Disaster! Florida Sinkhole Causes Condo Collapse

The Associated Press has reported that a 48-unit condo building at a resort in florida has collapsed into a sinkhole. We can now add sinkholes to the list of disasters that condominium associations are ill-prepared to deal with. Read more about what a community association can do when faced with a natural disaster for which there are no reserves and no insurance. 

Survey: Condos Still Short of Funds

          Community Associations are going broke. They are running out of cash. Borrowing from reserves to pay operating expenses has left reserve accounts severely underfunded.  There will not be enough money to do necessary repairs when the time comes.  As a consequence, associations are resorting to bank loans and special assessments to fill the gap. How do we know this? Check the survey below.

In 1996, Berding|Weil published “Latent Liabilities” a treatise which explored the long-term impact of underfunding the reserve accounts of community associations. Some of our data came from our clients, and some from Levy, Erlanger and Company. We suggested that most community associations, and principally condominiums, were severely underfunded for long-term maintenance and repair and predicted that this issue could lead to large-scale deferral of necessary maintenance or re-construction and ultimately a shortened service life for these projects. Subsequent financial surveys by Levy, Erlanger and Company, with our assistance, have shown this problem to be endemic—this year’s survey finds community associations now have only 54% of the funds on hand that their reserve studies say they should have at this point in time. And the problem is obviously getting worse—in 1993 that figure was 60%! The present survey numbers support those earlier predictions.

          Borrowing from reserves for regular and newly discovered maintenance problems has trended upward, and when the reserves run out, borrowing increases. The fundamental cause of this cash shortage is the inability or unwillingness of boards of directors to increase assessments sufficiently to stay ahead of both inflation and the cost of anticipated repairs, often coupled with the discovery of unplanned-for maintenance and repair problems which are not anticipated by the reserve budget at all. 

          These instances of “hidden damage” have pushed many associations to the financial edge. Too many older associations have discovered hidden damage resulting from long-term deferred maintenance which, when discovered, carries a price tag that greatly exceeds the resources of the membership. Dry rot in balconies, entry structures, roof under layment, and wall framing; and deterioration of utilities like electrical lines and plumbing, are becoming common but are rarely included in any reserve budget.[1]

          Long-term underfunding of reserves coupled with the late discovery of unanticipated damage to buildings places a heavy financial burden on the owners of attached housing units.  This financial burden is enough in some cases to raise the question: have many of these projects reached the end of their service lives—are they, in fact, obsolete? It is important to compare the resources and expenses of a community association to other, similar associations, and it is also important to investigate beyond the parameters of a typical reserve study—especially in older associations. Review the data in this survey and compare it to your own.[2]  Then ask yourself, are the components listed in your reserve study the only areas of concern, or could there be others? If your reserves have less than 100% of the funding called for by your reserve study and if your association was built more than 20 years ago, it’s time to undertake a sober review of the association’s financial and physical condition.

Are California Community Managers Required to have a Contractor's License?

By Tyler Berding and Julia Hunting

Legislative Update!

The Governor of California has signed SB 822 which clarifies AB 2237, discussed below, and confirms the legislative intent that Community Managers are not required to have a contractor's license in the course of their regular duties. SB 822 amends California B&P Code Section 7026.1 to add the following section: 

(b) The term “contractor” or “consultant” does not include a common interest development manager, as defined in Section 11501, and a common interest development manager is not required to have a contractor's license when performing management services, as defined in subdivision (d) of Section 11500.

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                 The blogosphere has been burning up lately over a new California law that some commentators say might require community association managers to have a General Contractor’s license to perform their jobs.  Since property managers can be said to “oversee” bids for construction projects it has been suggested that they might fall within the expanded definition of “consultant” which was added to the basic contractor’s licensing statute by Assembly Bill 2237.[1]                           

               

                California Business and Professions Code Section 7026.1(b)(1) defines who must have a General Contractor’s “B” license as follows: 

                                                                         

                “Any person, consultant to an owner-builder, firm, association, organization, partnership, business trust, corporation, or company, who or which undertakes, offers to undertake, purports to undertake, purports to have the capacity to undertake, or submits a bid to construct any building or home improvement project, or part thereof.” 

          

                AB 2237 added subsection (2) which states that a “consultant” is someone who: (A) Provides or oversees a bid for a construction project; or (B) Arranges for and sets up work schedules for contractors and subcontractors and maintains oversight of a construction project.” 

                Question: “These sound like tasks that a community manager might perform for their client associations during construction projects so why don’t they need to be licensed under the new law?”

                Answer: The new subsection modifies 7026.1(b)(1) by adding a further definition of “consultant,”[2] but it does not remove or change the other qualifying language in that same section which defines a “contractor” as someone offering to construct a building or part of a building.

