Article Courtesy of Bloomberg Businessweek
By Peter Coy
Published June 15, 2021
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.
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.
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