Condo owners are facing a financial
reckoning in the wake of the building collapse in Surfside,
Fla., that killed 90 people and left 31 unaccounted for.
Across the country, residents and board members are
discovering that they haven’t set aside enough money to pay
for major repairs, like aging roofs. This funding crunch is
rattling developers and property owners, and could increase
housing costs for millions of Americans, who often view
condominiums as a low-stress, lower-cost alternative to
single-family homes.
There are about 160,000 condominium buildings in the United
States. Though industry officials can’t put a price tag on
how much maintenance is needed nationwide, Robert Nordlund,
the CEO of Association Reserves — which advises condominium
and homeowners associations on setting aside money for
repairs — said the figure is “staggering.”
Of Nordlund’s 30,000 clients, he estimates that 30 percent
of properties are significantly behind in their reserve
funding, meaning they hold 30 percent or less than the total
funding they need for planned and unexpected future
projects. Another 40 percent of properties are only in
“fair” condition, holding just 30 to 70 percent of needed
funding.
In a separate report issued last year, the Community
Associations Institute (CAI), an umbrella organization for
resident-owned buildings and developments, found that 80
percent of associations faced unplanned repairs during the
preceding three-year period.
Own a condo? Here’s what you should know about building
safety after Surfside.
Despite the enormity of the challenge, industry leaders say
they don’t see signs of a financial “bubble,” where costs
could overwhelm residents and creditors. One major reason
for that, they say, is that property values in many places
continue to rise despite the backlog of maintenance needs.
But industry leaders say the collapse of Champlain Towers
South in Surfside, Fla. — the cause of which has yet to be
determined — should be a wake-up call for condominium owners
on the true costs of their units. And the collapse could
also nudge cities and states to reevaluate whether more
regulation is needed.
“The sad part about government is it takes a crisis or a
tragedy to inspire legislation to protect the future,” said
Jerry Hill, a former California state senator who in 2018
pushed to update laws in that state after a six people were
killed in a balcony collapse in Berkeley.
The financial and regulatory challenges facing the
condominium industry come about four decades after the first
big wave of condominiums hit the market in the United
States.
Although a form of common-interest ownership has been around
for at least a century, there were only about 10,000
condominium and homeowners associations in the United States
by 1970, according to the CAI.
But in the mid-1970s, after federal tax reform permitted
condominium mortgages to be deductible, the number of units
began to proliferate.
Around the same time, real estate investors in big cities
such as Chicago sought to boost returns on aging apartment
complexes by converting buildings into condominiums.
Condominiums also helped absorb an influx of residents into
fast-growing states such as Florida, Texas and California
during the 1980s.
The number of condominium units in the United States
increased by 115 percent between 1980 and 1990, according to
the Census Bureau.
Some of the buildings constructed during the original condo
boom are now due for major repairs and replacement projects,
part of the financial crunch owners now face. According to
Fannie Mae, the recommended life span for a metal roof and
chimney on a multifamily building, for example, is about 40
years.
But Jim Riley, director of architecture for Certa Building
Solutions — which advises condominium associations on how
to rehab troubled properties — said that some buildings are
experiencing structural breakdowns far sooner than expected,
accelerating the timeline for remedial work.
The biggest culprit, Riley said, is moisture infiltrating
some structures, especially those that were poorly built in
the first place. “Water is getting into places it was never
intended to be,” said Riley, who primarily works in Florida
and the Pacific Northwest but says challenges can extend far
away from coastal communities. “It’s rusting rebar, it’s
damaging wood framing and it’s causing all kinds of
problems.”
Joel Meskin, an insurance executive, added that the
structural vulnerabilities can impact newer buildings, as
well as older ones.
“I’ve got co-ops in Manhattan built in the 1920s that aren’t
having these kinds of issues because they were built with
good materials and craftsmanship,” said Meskin, managing
director of community association products and risk
management at McGowan Program Administrators. “A lot of the
new developments are being put together with what seems to
be cardboard and super glue now, and a lot of that has to
deal with the developers.”
When problems arise, condominium associations can quickly
face financial distress if owners have not been proactively
saving for repairs.
Nordlund said condominium associations should be putting
aside at least 25 percent of their annual budgets into
savings for repairs, which is known as a reserve fund. The
budgets of most condo boards are made up of monthly fees
paid by residents, which can range from a couple hundred
dollars to a couple thousand.
When they don’t, the costs of unexpected repairs are passed
on to owners through special assessments that can quickly
test the ability of the owner to pay for them.
At the Champlain Towers South building, for example, the
condominium board had been pushing unit owners to finance
$15 million in roof and structural repairs in the weeks
before the building collapsed on June 24.
The association had just $800,000 in reserves. The only way
to pay for the project was to charge each unit a special
assessment, ranging from $80,000 to $200,000. Owners balked
at the high cost, leading to infighting and causing board
members to resign.
In recent years, some condominium buildings have faced
equally eye-popping special assessments. In 2007, the owners
of units in Harbor Towers in Boston faced special
assessments of $70,000 to $400,000 after the board
discovered $75 million in repairs were needed on the
then-36-year-old building, the Boston Globe reported at the
time.
