Aging condos, often featuring flawed governance practices, can become "ticking time bombs" and lead to deadly building failures like the one in Miami, FL

 

The deadly collapse of Champlain Towers South in the Miami, Florida, area raises concerns about the soundness of condominium construction. It also raises questions about the condo governance model, according to a report at Axios (with original reporting from Peter Coy of Bloomberg Businessweek.) From the Axios e-newsletter report:

It's not just the structural soundness of high rises that's being scrutinized after the Surfside calamity. The amateurish way many condos are governed is also being challenged.

• "Some economists argue that the U.S. and other countries made a mistake by going too heavily into condos ... in the decades after World War II," Peter Coy of Bloomberg Businessweek reports. 

• Florida's strict building regulations for high rises "have been enforced unevenly by local governments, and sometimes not at all," the N.Y. Times reports (subscription).

Bloomberg's  Peter Coy writes under the headline: "Aging Condos Are a ‘Ticking Time Bomb’ and Need More Oversight: Maintenance is a problem at some of the condos, housing co-ops, and HOAs that house 74 million Americans": 

It’s not just condominium buildings that are showing their age, as was the case in the deadly collapse of a condo in Surfside, Fla. The condominium form of ownership itself is under strain. Some condo buildings are even being “de-converted” to rental properties—including the 391-unit 1400 North Lake Shore Dr. in Chicago, which was bought by a New York developer in 2019 for about $107 million. 

Some economists argue that the U.S. and other countries made a mistake by going too heavily into condos and related forms of ownership, including housing co-ops and homeowner associations, in the decades after World War II. Some 73.9 million Americans lived in condos, housing co-ops, and HOAs in 2019, according to the Foundation for Community Association Research. The shared form of ownership is also popular in Europe, Israel, Australia, China, and Russia, among other parts of the world, says Amnon Lehavi, dean of the Harry Radzyner Law School of IDC Herzliya in Israel.

Shared ownership, however, can lead to problems, Coy reports:

The rap on condos is that owners and the boards they elect are poorly equipped to make important decisions about maintenance. “Association homeowners and boards often are focused on keeping regular assessments low and only investing in visible, immediate outcomes,” says Breaking Point: Examining Aging Infrastructure in Community Associations, a 2020 report by the Foundation for Community Association Research.

This bit from the report will sound familiar to condo owners: “While homeowners will tolerate a modest special assessment in an emergency, evidence in this study suggests that it’s often hard to convince them to contribute to long-term maintenance, i.e., higher regular assessments. Substantial special assessments are particularly unwelcome.”

In theory, at least, a landlord-tenant form of ownership can be more stable because the landlord has a stronger financial interest in maximizing a building’s long-term market value than does a typical condo owner, who may be cash-strapped or hoping to sell and move before the building’s flaws become apparent, says a 2018 working paper by Michael Makovi, a professor at Northwood University in Midland, Mich. 

Short of de-conversion projects such as those in the Chicago area, though, condos and related forms of shared ownership are here to stay. The question is what can be done to make sure they have the right governance and the financial wherewithal to keep the housing stock safe. 

The U.S. on the whole actually does a better job of overseeing condos than some other countries do, says an article in The Atlantic by Matthew Gordon Lasner of Hunter College in New York City, author of High Life: Condo Living in the Suburban Century. Miami-Dade County, where Surfside is, requires a recertification of condos’ safety after 40 years. The state has outlawed deceptive practices by developers such as keeping sales prices artificially low by retaining ownership of common areas and renting them back to associations at inflated rates, Lasner writes. Disputes between owners and associations are often resolved swiftly through out-of-court procedures. 

But more could and should be done. Lehavi, the Israeli law school dean, says developers should be required to set up a large financial reserve for future repairs. They don’t want to do that because the cost of funding the reserve raises monthly fees for condo buyers, discouraging sales. But it’s better than keeping monthly costs low at first and then attempting to raise them later, Lehavi says.

Since condos likely are not going away, how can their management be modernized?

Reserve fund requirements for condos already exist in almost all states, but “what’s missing is how much is supposed to be in them,” says Evan McKenzie, a professor at the University of Illinois Chicago Law School. Only nine or 10 states require condos to conduct regular studies of reserve adequacy, McKenzie says. And if reserves are judged inadequate, there’s nothing to force the condos to add to them, he says. “It’s bonkers.”

McKenzie calls aging condos, especially in less-coveted neighborhoods, “a ticking time bomb.” He says governments should provide low-interest loans to ailing condos in return for oversight of their operations. That, he says, would generally be better than knocking them down or de-converting them. “I think you need low-priced and moderately priced condos for people who are just trying to get into the housing market. It’s the first rung on the ownership ladder.”