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.

 

Are Condos a Bad Idea?

Internal Conflicts and Lack of Funding Undermine Sustainability

 

 

Introduction

 

Condominiums are a nice idea, but their execution has been less than perfect. Long before the fatal Berkeley, California balcony failure in 2015 or the 2021 Champlain Towers South collapse that killed 98 people in Surfside, Florida, we suspected that all was not right with the basic condo concept. Years ago, there were already signs this "cooperative" housing model was anything but. Whether due to owner apathy, internal disputes, or failure to fund future repairs, sustaining these projects for the long term has been difficult, leaving their future in doubt. Can this be fixed, or is the concept inherently flawed?                                               

 

Every enterprise has an organizational "model" to run the business. For-profit corporations obtain revenue from the sale of products or services. The revenue of non-profit condominium corporations is the assessments paid by the owners of the individual units. While these assessments are “mandatory” in the sense they must be paid, they are also “voluntary” since the amount is left to the board of directors to determine. Condos are cheaper to buy, but the sales price may not reflect the real cost of ownership. They are "cooperative" because costs and space are shared, but internal disputes and funding shortfalls operate to shorten the life of these buildings in ways few owners understand.

 

Internal Disputes

 

            Why is condominium life frequently not “cooperative?” Disputes. Disputes between condominium owners and their associations; among board members; and between individual owners and their neighbors. There are arguments over the right to put a flag on the balcony. There are arguments over swimming pool hours. The right to paint their front door some color other than everyone else's. The right to be free of noise, smoke, or view-blocking plants. And sometimes, the claimed right not to pay assessments needed to maintain the project—all notwithstanding the governing documents to the contrary. The right to use one's property as the owner sees fit is a concept imported from the single-family home experience but not replicated in condominiums where common ownership requires rules to avoid chaos.

 

But a condominium association's most important concern should not be the color of someone's front door or when they can swim but sustaining the building and keeping owners safe. Maybe we care someone has painted their front door bright green, but should that concern have priority over finding rot that may cause a balcony to collapse with someone on it? Resolving conflicts and enforcing the governing documents have a reasonable success rate. Still, the effort required to do that often distracts the board from more critical issues—damage that can sink the ship. Directors can waste a lot of time re-arranging the deck chairs on the Titanic when, if they look closely, the iceberg is coming. 

Another Florida Condo Building Evacuated

 When the Surfside, Florida high-rise condominium building collapsed, many experts blamed poorly maintained reinforced concrete and the building's podium slab design. There have been several more high-rise Florida reinforced concrete condominium buildings evacuated after expert investigations identified potentially dangerous conditions. 

Now we have a low-rise wood-frame condominium building, also in Florida, ordered evacuated, again after inspectors identified deteriorating structural conditions.

According to CNN, "During an inspection on April 14 (2023), a building engineer found the Majestic Isle condominium building in North Bay Village had sagging floors and termite damage and deemed it structurally unsafe."

Majestic Isle is 60 years old. It is three stories with 36 condo units. It is very typical of many condominium buildings built in California as well as many other states. What sets Majestic Isle apart from hundreds of other similar buildings? Nothing except that this one had a thorough inspection of its structural components after a partial ceiling collapse.

Whether this building can be repaired for an amount the owners can afford is unknown, but our experience with structural damage in other wood frame buildings suggests that it will be very expensive and that there will be little or no reserve funding to cover it.

Natural Gas Appliance Ban Overturned

 In March 2023, the Bay Area Air Quality Management District (BAAQMD) adopted rules effectively banning the replacement of some natural gas appliances after 2027. Gas-fired water heaters would have to be replaced with electric water heaters after 2027, and gas furnaces would have to be replaced with electric furnaces after 2029. The City of Berkeley started the 'ban the gas" movement in 2019, and that policy was adopted in other cities. 

