Sunday, May 25, 2008

 

Introduction

 

Co-operative, private maintenance of commonly owned land and structures in small villages and towns has been around for thousands of years.  But in California, “common area,” and the community associations that maintain it, have only been regulated by statute for a few decades. The first California Condominium Act was enacted in 1963.  The Davis-Stirling Act, in use today, was enacted in 1985.  We began seeing condominiums massed produced for California consumers in the early Sixties when the McKuen Corporation started building their ubiquitous fourplex buildings throughout California.[1]

 

Consequently, California’s experience with this form of housing dates back less than 50 years, and with so little history to review, predicting the future requires a lot of speculation.  We do have some data, however, and from those sources we can piece together a picture of how community associations, and the projects they maintain, might evolve over the next half century. Some of this comes from other writer’s accounts, and some from our own experience.  We tried to make practical predictions, based on recognized trends, so you won’t see anything here about condos on the moon! The following facts are already evident:

 Aging Projects

 

Community association projects are aging. The earliest are now more than 40 years old. 20 and 30 year-old condo buildings are quite common, and consider all of the old apartment buildings that have been recently converted to condos. Regardless of the slick sales presentations, these older buildings are wearing out and a big challenge for the future will be how to fund their restoration.

 

Neighborhoods and whole cities are changing character, and will change a lot more in the next 50 years. Low-rise, low-density projects that were appropriate 30 and 40 years ago are becoming space and energy inefficient, as well as functionally obsolete and re-development of these projects will be necessary. This will give rise to new ways of utilizing land, constructing buildings, organizing common elements, funding repairs, and managing community associations.

 

During the next half-century we will see density increase appreciably in the present urban cores and former suburban locations in concert with expansions of rapid and mass transit options. This will be a response to European-style gasoline prices and environmental concerns that will make commuting from present-day suburban neighborhoods prohibitively expensive if not socially unacceptable.

 

The future of community associations is and should be of concern to every professional, owner, and politician. For one thing, a professional’s livelihood depends on their ability to accurately predict the direction an industry is going. For another, owners must be able to adequately plan their association’s financial future and governments will need to solve the many housing problems that arise from an increasing population and serious energy concerns. With these thoughts in mind, let’s take a look at the next 50 years!

 

 Architectural Changes

 

The low-rise condo structures built during the last 50 years were constructed primarily of wood. Wood was used in framing, roofing, siding, decks, and staircases. Wood rots and eventually the funding will be unavailable to replace it because the owners will chronically underfund reserve budgets.

 

As one consequence, construction materials will evolve from wood to synthetics, steel, glass, and masonry--all of which last longer and require less maintenance than wood. Components previously made of wood will be replaced with building components manufactured of synthetics to look and function like wood. Vinyl windows, concrete tile roofs, fiber cement siding, and steel or composite decking and framing are all products that we have now. These changes will be dictated not only by the obvious economic longevity they provide but also by environmental and energy concerns as well.

 

Vertical steel, glass, and concrete cities will replace horizontal wooden suburbs. These will include mixed-use structures with not only private common areas, but also public common areas and public services mixed in with private services as well. Residences, commercial spaces, and government facilities will co-exist in the same shell. This multi-use mix will require carefully drafted governing documents to accommodate the needs of these diverse constituencies.

 

 

Structures will be taller, but also larger overall as economies of scale begin to pay off. Developers will build more units on the same parcel of land than they do now because growing population center density will dictate more volume to preserve the few remaining open spaces. This will further drive the move to re-develop the former low-rise, low-density wood-frame condominium projects that presently are the dominant form of attached housing in California.

 

 

Re-development

 

Older projects will re-develop as the urban core extends outward and upward to accommodate larger populations in and around existing cities.  Urban density will reach 50-60 stories in San Francisco, San Jose, and Oakland. Walnut Creek will see high-rise construction reach 20-30 stories, as will Pleasanton and San Mateo. Environmental and energy concerns, commodities prices, and natural boundaries will prevent further development of rural agricultural lands. People will not be able to commute 50 miles to their jobs and agricultural lands will be needed to grow food and bio-fuels.

 

So where will we get the land to build these higher density projects in what are now low-density suburbs? Ask yourself this question: What is the service life of an entire condominium project? 50 years? 100 years? It’s not just the life of its physical components. It’s also the life of the funding plan that maintains it and the neighborhood in which it exists. All three must remain viable for the project to survive. But what are the chances that the buildings, the financing, and the neighborhood will be viable and valuable indefinitely? Most neighborhoods underwent significant economic change during the last half-century. Some improved, some deteriorated. We’ve written reams about the failure of funding plans, and to think that a community association will always be able to look to its members for critical funding is naïve. It’s not happening now. For one reason or another, given enough time, all community associations will become obsolete.