John David Allen, a former property manager in Northern
Virginia, said many condominium owners do not understand
that a well-managed building should be steadily increasing
monthly assessments.
“It’s a big challenge for property management,” Allen said.
“I recall often going to the president of my company and
saying, ‘We have to go to talk to the board and tell them,
‘No, you cannot cut this [monthly condo] fee.’?”
Condominium boards often don’t have to look far to see what
could happen if they push off maintenance for too long.
In 2016, a building at River Towers Condominium, a
marsh-front complex in Northern Virginia built in the 1960s,
suffered serious structural damage.
The center tower, which is shaped like a “T” when viewed
from above, rested on steel support beams that dug into the
ground but had not been properly secured by concrete,
according to Bill Hicks, Fairfax County’s director of land
development services.
As that steel was exposed to the elements over the years,
the northern end of the building — equivalent to the bottom
trunk of the “T” — dropped about two inches down and shifted
out another two inches, bringing the nine stories above
closer to the ground and nearby sidewalk.
County officials quickly ordered mandatory evacuations.
Residents “left their homes with what they had in their
hands,” Hicks said. “Immediately, all of a sudden, folks
realized they were not going to be back anytime soon.”
Laura Sebastianelli, 61, who bought her unit in 2013 and
still lives on the second floor, said that in hindsight the
foundation issues appeared months earlier. She recalls how
green marble that abutted the north end of the building
began popping off. Then, a floor-to-ceiling window in the
front lobby fell out, too.
“Nobody anticipated that the building was moving,” she said.
“People thought it [the window and marble damage] was
vandalism or that it was a high windstorm, but nobody
imagined that our building was shifting.”
About 32 residents were displaced from their condos for up
to nine months, as firm KCE Structural Engineers developed a
plan for remediation.
Margaret Crowley, a 70-year-old retired teacher who was one
of the residents who was displaced, said the condo board
split the cost of repairs among all the owners in the
three-tower complex. The owners were given the option to pay
the sum all at once — $4,000, in her case — or add it on to
their condo fees, which range from about $350 a month for
her smaller unit to $900 or $1,000 for some of the larger
properties.
The River Towers condo association board did not respond to
multiple requests for comment. Hicks said it was likely the
problem got as bad as it did because of a lack of routine
maintenance or inspection.
Residents, meanwhile, said the ordeal makes them question
why Virginia does not require a thorough inspection of aging
condominium properties.
“Nobody wants to pay extra money for an inspection,”
Sebastianelli said, adding that she would still support more
robust inspections if it was “something that could truly
help make us all safe.”
But most states and municipalities don’t do much to regulate
condominium associations.
Only California and two counties in Florida — Miami-Dade and
Broward — require condo associations to conduct structural
inspections of aging buildings.
Only nine states — California, Delaware, Colorado, Hawaii,
Nevada, Oregon, Utah, Virginia and Washington — require
condominium associations to conduct a reserve study to map
out how much a condominium association should set aside
based on the expected life span of a building’s various
components.
Hawaii is the only state that mandates how much an
association must hold for its capital projects.
After the Champlain Towers South disaster, which occurred in
the midst of Miami-Dade County’s 40-year recertification
requirement for condominium buildings, some lawmakers are
calling for tighter re-inspection requirements.
After a fatal balcony collapse at Liberty Gardens apartment
building in Berkeley, California passed a law requiring
condominium associations to hire a structural engineer or
architect to inspect balconies, decks, outdoor stairs and
elevated walkways every nine years.
“It happened here. It happened there [in Surfside]. It can
happen anywhere,” said Hill, the co-sponsor of the
legislation.
Industry leaders, however, are skeptical that more
government regulation of condominiums is needed.
Dawn Bauman, CAI’s senior vice president for government and
public affairs, noted that most states have a limited number
of municipal building inspectors. Requiring buildings to
hire their own engineers would increase costs on homeowners
while also raising questions about how government could
assure the reports being generated are accurate, Bauman
added.
And although government mandates for reserve studies are
limited, Bauman said the mortgage industry has its own set
of requirements. Fannie Mae, Freddie Mac and the Federal
Housing Administration — which back about 70 percent of
mortgages in condominium buildings — usually require a
building to have a reserve plan before they underwrite the
loan, Bauman said.
“The problem is being addressed by the financing side, as
opposed to the regulatory side,” said Tom Skiba, CAI’s chief
executive, who added that he remains more worried about the
financial risks posed by “natural disasters” than he is
about widespread foreclosures or insolvencies of condominium
associations due to maintenance costs.
But Skiba and other industry leaders say the Champlain
Towers South collapse means condominium owners across the
country could soon discover that their housing choice isn’t
as cheap as they had expected.
Meskin, the insurance executive, said developers and real
estate agents continue to sell condominiums under false
assumptions that associations are adequately funded, or that
monthly assessments will never increase.
“The problem is, at the end of the day, someone has to pay
or you can end up in this type of situation again,” Meskin
said. “I am leery of creating too much fear in people,
because I hope this does not happen again, but it may, and
that is a concern of a lot of us, so people have to wake
up.”