On April 17, 2023, however, the Ninth U.S. Circuit Court of Appeals in San Francisco overturned the ban. How or if that decision will impact the BAAQMD rules is unclear; however, the federal court found that the Berkeley rules were pre-empted by federal energy policy. This does not bode well for the district's rules.

Why is this important to homeowners' associations, especially condominiums? Because it is likely that retrofitting condo units that currently use natural gas water heaters and furnaces with electric versions will be very expensive. And perhaps compliance with the district's rules cannot be done at all in some buildings.

Electrical panels that distribute electricity to multiple condominium units are sized to a building with the electrical loads expected in mind. In many cases, the panel may need more capacity to provide what would be required for electric furnaces and water heaters. Even if the panel can be enlarged to allow for the extra load, the building and the units may need to be wired for electricity for furnaces and water heaters.

The panel and much of the wiring are likely common area which would mean the association would be responsible for upgrading sufficiently to comply with a demand for new appliances run on electricity.

While we applaud the environmental goals of anti-gas rules, retrofitting most condominium buildings would be a colossal expense and one totally unexpected in any reserve budget. 

 AB 1101 Puts Condos at Risk

  The California legislature is considering AB 1101 that would amend Civil Code §5551 and Health and Safety Code §17973 which require inspections of "exterior elevated elements" on condominiums and apartments for safety. These include balconies, elevated walkways, and staircases made of wood or wood-based products. The point is to detect or intercept rot that would compromise the safety of these structures. Currently the statutes provide that these safety inspections be done by qualified experts--architects, structural engineers, and in the case of apartment buildings, certain licensed contractors. AB 1101 would add another category--termite inspectors. 

The original statute did not allow inspectors to also perform the repairs. The idea was to prevent the inspectors from capitalizing on their relationship with building owners or homeowner associations to secure jobs repairing what they had just recommended. Seemed logical at the time. Along the way, that prohibition was dropped. That wasn't a good idea then and it isn't now. Homeowner association boards of directors especially are often not sophisticated in construction issues and do not have the background to review or challenge an expert's recommendations. In the past, however, at least with Civil Code 5551, the version that requires balcony safety inspections of condominiums, the inspectors were design professionals--architects and engineers--who do not normally contract to repair what they inspect.

AB 1101 would allow "Branch 3" termite inspectors to not only perform condo inspections, but recommend repairs, and then contract to perform the repairs they recommend. The checks and balances of the original statute would be wiped out. This may not be important for investors and owners of apartment buildings who have the skill and background to oversee these inspectors and, where necessary, question their recommendations. They also know to seek alternate opinions and bids if they question the original reports. While boards of directors of condominium associations can seek the help of professionals to review inspector's recommendations, they are more likely to follow the guidance of the expert already retained.

We also question if termite inspectors have the necessary skill set to calculate whether rot-compromised structural framing on a multi-family building can support the intended loads. A review of the required "Branch 3" exam prep courses doesn't show  much required knowledge of structural engineering or design sufficient to evaluate the ability of a compromised structural support for a balcony or a staircase to hold up when occupied. 

However, even if their training includes how to re-construct a failed balcony or stairway, no inspector who inspects and recommends repairs under these statutes should be allowed to also contract for their repairs. To protect consumers, that just makes sense.

Where Old Condos Go To Die

Will you still need me, will you still feed me,

When I'm sixty-four?

…The Beatles

 

            In 2005 we published a treatise entitled "The Uncertain Future of Common Interest Developments." We worried about the inability of condominium boards to fund reserves for future repairs and maintenance. In addition, political pressure from individual owners was keeping assessments artificially low. While this pleased the then-owners, it underfunded reserves and robbed future owners of the resources for long-term maintenance.

 

            In the following years, we noticed and added another factor to the under-funding equation—damage unseen during routine inspections, which eventually required unexpected and unfunded repairs. At first, these problems—rot in wall cavities hidden for years, gradual soil problems, slow deterioration of framing elements—required spot repairs but often led to large-scale reconstruction later. Unfortunately, some of that hidden damage eventually caused catastrophic failures of building parts or entire buildings and loss of life.

