Condominium Conversions: Old Apartment or New Product?

Does Caveat Emptor apply to Conversions?

The spate of conversion of old apartments to condominiums has finally abated largely due to the failed economy. For many reasons which we have previously noted, buyers prefer new construction and only buy conversions when the housing market is in a selling frenzy. Nevertheless, thousands were sold and owner claims have arisen which range from minor issues with the unit itself to major waterproofing and structural failures in the buildings which will require very expensive reconstruction for which no funding was provided by the converter.

These claims are often defended by developers with the argument that since what was purchased was not new, the owners cannot expect that the converter should pay the cost of rehabilitation. That the conversions are not new construction is not usually hidden from buyers. Everyone buying into a converted apartment project did or should know that the buildings were more than just a few years old and that deterioration can be expected.

But what most buyers do not know and should not have to expect is that the maintenance and repair funding plan which was coupled with the sale of the unit was inadequate for the eventual repair of the buildings. And why is this important? Because a condominium conversion is not just a used apartment alone. It is a new product assembled from several important pieces.

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The Great Foreclosure Debate

Should Community Associations Use Alternatives To Foreclosure To Protect Their Cash Flow?

There is currently raging a great debate. This one has nothing to do with national health care, war in the Middle East, or the future of the Washington Redskins. No, this debate is whether community associations should have the right to use foreclosure as the ultimate delinquent assessment collection tool. Foreclosure is the enforcement device that allows a creditor, in this case a homeowners association, to force the sale of an owner’s condominium or single family house to collect a delinquent association assessment. The practical arguments among the various participants in this debate go back and forth something like this: Assessments are a community association’s cash flow lifeline—if owners fail to pay, the association cannot keep its commitments. Foreclosure is a radical remedy—it costs associations more than they can possibly recover, so why do it? Foreclosure for failure to pay delinquent assessments is the only enforcement mechanism that works.

The legal arguments include: There is really no contract between owners and their association that gives the board of directors the right to foreclose because the owners weren’t parties when the association was created. The CC&Rs are recorded against the title of the owner’s interest and provide for lien rights and hence the right to foreclose. State legislatures have not clearly provided for an association’s right to foreclose.

And finally, the moral arguments: A home is a sanctuary—how can we allow it to be taken away just to satisfy a small arrearage in assessments?  We should not allow owners who do not pay their assessments to live on the backs of those owners who do. Everyone should pay his or her own way. Foreclosing on someone’s home is immoral and community associations should have no right to do it. It just supports a large number of attorneys, property managers, and collection companies.

Anyone who has paid any attention to the articles, blogs, websites, and water cooler conversation about community associations and the recession has heard these arguments, or others like them. Can’t be missed. And the underlying problem is real—thousands of community associations have real cash flow problems because owners are falling behind in their assessments. Enforcement activity is up, and that often means an increase in the number of properties entering the foreclosure process. People are losing their homes for a variety of reasons, but there has been an outcry over whether community associations should be able to enforce delinquent assessments through foreclosure. But we’re getting ahead of ourselves. Let’s back up and look at how we got here.

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Who Do You Trust?

      The Essential Ingredient in Effective 
Management of Community Associations 

     When there is war inside a community association there are usually several sides—the owners, the board of directors, management, and sometimes, lawyers. Each brings their unique perspective to the dispute, and each may distrust the views, or worse, the motives of the other. That they should all be working together to manage a project that is inherently unmanageable is beside the point—when there is a lack of trust cooperation goes by the boards and issues that should be open to easy solutions instead become a battleground. Why are we wasting good ink to discuss disputes that are often inconsequential in the scheme of things? Because lack of trust can paralyze a community association just when economics require unprecedented cooperation.

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A Reader Responds...

What About Absentee Owners Who Won't Serve?

Dear Tyler,

I am the president of our HOA board and I pointed our homeowners to your recent 'blog posting while pleading once again this year for candidates.

One of our resident owners responded with a point about another problem to add to your list and I thought I would pass it along to you.

Thanks for your efforts to educate.

