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...

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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.

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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.

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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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