 

            After studying this phenomenon for several decades, we have concluded that these failures and the lack of funding that leads to them result from a fundamental flaw in the condominium business model. Allowing critical funding decisions to be made by a majority vote of owners with disparate interests invariably defeats most fund-raising efforts by the board of directors. This makes funding voluntary. Condominium repair and maintenance are determined not by experts but by laypeople whose interests in the project are mostly short-term. But the managing corporation's interests are long-term. Thus, an inherent conflict.

 

            The consequences of voluntary funding are seen in the gradual deterioration of many older condominium buildings. Newer owners resent that they have been saddled with the cost of decades of deferred maintenance while past owners escaped unharmed. Repairs or restoration that the association could have done inexpensively twenty years earlier, if found in time, now require six-figure special assessments or bank loans, again the responsibility of current owners. Reserve funds were kept artificially low by past votes against higher assessments, did not keep up with the rate of deterioration, and promoted increasing reserve deficits.

 

            So, what's the end game? What happens when current owners either balk at paying for reconstruction to keep a building watertight and safe or lack the financial capability to address these problems? State and local entities have learned of the potential for injury or death from failed building components due to poor maintenance. They can and will condemn buildings considered unsafe or uninhabitable. Insurance companies that provide liability or property damage coverage are also aware of these conditions and, for now, have raised premiums to account for it. But they may deny coverage altogether. Boards of directors have been sued by current owners who reject the idea that they should bear responsibility for many decades of deterioration. And then, there is the possibility that all or a part of the building will fail due to inadequate maintenance, construction defects, or natural disasters.

If any of these factors are present, the project may be at the end of its service life. That's not what a community association's governing documents intend, but that's the reality. Buildings destroyed, unsafe, or cannot be adequately maintained for habitability can no longer function as planned, and the owners must consider an "end of life" outcome. Some outcomes can be chosen, but some cannot be addressed in time to save the project. Here are a few.

Do Labor and Materials Shortages Impact Construction Quality of New Homes?

 

            During periods of high housing demand, as we experienced over the past five years, supply chain disruptions affected the availability of building materials. Everything from insulation to plumbing fixtures to framing lumber has been scarce[1]. Not unknown before the pandemic, labor shortages in the construction industry only intensified with the Covid virus. In addition, falling birth rates, a slowdown in legal immigration, and early retirements created a labor crisis.[2] Demand for new homes was at an all-time high. So, how did these shortages and delays impact the quality of home construction?

 

            The prevalence of construction defects in new housing often accompanies periods of high demand. When sources of trained labor dry up, builders must obtain workers from unconventional sources—sometimes from the parking lot at Home Depot. The same is true for building materials in short supply. As a result, there are substitutions or changes in accepted installation practices. In addition, builders substitute lower-quality materials for traditional building products. Each factor can negatively influence construction quality. 

 

            The most acknowledged result of shortages in materials and labor is the cost of new housing. Builders raise the price of new homes to compensate for the expense of hard-to-get materials and delays caused by the lack of labor. But there are other consequences—some may not be discovered until after the home's sale. For example, forensic investigations of new housing often expose the shortcuts taken during construction. These are quality-control issues often not visible on the exterior of a completed building. But reports of leaks or mold, for example, in a new home will trigger intrusive inspections that reveal poor construction methods. 

A Guide to Construction Defect Claims for Community Managers and Boards of Directors

A Guide to Construction Defect Claims

Introduction

By Tyler P. Berding, J.D., Ph.D. and Julia Hunting, J.D., P.E., S.E. and Anna P. Fabiano, J.D.