Regards,

Ken Meeuwse

Pleasant Hill

It occurs to me that Tyler Berding has missed one essential problem with condominiums and their Boards in his article and that is absentee homeowners who rent their units and expect resident homeowners to do all the managing of the association.

I am aware of at least two owners in my building who have owned and rented their units since the association was first organized and have never served on the Board. They are the owners of Unit [] and Unit []. There may be others in the complex and there are other owner/renters in this building who have owned for a number of years and never served as well. I suggest that the current Board make them aware of THEIR responsibility. Since they have relied for 28 years on people like me who have served multiple times on the Board to manage the complex in which theirr investment property is located, I suggest that the Board specifically contact the absentee owner/landlords and tell them that it is their turn to serve.

If they are unwilling to do so, then I think it is time for the Association to explore what legal options we have to take into account the additional cost absentee owners represent to the Association and to resident owners such as the difficulty in getting fixed rate financing on one's unit due to the number of rental units, increased clean up costs from more frequent move in/move out in those units, lack of absentee owner participation on Board, etc. and assess absentee owners accordingly.

Those of us who have served multiple times on the Board have a right to ask those who have not and who have a unit owned here for more than a decade (whether they live here or not) to step up to the plate!


Ken, thanks for your note and for forwarding the comments above. He is correct--absentee owners are less likely to serve on the board of directors than residents. 


Tyler

The Water Emperor Has No Clothes

$54 Billion to fix the Sacramento-San Joaquin Delta—Is This the Price of Suburban Sprawl or has California Development Finally Reached its Environmental Limits?

     Actually, its not a question of what it costs to fix the Sacramento-San Joaquin River Delta, it’s a question of what can we afford to spend to send vast new quantities of water to southern California and the Central Valley. The latest estimates for “fixing” the delta have reached monumental proportions. But why do we assume that new development is a given, especially development that is not water-friendly—new tracts of suburban development with yards to water and swimming pools to fill? Why also do we assume that certain crops, like water-thirsty cotton, must be grown in the Central Valley? These and similar questions are apparently not being asked with enough volume to reach the ears of our legislators. Or is it that the California legislature is dominated by the votes of those whose constituents will most benefit by future water exports to the south?

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Aging in Place: A New Plan for the Suburbs?

Should We Re-Develop Condos to Become More Senior Friendly?

Can we save older common interest developments? Does their eventual obsolescence give us an opportunity to turn them into something else? Perhaps a new form of housing that will be absolutely necessary in the years to come? These questions and many like them have been asked on these pages for years. We have predicted the end of common interest developments as we know them.[1] We have outlined the reasons why this form of housing most likely has a finite life.[2] New Towns and other urban-style developments as successors to existing, low density, car-dependant projects on the outskirts of cities[3] Discussions about the end of the move to suburbia. [4]But now comes another idea, something so fresh, yet so immediately understandable, that it makes you wonder why it hasn’t surfaced before.

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[1] Berding, “The Uncertain Future of Common Interest Developments” 1999, 2005
[2] Berding, “ When Condominiums become Obsolete” 2008
[3] Berding, “New Towns” 2008
[4] Berding, “Back to Our Housing Future” 2008

Why Won't They Serve?

Homeowners won’t volunteer for boards of directors of community associations—another nail in the coffin?

Community associations are corporations. Their bylaws require management of the association by an elected board of directors. That board serves all of the owners by conducting the business of the association. Like any corporation, the board of directors, and its officers, have the sole legal authority to handle all of the vital functions of the enterprise—from hiring and firing property managers, to contracting for repairs, to determining the adequacy of the association’s revenue stream.

A property manager does not have the authority to conduct the business of the association on its own. No matter how good, how skilled the manager, without the legal power of the corporation behind it, business would stop. Vendors would not continue to provide critical services to the association if there was no one with the authority to write checks. Local government would begin to question whether a condominium project could continue to be habitable if no one was able to pay the water or the electric bill.

Without the board of directors, the association would cease to function. There is no alternative within a corporate framework. Yet many associations have a very difficult time recruiting board members. Board positions go unfilled waiting for volunteers. This has potentially disastrous consequences and justifies further examination. First, we’ll examine some of the reasons why it is so difficult to convince owners to serve on their community association’s board of directors and then discuss the impact of that.