Owners stuck with a failed condo project

The Privatopia Papers: In Carrboro, working-class condo owners must pay $...: In Carrboro, working-class condo owners must pay $5,400 fee—in three weeks | Orange County | Indy Week : The fees are intended to generate n...

If you read the entire article at the link above, you will see a perfect example of one generation of owners passing deferred maintenance on to the next generation and so on until the building becomes an obsolete condo project at the end of its life. At that point, since it is essentially an apartment house owned by multiple owner/tenants, there is no source of repair funds other than the remaining owners and it is unlikely they will be able to raise the necessary capital. This happens because previous boards of directors wouldn't make the tough decision to raise assessments sufficiently to maintain reserves for repairs.

Reaching the Pinnacle?

California Supreme Court Rules That CC&R Arbitration Provisions Are Enforceable Against HOAs

Matt J. Malone

This is the first in a two-part series on the Pinnacle case.  In this first part, attorney Matt J. Malone describes the nature of arbitration, the details and reasoning behind the ruling, and the issues and questions remaining now that Pinnacle is the law.  In the second part, attorneys Tyler P. Berding and Randolph M. Paul will discuss both the myths concerning arbitration and the reasons why not all developers or insurers will jump at the chance to arbitrate association defect disputes.

For the past several years, the Courts of Appeal in California have struggled with the enforcement of arbitration provisions in homeowner association Conditions, Covenants and Restrictions (“CC&Rs”).  These provisions waive an association’s right to jury trial in construction defect disputes against developers or converters.  And largely, the Courts of Appeal had refused to enforce them on the grounds that associations never consented to them and/or they were unconscionable.  But in August, the issue finally came before the California Supreme Court in the case of Pinnacle Museum Towers Association v.  Pinnacle Market Development (U.S.) LLC.  And the Court spoke clearly:  CC&R arbitration provisions are valid, enforceable and are not unconscionable under California law.

In order to provide a background for why enforcement of arbitration provisions is such a significant issue for associations, this article will begin by briefly discussing the arbitration process and its potential difficulties.  Then we examine the Pinnacle decision itself, to understand why the Court enforced CC&R arbitration provisions even though an independent, owner-controlled association never consented to them.  Finally, we take a look forward to examine the potential effect of Pinnacle on associations with defect claims, as well as what other consequences may arise from the Court’s decision.

Where have all the seismologists gone?

Italian Scientists found Guilty for failing to Predict Earthquake!

We see disasters all of the time--hurricanes, forest fires, floods, and earthquakes. Many of them damage community associations. But an Italian court just found 6 scientists guilty of manslaughter for failing to accurately predict the intensity of an earthquake that killed several hundred people in Italy several years ago. First of all, if I were a scientist in the business of predicting disasters--climatologists, seismologists, civil engineers--I would be tempted to make no predictions at all after this.

And what was accomplished, even setting aside the ridiculous idea that the intensity or even the date of an earthquake can be accurately predicted at all? Scientists will have to re-consider whether to leave the public without guidance of any sort, or to overstate the danger to avoid this same fate. Neither outcome benefits the public when prediction of most natural disasters is inexact at best.

It would seem that the prosecutors in Italy should have focused on the hundreds of ancient masonry buildings that crumbled and their owners who failed to properly retrofit them for earthquake safety.

Are Rental Apartments the New Condos?

 Will Developers Stop Building Common Interest Developments?

          If you check in regularly with the community association social media—blogs, Twitter, Facebook—you cannot miss the group of correspondents who have a decided bias against community associations. It’s not always possible to separate fact from fiction, or personal bias from social concern, but the message is clear—there are many people who don’t like their homeowners association specifically or the entire concept generally. Claims of over-reaching by boards of directors or managers; vendors who see community associations as a piggy bank; and professionals—attorneys especially—who are blamed for overzealous enforcement of the rules and regulations and foreclosures, are all listed as reasons why community associations are not a good thing, or maybe even unconstitutional!

          Of course, these commentators’ understanding of the legal framework of homeowner associations can be a little thin and hence their opinions often lack practical application, but the passion is clearly there. I have read many times that we should (somehow) restrict or ban this type of housing altogether. I can empathize with some of the frustration that they feel because it is obvious that community associations are often creatures of convenience for developers and municipalities rather than organizations with their eventual owners in mind. They are created under laws enacted by state legislatures that respond more to the notion that we need to build more affordable housing now than to the idea that it has to be practical to maintain and manage in the long run. Regardless, boards, managers, and vendors inherit the real-life responsibility for these projects no matter how flawed they may be in concept. 

          But for now, the pundits' prayers may be answered—at least for a little while. Rental, rather than owned, housing seems to be the real estate concept du jour. And of course, rental housing does not come equipped with a homeowner’s association. That’s not the same as banning them outright as some politically naïve souls might like, but it probably has the same practical effect—you will be able acquire affordable housing without the drawbacks of an association of owners to weigh you down and interfere with your constitutional rights.[i]