For decades, litigation over the defective construction of multi-family projects has been a frequent component of a property manager's portfolio. Low-rise, wood frame condominiums, apartments, and townhouses have long been susceptible to construction mistakes which lead to disputes with contractors and developers. High-rise projects can also exhibit poor construction. Community associations and owners of apartment buildings have found many reasons to sue builders. What leads to construction defects? Often it is a shortage of skilled labor in times of high real estate prices and demand. When there is strong sales potential, builders are eager to supply inventory, but good construction takes time and talent; when time and talent are in short supply, substitutions are made, which can lead to poor quality and subsequent claims.

Construction defects may be noticed almost immediately by new buyers, or they may lurk within a building for years before the damage they cause is detected. These problems can be as obvious as an actively leaking roof, or they can be as subtle as cracking caused by soil problems that develop several years after purchase. They can be easy to fix or potentially catastrophic, and their severity will strongly influence whether or not the builder or contractor will make repairs without the compelling force of litigation.

Here we cover construction defects in new construction. Defective repairs in new and older buildings are a topic covered in our companion book: “A Property Manager's Guide to Reconstruction Projects.”¹ Property managers must have a basic understanding of the elements of a construction claim, so they can adequately advise their clients, retain or recommend appropriate professionals, and monitor the claims process. That information follows. We hope this resource will be useful to both you and your clients.

For a full copy of this publication, contact Jill Jackson at jjackson@berding-weil.com 

¹  Tyler P. Berding. J.D., Ph.D., Paul W. Windust, J.D., and Julia Hunting, J.D., P.E., S.E., A Property Manager's Guide to Reconstruction (2013).

The Contractual Community

Why Community Associations Are Not "Governments" 
 By Tyler P. Berding, JD., Ph.D.

Editor's note: This article was originally published several years ago. In light of the continuing debate (see post below on a similar topic) over the legal nature of a community association, it is being reprinted here.

Articles and blogs devoted to the analysis and, occasionally, criticism of community associations often discuss the concept as if it were just another subdivision of local government. It is a common mis-perception because so much discussion about this unique housing type is devoted to questions of governance. We have boards of directors, which in some respects appear to be like city councils. There are property managers who carry out many of the same functions as city staff. The property so governed has many of the same physical accouterments as a town or city--streets, utilities, parking, recreation facilities, etc.

There are controls which are seemingly analogous to municipal government, where ordinances such as zoning place restrictions on individual property rights in order to give effect to the paramount needs of the city or county--as determined by the elected policy-makers. But while these two governance systems may appear similar, their respective legal bases are really quite different. Understanding this difference may help to understand why the occasional characterization of community associations as "mini-governments" or "quasi­-governmental agencies" is particularly inapt and can lead to false assumptions about community associations.

The sovereignty of our political government is subject to the limitations imposed upon its authority by various constitutional provisions, but its continued existence, short of war or violent revolution, is assured. A community association is not a sovereign entity, even though in many cases and in many of its duties, it appears as one. Its continued existence is wholly dependent upon the collective will of the owners of the property, and it has no assurance whatever of perpetual life.

A Community Manager's Guide to Re-Construction Projects

      Every manager of multifamily projects will encounter a large re-construction project several times in his or her career. These may be planned projects or the result of an emergency. Planned projects include those that are routinely projected by building inspectors, architects, and other building professionals—re-painting; new roof coverings; re-paving of parking lots and streets. Emergencies usually involve previously unknown problems discovered in a forensic investigation or as the consequences of age.

       As residential housing gets older, construction projects become more complex and difficult. This complexity often results from those unplanned and unexpected discoveries. Age brings deterioration of components that years before would not have been considered at risk. A routine roof project, for example, may only require replacement of the roof covering when the project is say, 15 years old. But in an older project, where moisture has had years to accumulate in concealed wood components, not only the covering, but also the wood substrate may have to be replaced. The same is true with other components largely built of wood—balconies, staircases, entry decks, and framing under siding and stucco. These components may actually leak, but not enough to alert the occupants. Instead the moisture remains in the wood or in wall cavities and supports gradual decay over time. These issues add to the challenge of preparing an adequate scope of work because a good portion of the damage is concealed.