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What You Don't Know...

When do Statutes of Limitation begin to run on Construction Claims?


A Developer lays a Trap for the Unwary.


[Introductory Note: Statutes of Limitation are intended to protect defendants from stale claims. They are also traps for the unwary claimant. If the time period expires before an appropriate claim is made, legal rights can be permanently lost. Here’s a story about an artful attempt by a developer to deprive a new community association of some valuable time that it needs to evaluate the condition of the project before the limitation periods run out.]
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You just moved into a new condominium project. You bought one of the first units sold in the second phase. Sales in that phase are just about done and then the project will be sold out. The project is just a little over two years old, so you are satisfied that any warranty items will get fixed. How hard could it be with the developer still on the board and with a few units left to sell? Everything seems to be going as expected.


But all is not perfect. The iron fences around the project are corroding badly. And the common area landscaping has a lot of dead spots where the irrigation system apparently doesn’t reach. There are places where rain and irrigation water pond for days and mosquitoes are breeding. You’ve also noticed that some of the wood fences in the project appear to be leaning. You went to the board meeting last night. Two owners are on the board along with three developer representatives. You raised those issues with the board, and one of the developer representatives told you that it was not the developer’s problem any longer, that it was the association’s responsibility to fix those particular defects. You argued that the developer is responsible for defects for ten years[1]. You also pointed out that you only noticed these problems a few months ago. So how could it no longer be the developer’s responsibility to fix clearly defective components?

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[1] That is not exactly a true statement. California Code of Civil Procedure Section 337.15 is actually a “statute of repose” which sets the outside limit of the developer’s liability for new construction at ten years from a specific date determined in accordance with the statute. There are many considerably shorter such periods in the law, such as those discussed in this article, which will cut off a developer’s responsibility much sooner, depending upon the type of claim made and as we discuss here, the type of building component that is the subject of the claim. A complete list of components and the time limits for bringing claims can be found on our website.

Are Apartments a Better Answer to the Housing Crisis?

Sometime in the early sixties, a large California developer opened its first development of condominiums for sale. Even by the standards of the day, they were offered at rock bottom prices. A home for a single family that could be bought for $10,000.00 was big news. The need for suburban housing that could be built in high densities and thus be affordable was apparent. It allowed for volume sales, which, of course, meant higher profits for home builders. Other developers followed suit, and the affordable, single-family attached home became a ubiquitous part of the California (and national) real estate market. An industry, as well as a type of housing, was born. Multi-family developments, however, were not new, even in the sixties.

For decades, rental apartments provided affordable housing for millions of people. What was new was the offering of these apartment units for sale. Because that's exactly what condominiums were - apartment units that could be sold to individual owners. In every other respect, they were just like the apartment buildings that everyone was familiar with. The big difference was that the maintenance and repair of these condominiums was now the responsibility of the owners - there was no landlord to foot the bill.

Now, even those homebuyers who could not afford a single family home could get on the real estate ownership bandwagon. Low interest and low down payment loans offered by various government agencies, gave many low and moderate income wage earners the opportunity to purchase a home. Most people could buy with 5% or no money down. Veterans could buy a new home for nothing down. Condominiums, and their planned development cousins, became the darlings of the real estate industry, and they were constructed by the car load.

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Negligent Conversion?

Is the Condominium Converter Liable for Failing to Properly Assemble the Parts of a New Community?

“Negligent conversion” is another way of saying that mistakes were made when joining all of the required pieces of a conversion project together. The converter of an apartment building into condominiums basically has three choices under the existing law in California: (1) Rehabilitate the buildings so that they are in a “like new” condition. (2) Provide cash to the association to offset any deferred repairs, or (3) Set the assessments high enough so that the association will collect enough working capital in time to perform needed repairs. While some combination of these three will work, the converter cannot choose to do “none of the above” as in, do only a few repairs, underfund the budget for what is left to do, and keep assessments artificially low...

To read this entire article, click on the title link above...

