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.