Vallejo, Alviso, and many others—were bay bottom and tidelands just a few decades ago. Now there are thousands of homes. The flood danger is obvious.

But what differs today from developments built three or more decades ago is that most of these new developments will be built as common interest developments. As a result, local or state governments will maintain little of the expensive engineered facilities necessary to protect these developments from storms, rising tides, and sea level rise but, instead, will be homeowners' responsibility.

Streets, storm sewers, parks, and sidewalks in older developments are maintained by cities and counties using tax dollars raised from a broad tax base. In newer projects, these “public” works are instead made the responsibility of private owner's associations. The advent of the community association was a boon to tax-starved local governments, which saw them as a way to promote development and raise new tax dollars while avoiding responsibility for the new infrastructure.

The cities and counties require developers to place the responsibility for necessary flood control improvements in community associations or small, special districts. Responsibility for Levees, settling basins, pumps, riprap, and retaining walls built by the developers of these new projects will eventually be maintained and repaired by community associations and paid for only by the owners who live there.

Local improvement, levee, or reclamation districts began this massive shift of responsibility away from governments and onto landowners and have been widely used for many years. Much of the Sacramento delta, a system of sloughs and islands on which more and more housing is being built and proposed, is maintained by such “special” assessment districts, not the state or local cities or counties. The taxpayers within those districts pay for all levee maintenance and repair work.

Originally these districts were formed to give farmers quasi-governmental authority over the properties in a particular area. It also shifted fiscal responsibility away from cities and counties and their broader base of taxpayers. But a flood disaster in an agricultural area will only inundate crops. The same disaster in a residential community will be much worse. So it matters who is in charge and who must finance the maintenance of such critical facilities.