Changes are needed to keep condo associations afloat
The multifamily housing boom of the 1970s and '80s was born in the 1960s with the advent of the condominium form of ownership.
The post-World War II generation purchased two-flats, duplexes, row houses and even cooperatives, but by the shear numbers, nothing compared to the explosion of apartment and townhouse-style condominium and homeowners associations that followed soon thereafter.
With the postwar baby boomers coming of age and demanding a piece of the American dream, local governments welcomed developers who offered affordable housing to meet this demand.
Like any other commodity produced for the mass market, quality sometimes gave way to greed. Local governments often did not invest heavily in quality control, which allowed room for substandard materials, untrained and unskilled labor and deadline-intensive shoddy workmanship. Disreputable developers could ring up huge profits the faster it turned out housing, and municipalities could gain from adding new housing stock to the tax rolls, as well as permit fee revenue.
It was not until the first purchasers of defective condominiums began to demand repairs did state courts and local governments react with some form of consumer protection laws.
The Building Officials and Code Administrators (B.O.C.A.) regulations were first enacted in 1915, but did not become the standard until several decades ago. Even though the code was always intended to measure performance rather than creating a set of rigid specifications for materials, in practical application it seems that the latter standard is typically used by building inspectors even today. Even though many cities reference the codes, a subjective standard is used from town to town, which is what creates so much variance from property to property.
Further, it was not until the schools became overcrowded and the strains on municipal services and utilities began to adversely affect existing residents that developers were required to pay, in advance, for the potential adverse impact they had on these communities. The obligation of developers to donate cash or a parcel of land as a condition of city approval of new residential developments was confirmed in the case of Krughoff v. City of Naperville, 369 N. E. 2nd 892, (Ill. 1977).
Of course, any additional costs, tariffs, taxes, etc., not originally contemplated in the developer's business plan is passed along to the buyer, either in the form of higher purchase prices or a reduction in quality of construction.
The more these charges were passed on to developers in the form of impact fees and reduced density, the more corners were cut in construction costs and the elimination of other amenities. At some point this reaches critical mass when roofs, concrete, masonry, woodwork, etc., which is all supposed to last 20 years and gradually wear out, starts to rapidly breakdown after only 10.
On top of premature deterioration of property, condo associations faced undercapitalization. Because of either lack of education, or a desire to keep costs down by not increasing assessments, association board members were woefully unprepared to deal with massive re-construction and repair projects. Board had little money in reserves, and a membership that was already hard-pressed to pay the existing assessments.
In the 1980s, the banking industry realized that not only could associations be good clients as depositors, they would become great clients with regard to extending credit. It took an extensive period of time for loan underwriters to figure out how to collateralize a loan to a condominium, let alone the appropriate conditions in which to fund it. What was the collateral? What should the financials look like? Would individual mortgages be subordinate? Once the conditions for loans were worked out, it then took a major sales effort to convince traditional banking quarters that these were good loans and for several decades this was the case.
Now, however, those poorly constructed, underfunded developments of the 1970s and '80s are already going through phase-two and phase-three reconstructions and there is a global crisis in extending credit and loaning money to any type of business or entity.
For the first time in the short history of this industry, condominium and homeowners associations are considering filing bankruptcy. Not only is this a catastrophe for property values, where once lenders thought nothing of loaning a condominium association several million dollars, there now has to be a new level of evaluation and qualification before a loan will be approved.
No one can accurately predict how long it will take for things to return to "normal," whatever that is. There will be changes mandated in Washington and Springfield, but what it will really take is the great minds in this industry in the interrelated fields; i.e. legal, accounting, management, development, lending, construction, etc., to put their collective heads together and seek radically different solutions to old problems. Otherwise, even though the calendar turned over, 2009 will just be more of the same.
• Condo talk appears alternate weeks. Jordan Shifrin is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions to jshifrin@ksnlaw.com. This column is not a substitute for consultation with legal counsel.