 

But there’s a conflict. The law as written perpetuates the idea of an “unlimited” service life for community associations. There is no notion of an end strategy in the statutes or in the governing documents. In California we must include repair or replacement of every component that has a service life of 30 years or less in a reserve budget, but how do we replace entire buildings or neighborhoods when they become obsolete and uninhabitable? A reserve fund cannot deal with buildings in such poor condition that they cannot be economically made habitable, and certainly not an entire neighborhood. When these elements are at the end of their service life, what is the end strategy going to be?

 

One answer will be to re-cycle and re-develop all or a portion of the common area. Owners can approve a partition (sale) of the property by an appropriate vote either under the governing documents or by statute, so re-development will be largely market-driven. Owners, who perceive that the common area is worth more sold for re-development than continuing as a community association will begin to search for ways to market the project. Those largely suburban, low-rise low-density projects will be re-developed to make better (at least, more efficient) use of the land. The old suburbs will become part of new urban cores. If you trace the development of cities like Oakland, San Francisco, and San Jose from the beginning of the last century, the trend to higher densities is obvious. The difference here is that a great deal of the developed property in the path of these changes is now commonly owned and it will be a legal challenge to unwind that to create marketable parcels suitable for re-development.

 

New Methods of Funding 

 

Larger, more expensive buildings will need reliable sources of funding to support them. Today’s condos require consensus among the owners to properly fund critical building maintenance. Lack of that consensus has and will financially cripple those condo associations that do not have the ability to assess without restrictions. There will have to be changes in the law if large, multi-family, multi-use structures are to exist and survive in the future[2]

 

Different methods of collecting assessments will evolve from the regular monthly assessment we see today. Deferred assessments collected from escrow at the time of sale will encourage greater funding of reserves since the non-operating portion of assessments, those intended to fund reserves, could be paid from equity instead of income. Developers will couple these deferred reserve assessments with a contribution when the project is new to limit monthly assessment payments to operating expenses only, qualifying more potential buyers.

 

With some help from the Legislature, quasi-governmental special districts could also be used to maintain a consortium of large projects that would be funded by a tax rather than a voluntary assessment. This treatment could lead to assessments that are perhaps tax-deductible and more in keeping with the semi-public nature of these large projects.

Less Litigation  

To avoid litigation over construction or budget issues and to encourage investment in these large projects, developers will create “hybrid” or dual-ownership buildings by separating common areas and the separate interests into several, unique legal entities. Investors will maintain the building and own the common area “shell”. The community association will enforce the governing documents and deal with all other non-building related issues.

 

In essence, the investors will be landlords who “lease” the common area to the individual separate-interest owners or to residential or commercial associations. All building-related issues will be the responsibility of the “landlord” as they are in commercial buildings today. The community associations will not be involved. This arrangement will eliminate the problem of under funded reserve accounts since necessary maintenance will be performed as needed and funded by the investors from the “lease” payments of owners. Equity appreciation will be shared between the “landlord” and the owners on the basis of a pre-determined formula giving incentive to both groups to maintain the building properly. Disputes over building maintenance or services will be referred to an outside mediator/arbitrator for resolution. The governing documents will combine common interest and leasehold language.

Member Discipline

The residential association will enforce behavioral issues. Community associations, now much larger and with many more owners, will create private ombudsman-judge positions in house or by contract, to resolve issues among neighbors and to enforce the rules. These positions will derive their authority from contractual arbitration provisions written into all sales and governing documents and their rulings will be enforced by a simple application to local courts.

 

Management

 

Governing documents will be maintained on the Internet with online legal and accounting advice in widespread use along with other management services, especially for smaller associations without in-house management staffs. College majors in community association management will be required of managers of these large complexes. The curriculum will include Engineering, Information Technology, Accounting, Psychology, and Law. Online management “packages” will be widely available which include Financial, Legal, and Maintenance services from consortiums of professionals.

 

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That’s it. We hope you enjoyed this glimpse into the future of common interest developments, and who knows? We could be right!



[1] We wrote about two specific examples, and their ultimate demise, in 2005 in our treatise: “The Uncertain Future of Community Associations”

 

 

[2] By statute in California, owners of units in common interest developments cannot be assessed beyond a statutory maximum without their approval. Single-family homeowners have no such cap of course; good judgment, expertise, and a desire to maintain market value encourage those owners to pay the actual cost of maintaining their properties. What would happen if we eliminated the statutory caps on assessments and required boards to assess the actual cost of maintaining the common property? Many owners would initially abandon their properties, but eventually those who could afford to maintain them properly would occupy them or they would be sold and re-developed. In other words, the present statutory scheme of limiting assessment increases artificially subsidizes, and disguises, the true cost of ownership allowing owners to live in these properties unaffected by market forces which would otherwise require a higher level of maintenance paid for by higher assessments.

36 comments:

Agent Orange said...

Unfortunately the expansion of the collectively own property in California is directly proportional to its Socialistic expansion.

If the HOA housing would be forced on the Russian Chinese or Cuban citizens as is on American citizens we would object calling it oppressive.

But we are the Americans and therefore an exception to the citizens tyranny and that is why we force public into the HOA Gulags.

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