The Board's Dilemma

Every board faces this dilemma sooner or later: how to raise revenue without raising assessments. Since the only revenue the average association can obtain is from owner assessments, that's usually impossible. Owners want the board to maintain and repair the association's property, but they don't want to pay more each month, especially in these difficult economic times. Boards of directors of community associations find themselves torn between two masters--their obligation to care for the project and the political will of the homeowners. This publication was written to help directors find their way through this morass.

Click on the title link above to download or read "The Board's Dilemma."

What You See is (Not Necessarily) What You Get!

“Visual and Accessible” is not enough: Let’s amend the Davis-Stirling Act to delete Limitations on Reserve Study Inspections

It’s the responsibility of every California community association to commission a reserve study every three years. These studies are used to calculate the amount that each association will need to save for future building maintenance and repairs. It is critical to the financial health of every association that this funding projection be as accurate as possible. The Davis-Stirling Act governs these studies. California Civil Code Section 1365.5(e) states in part:

“At least once every three years, the board of directors shall cause to be conducted a reasonably competent and diligent visual inspection of the accessible areas of the major components that the association is obligated to repair, replace, restore, or maintain as part of a study of the reserve account requirements of the common interest development...”

Note that this requirement is limited to a “visual” inspection of the “accessible areas of the major components.” But the assessment responsibility of the board of directors is not similarly limited. Civil Code Section 1366(a) says that the board of directors shall assess as necessary to meet the requirements of the governing documents and the Civil Code. But what are those requirements exactly? And how does a board know for sure, if only the visible and accessible areas of the project are investigated?

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Predictions of the Future in an Uncertain Present

Common interest developments are reliant on member assessments to provide long-term maintenance and repair. Since the association’s governing documents and state statutes give directors and members control over the amounts raised, funding decisions tend to be more political than practical with the result being that critical funding is often deferred to future residents and boards who are unable or unwilling to handle this unexpected obligation. If the problem isn't solved, many communities will be unable to discharge their responsibilities and will become obsolete in the coming decades. With that in mind, just what does the future hold for common interest communities? What do prospective buyers need to know about the state of the association's funding? What options are available to attorneys, association leaders and legislators? Read this new publication to find out.

Click on the title link above to read or download "Predictions of the Future in an Uncertain Present"

What Happens When a Community Association Fails?

Does the experience in Florida presage the future for California?

We have written many times about the difficult future of the housing industry and that of common interest developments in particular.[1] Underfunded reserves have given way to underfunded operating budgets as the economic crisis deepens and community associations are finding layoffs and foreclosures beginning to impact their ability to pay for even daily operations as assessment payments dry up. What we once predicted as a future problem has been escalated to the present by the economic downturn.

This problem is not confined to California. Other states are experiencing the effects of the economy on community associations. In Florida, the problem is epidemic. In a recent article Jim Loney, writing for Reuters.com, tells the story like this:

“Florida's condominium and homeowners' associations are facing what experts call a trickle-down disaster from the property crisis. Dozens and perhaps hundreds of condo buildings have budget shortfalls as thousands of owners, under water on their mortgages or in foreclosure, stop paying monthly fees.

"I call it a death spiral," Miami Beach city commissioner Jerry Libbin said. "It's a catastrophe in the making." [2]

Community associations rely on the monthly cash flow from assessments to pay virtually all of their expenses. In most cases, they have no other source of income. When that income is seriously curtailed, the ability of the board of directors to protect and maintain the project is in jeopardy. Borrowing from reserves works for a while, assuming there are reserves in the first place. But that lasts only so long as does the available cash, and then what? We’ve written about this situation recently, and it leaves boards in the position of making some very tough decisions.[3] Landscape or pool maintenance? Painting or insurance premiums? Management or the water bill? When we get down to life-safety issues, like paying for electricity, security guards or the sewer bill, its time to re-evaluate the very survival of the association. Loney shows us that the problems in Florida are similar: “Rust pokes through the peeling paint on the railings, pest control has been curtailed and the palm trees are no longer being fertilized at the 1940s-era Miami Modern condominium building in Miami Beach.”