          As projects become more difficult, property managers find that they are responsible for a wider range of tasks--not only obtaining bids to do the work, but also for determining what experts to retain to investigate and determine the scope of that work; deciding who manages the contract; negotiation over the terms; and finding the funds to pay the contractor. This guide is intended to offer community and apartment managers assistance in managing a complex construction project including recommending and retaining appropriate professionals to determine the scope of work; construction contract and bid package essentials; administering the project; and handling disputes.

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Builders Report Lack of Skilled Labor

A diminished labor pool is impacting new construction--will quality suffer as a result?

Yahoo reports that the building industry is suffering from a lack of skilled labor resulting from tightened immigration policies and young workers choosing other fields. We reported on this problem in an earlier post on the Berkeley building collapse. Quality suffers when demand is high and the skilled labor pool is low.

"Unemployment in the construction industry fell in June to the lowest level since 2001, according to an analysis by the Associated General Contractors of America. That's because contractors are having a hard time finding enough qualified workers to meet growing demand, association officials said....We've lost about two-thirds of our Hispanic and South American population in South Carolina, and that has had a profound effect on labor...Local high schools have training programs, but they have been slow to churn out new workers."

So where do builders get the labor to meet demand? We need to spend more on high school and community college technical training, that's where. In the meanwhile, more and better inspections must be employed so that mistakes left behind by untrained labor won't result in construction problems and building failures.

A Community Association's Four Stages of Life

          Community associations, like people, evolve during their lifetimes. Some of it is good and some is bad, but  change is inevitable as projects, and people, age. Whether that evolution leads to a long and healthy life, or an early demise depends a great deal on the decisions made early and the ability to recognize signs of decay--both physical and political. To assist, we have outlined what we consider to be the various "stages" that an association will pass through eventually. You will note that we are not just talking about physical manifestations, but political and economic ones as well, for they each play a role in the long-term health of the project. Read about them and see which apply to your association or your client's associations. Like anything harmful, recognizing the symptoms can help with a cure.

The First Stage

A brand new project enters the first stage. The duration of that stage depends on many of the factors outlined above. Generally, during the first stage, the regular assessments will appear to cover all projected maintenance and repair costs without resort to special assessments or outside sources, and with only modest annual increases. Non-owner occupancy is at the lowest percentage it will ever be, usually 10 percent or less. Board members and professional managers are easy to find, the political climate is benign and the members are generally supportive of the board. The project looks and feels new and exciting. The membership's attitude reflects these qualities. Re-sales are brisk and values stay high with modest appreciation reflecting general market trends.

The Second Stage

Disaster!

No Reserves. No Insurance.  

What’s Left if a Natural Disaster Destroys a Community Association?

       Hurricane Sandy attacks the East Coast of the United States. We have  seen horrific earthquake disasters in New Zealand and Japan. There has been widespread loss of life and destruction of infrastructure and buildings. California has a history of devastating earthquakes as well—the San Francisco, San Fernando, Northridge, and Loma Prieta earthquakes, among others. Heavy rains have created landslides, mudslides and shoreline erosion all over California, damaging homes and property, some of it in community associations. Wildfires in the past decade have destroyed hundreds of homes. Rising sea levels are threatening to flood low-lying developments, including many common interest developments. 

Hate Rules Enforcement by your Community Association?

 Get your Neighbors to Vote it out!

Read any pundit’s blog about homeowner associations and you will see a recurring theme: boards of directors over-zealously enforce the rules. True or not, I’m calling the pundits’ bluff: If you don’t like rules enforcement by your homeowner’s association then round up your neighbors and vote it out. I don’t mean dissolve the association entirely, just limit its authority to enforce certain rules and leave that enforcement to the individual owners who care the most. This has two benefits: it leaves certain disputes between individual owners to be resolved just by those owners; and it relieves the board of directors and the association from having to act as a cop.