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.