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[1] Berding, “The Uncertain Future of Community Associations,” 1999; 2005.

[2] Loney, Jim, “U.S. property bust threatens condo ‘death spiral;’” Reuters.com, April 3, 2009.

[3] Berding, “Your Association is Broke—Who do you pay when the cash runs out?” CondoIssues.com, December 3, 2008.

Private New Towns--A promising new concept saddled with an old problem?

The City of Hercules, once known for The Hercules Powder Company, a manufacturer of dynamite, is redeveloping its old industrial properties into what has become one of the most explosive new ideas in housing and one of the finest communities of its type on the West coast. Call it the anti-suburb plan; Hercules has employed smart growth and green planning concepts to create commuter and retail-friendly spaces among new housing, commercial and office space. A whole new downtown--"Market Town" will rise from this once industrial area on San Francisco Bay. Various environmental groups, including The Greenbelt Alliance, have supported this new mid-density development.

As a way to counter the suburban sprawl that has consumed our farm and pasture lands at a dizzying pace (some of the fringes of which now lie half built or abandoned) incorporating housing with commercial spaces in a re-vitalized downtown can't be beat. You can add many times the density in a much smaller area. But more than that, bringing goods, services, and transportation within walking distance of residences cuts reliance on automobiles in a way unseen anywhere outside of a few big California cities in recent years.

The Problem with Privately Owned Public Spaces

But like all new ideas, there might be a dark side, one that we have seen and written about many times. While many of these new “transit villages” appear like traditional towns, in most cases, multiple private owners own them, just like in the more traditional residential condominium. Mixed-use common interest properties in high-density buildings require a way to manage and maintain them and the means to fund those repairs. Normally, a building owner who leases space in buildings in a typical downtown area pays for building maintenance from rental proceeds. The established municipality pays for street and utility maintenance from property taxes...

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Is Reserve Funding Mandatory?

Can an Association Legally Defer Funding Reserves Necessary for Repairs and Renovations?

There is a continuing debate in community associations over how much cash an association must set aside to adequately fund its operations and reserve accounts, and at what level the assessments must be set to obtain that cash from the members. Boards of directors frequently face the dilemma of whether to raise monthly assessments in the face of member resistance, or to defer funding certain budget line items--typically reserve funds--to a later time.

California has a mandatory funding statute for community associations. Civil Code Section 1366 says: “Except as provided in this section, the association shall levy regular and special assessments sufficient to perform its obligations under the governing documents and this title.”[1] It uses the term “shall” and that means assessments adequate to do the job are mandatory up to the limits of the board’s authority. In California, the board has the authority to increase regular assessments up to 20% over the prior year and can impose a special assessment of up to 5% of the gross budget, all without a vote of the members.[2] So the authority is there. But does the board have to use it?

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[1] California Civil Code Section 1366(a)

[2] California Civil Code Section 1366(b)

Hang Together or Hang Separately?

Selling a Distressed Common Interest Development

as a Single Parcel: Is Partition an Alternative

to Losing it to Individual Foreclosures?

To view the future of many common interest developments take a look at the present-day reality of those recent condominium conversions that were born with serious maintenance issues and a major cash deficit. The financial condition of these projects shows us what other associations will encounter as their need for maintenance and repair overwhelms their budgets.

If an association cannot pay for essential maintenance, the value of the units will drop, similar to the recession-caused loss of value today. But they will fail to sell notwithstanding lower asking prices, and the owners, many now under water, will stop paying their assessments. When the association gets to the point where it cannot pay for essential services or do critical maintenance, the local municipality will have to decide if the units remain habitable. If the answer is “no,” condemnation may be next step.

But the owners may not have to wait for the local municipality to act. The O’Toole case which was discussed in a previous post (November 17, 2008) decided that a board of directors of a community association not only has the obligation to pay the debts of the association, it also has a duty to specially assess the members sufficiently to pay those debts, and not only that, a receiver may be ordered to insure that these obligations are carried out. So then the question arises--what if an owner decides to sue the association for failing to adequately maintain the project and the owners cannot afford the special assessment levied to pay the resulting judgment? If a court orders an assessment that the owners cannot afford, the next logical step would be for the court-appointed receiver to initiate foreclosure of the properties to collect the unaffordable assessment!

Whether this is a likely scenario or not is irrelevant--it is one of the few legal options available if a court-ordered assessment were to exceed what the owners have the ability or the willingness to pay . With no way for the homeowners to satisfy the court judgment, foreclosures would no doubt ensue. If the owners could not afford the assessment or if the assessment exceeded their equity, (again not surprising, especially in the seriously depressed market that exists today,) a court-appointed receiver may have no choice but to empty out the development, substituting banks or other lenders in place of homeowners and most likely turning the property into a rental apartment that would be owned and maintained by the foreclosing lenders, who would likely also take a loss on the deal. The court in O’Toole obviously ignored an essential truth--that while it may ultimately be up to the owners to pay for maintenance and repairs, if they lack the cash to do that, the project will likely default to multiple lender ownership and no one will win.

But there may be yet another alternative. In California, and in other states, there is a legal remedy for an obsolete common interest development, its called "Partition." Now, "partition" may sound like division, but actually it allows an entire project to be ordered sold as a single parcel. California law allows partition of a community association in one of three instances: (1) Material damage or destruction occurring more than three years prior to the partition request and repairs have not been made; (2) At least three-quarters of the project has been damaged or destroyed, and 50% or more of the separate interest owners oppose re-construction; and (3) The project is 50 or more years old, is obsolete and uneconomic, and more than 50% of the owners oppose restoration.

Many associations are approaching the 50-year mark. But even before that, could a seriously deteriorated infrastructure qualify as “material damage” to the point where it would qualify under the statute above? Would a court, looking at a project that has deteriorated to the point of becoming uninhabitable amid claims of improper maintenance, order partition in lieu of ordering the owners to pay an unaffordable assessment? Could a majority of owners force the project to be sold in its entirety to avoid individual liability for such a judgment, and if they did would they realize more value than trying to sell their individual unit in a badly deteriorated project?

The answer is, that in the right circumstance with the right facts: yes. What are those facts? If the special assessment necessary to achieve basic habitability exceeds the ability of the present owners to pay, you may not need anything else. A majority of owners, or a court, could force a partition of the property and sell it as single parcel. We have discussed many times the possible greater value that an older project may have sold or redeveloped as a single parcel than as a collection of individual condominiums.

This situation, played out over time, may await many common interest developments today. They are under-funded for critical maintenance, values have fallen, and owners have no incentive to contribute additional capital. But rather than wait for a judgment creditor or lenders to foreclose, the association should look critically at the possibility of selling the entire project and thus potentially realize greater value from a sale or redevelopment as a single parcel than as multiple individual interests that cannot continue to survive on their own.

This may seem like a draconian reaction to an inability to raise sufficient funds to maintain a common interest development, but if the owners wait long enough without taking any alternative action, their individual interests may become worthless. So rather than watch the project deteriorate to the point where it is no longer habitable or is vulnerable to lender takeover, owners of severely distressed common interest developments might want to consider an outright sale of the entire project.

Clearly, we are talking about a project in a great deal of financial distress, but our experience with hundreds of old and aging projects tells us that some are already there. If you believe that this situation may exist in your association, talk to your legal advisor about your options. Using partition to maximize the value of the project by selling it as a single parcel could be an alternative to handing it over to the banks and walking away.

The "Soft-Story" Problem and Earthquake Safety

Another Issue for Condominium Conversions

A recent article[1] in the Los Angeles Times[2] highlights an old problem that may have new consequences. The Northridge earthquake occurred 15 years ago and many southern California apartments suffered extensive damage as a result. One complex in particular however, was deadly. The Northridge Meadows apartment complex collapsed on January 17, 1994 and killed 16 residents. The collapse was due to a weak first story. Since the Sylmar earthquake in 1971, experts have known about the problem where parking or big windows exist under the upper floors of a building, and there were efforts in many cities to beef up building codes to prevent building collapse in a seismic event.

The article points out that many landlords took steps to perform interim structural repairs, but that in many cases those repairs were not permanent or were not done at all. The small posts, for example that support upper floors over carports cannot withstand the movement that occurs in an earthquake.

“In the case of Northridge Meadows, the magnitude 6.7 temblor caused the second and third floors to crumple right down onto the lower floors, leaving some cars poking out of the sides of the buildings. Its collapse caused the largest number of deaths in a soft-story building. The 16 people who died were on the first floor”[3]

Government agencies have not exactly been on a fast track to force repairs. Fremont is reported to have sent out notices to the owners of 28 apartment buildings in 2007, the year its enhanced codes went into effect, but only two have completed the necessary retrofit. In Berkeley where 320 buildings have been identified with soft first stories, only half have applied for correction permits.

Our concern, however, is for the numerous condominium complexes that have been converted from older apartment buildings. We have seen many that were built before 1994 and some which appear to have soft first stories--mainly where parking exists under the second or more stories of the building. Our experience is that Boards of Directors of community associations responsible for these buildings barely have sufficient funding to do routine painting and roof repairs. The cost of a seismic retrofit is not only unbudgeted, but probably could not be funded short of a large special assessment which would have to be approved by the owners. An expense of that magnitude could be the difference between economic survival and obsolescence.

We recommend that any suspected “soft-story” condition be immediately inspected by a structural engineer. If the conversion has been recently done, the seller may be responsible for the costs of a retrofit if one is necessary. But in any case, the Board and the owners will need assurance that if the “big one” hits the Hayward or the San Andreas Fault, Bay Area communities will not suffer the same fate as they did in Northridge.

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[1] My thanks to Fred Pilot and Evan McKenzie for providing this article.

[2] Chong, “Quake vulnerability of ‘soft-story’ apartments in state still widespread,” Los Angeles Times, January 17, 2009

[3] Ibid.

A Reader Views the Future of His Community

Jack Denman is a reader and our occasional correspondent and President of his homeowners association. Taking our concerns to heart, Jack has worked hard to stave off the financial obsolescence troubling many associations and of which we have so often written. Here is his account of the success he achieved in convincing members to raise assessments to stay even with the true cost of ownership. But the most interesting part of his letter is his discussion of future redevelopment and how to achieve a positive financial return while greatly improving the project. This is not fantasy--it is a glimpse into the future.  TPB

Tyler,

I became president of the board this year and had discussions with the other members on a monthly dues increase. Over the last nine years I alone made recommendations (and received support) to raise the dues from $186 in 1999 to $250 today. I'm still on the board. Who says that miracles don't happen nowadays!?

Since I knew it could be a "land mine" with the membership, I was able to convince the other members of the board to write a lengthy explanation to the membership to justify the increase. I wrote the original draft and the other members contributed to the final version.

NOBODY COMPLAINED TO THE BOARD ON THE INCREASE!

One member scratched off or scribbled something unintelligible on the first installment of the increase.

I prepared the latest budget because I have the most financial experience on the board. I took the last 8 years of data and did a linear regression analysis on each item and made a calculation, not an estimation on this most recent budget. On a few items I did an average where the correlation coefficient was low.

FYI:
I have included the letter of notification and justification and the latest budget.

It's "all your fault" that we are aging gracefully as a 40 year old association. Soon I will begin to lay the plans for redevelopment when we someday become obsolete. It's a long ways off, and I won't be here, but we should, if future residents are to maintain their equity. My idea for redevelopment is to rebuild from two stories to three, increase the living space by 50% in area, provide subterranean parking to reclaim lost space now consumed by carports, and finally to use all steel and aluminum construction and finally to sell new additional 40 units for enough to cover the cost of construction to the current 40 residents so that they pay nothing. I might look to the city of Fullerton for a bond issue to cover the cash gap until the new 40 units are sold. When the real estate market improves the city might look favorably on a bond because of the future tax revenue from the additional units.

My nephew, who owns a escrow company, and lives in San Diego, said "But where will the people go during the reconstruction?" I told him that they will leave one way or another because of obsolescence. It's only a case of coming back to something better than what they left when it's all over.

Happy New year,

Regards, Jack C Denman