New legislation, litigation and luxury options are redefining the realm of the homeowner association (HOA). Here's a look at trends affecting condominium markets and the HOAs that care for them.

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A Mad, Mad World of Restrictions

Read any local newspaper and you may decide condominium ownership is only for the strong of heart:

• "The $140,000 Parking Ticket in a California Homeowner Association," AHRC News Services, Palm Desert, Calif., March 2005

• "A disabled Magalia (Calif.) man is going to court in a fight to keep from losing his home after he missed a $123 payment to the Paradise Pines Property Owners Association," Chico Enterprise Record, March 2005

• "Homeowner Associations Face New Limits," Sacramento Business Journal, May 2004

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The golden laws of condominium ownership relate to what the industry terms "C, C & R"—covenants, conditions and restrictions. Written by the developer (assisted by an array of legal and other consultants) for entitlement purposes, these terms establish rules and standards for the project. A lesser, but important, set of rules defines environmental and architectural standards for the development, such as exterior paint colors and landscaping requirements. The de facto approval of bylaws by a homeowner accompanies each condominium purchase.

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HOAs define their mission as sustaining property value by managing, maintaining and preserving the development for the common benefit of all the owners. Homeowners should expect a dispute if collective good collides with individual want. The California Supreme Court ruled anyone who buys "a unit in a common interest development with knowledge of its owner association's discretionary power accepts the risk that the power may be used in a way that benefits the community but harms the individual." In other words, owners may need to weigh their desire to install solar panels against a daily set of tennis on the association's rooftop courts.

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How far should an HOA go to preserve value? Let's assume an association's environmental rules specify a homeowner must maintain his or her front yard landscaping. Can an association require a thirsty species of grass? Couldn't the homeowner contract with a landscape architect to design an attractive xeriscape, with minimal water requirements—especially for drought areas where municipalities ration water?

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Colorado State Senator Bob Hagedorn (D-29th Dist.) encountered a series of vocal constituents on last year's campaign trail, many of whom found their HOA rules oppressive. Hagedorn said, "Most HOA boards are doing it right, but there are a significant number of HOA boards that are riding roughshod over rights of homeowners. What we are trying to do is find the right balance of protecting homeowner rights and the responsibilities of HOAs." To that end, Hagedorn and Colo. Representative Morgan Carroll (D-36th Dist.) introduced state Senate Bill 100, now awaiting House approval. The passage of S.B. 100 would prohibit Colorado HOAs from fining homeowners for the presence of political signs or the American flag, limiting xeriscaping or fining street-side commercial vehicle parkers if they are emergency first responders who need access to their vehicles.

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Hagedorn said: "I have been most intrigued by all of the people who have come up to me and asked what group is lobbying for this bill. I tell them that no group is pushing this bill, just thousands of homeowners who have been denied their rights without due process and are mad as hell."

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Safety Net

Wake-up Call

The estimated losses from the 9-11 terrorist attacks range from $40 to $70 billion. In contrast, the insurance industry's largest previous loss on American soil, Hurricane Andrew, cost insurers $19 billion. Prior to 9-11, the insurance market was slowly tightening, with a diminishing number of companies offering coverage for community associations, and stricter underwriting guidelines at higher prices and deductible levels. Sept. 11 shone a spotlight on terrorism risk. As nature abhors a vacuum, financial markets detest surprise. The inherent uncertainty of terrorist acts makes quantifiable risk models nearly impossible.

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In 2002, the Terrorism Risk Insurance Act (TRIA) created a three-year program under which the federal government shares in the cost of a foreign terrorist attack after insurers pay an annual initial deductible amount dictated by statute. The act's primary objective is to ensure the availability of commercial property and casualty insurance coverage. The TRIA also allows for a transitional period for private markets to regain stability after a terrorist event. The U.S. Treasury Department has extended the "make available" provision of the TRIA through December 2005. Because condominium owners have so much to lose, the industry, including the Institute, engages in aggressive lobbying to expand and extend the TRIA.

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Brian McDonnell, senior vice president, ABD Insurance & Financial Servicves, a subsidiary of Greater Bay Bancorp, said insurers currently are giving terrorism insurance away as they attempt to quantify potential terrorist targets. A five-story suburban condo project won't attract the risk attention of a multi-towered, 600-unit development in a major metropolis. Lenders are softening loan requirements as well; the same five-story condo project probably will not necessitate terrorism risk insurance.

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Standard Issue

Other aspects of HOA insurance coverage prove more mundane. According to CAU, the largest national community association insurance provider, a full 65 percent of property claims are for internal water damage caused by failed washing machine hoses and burst water heaters. Standard turnkey HOA products include property and liability coverage, crime insurance (which covers a board member absconding with maintenance funds, for example) and directors' and officers' liability coverage. The greatest variable among HOAs is deductible levels. While lower premiums tempt HOAs, most insurance consultants will advise against high deductibles in order to ensure loss obligations can be met.

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Mitigate Risk

Another HOA trend is a proactive role in managing risk. Associations partner with their property manager and their insurance provider's loss control professionals to analyze the property from life-safety and maintenance standpoints. Annual inspections and walkthroughs mitigate significant potential loss.

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Because most systems within a condominium project are constructed with the same materials by the same builder at approximately the same time, wear and tear often result in repairs during the same period. When it rains, it really does pour. McDonnell said: "I would encourage homeowner associations to actively work with the developer and builder to mitigate problems."

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For the Love of Foreclosure

A common interest development's association assessment lien may be enforced through either or both judicial or nonjudical foreclosure processes. On one hand, the hefty foreclosure hammer is intended to motivate homeowners to settle debts. Conversely, the process can seem draconian for insubstantial amounts. Few people want to see a homeowner evicted.

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Bad press results from HOAs that use foreclosure as an abusive payment collection tool. HOAs can add attorney fees onto unpaid debtors' bills, even if the fees have not yet been incurred. Thus, a moderately sized debt can quickly grow.

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North Carolina House Representative Beverly Earle (D-101st Dist.) expects to soon introduce a bill that restricts HOAs' rights to collect outstanding dues. Earle believes foreclosure is too extreme a remedy and also wants to limit additional attorney fees. Opponents contend the restriction will deal a devastating financial blow to HOAs that may find themselves shorthanded because of outstanding or late dues payments. To compound the problem, HOAs spend disproportionate time and resources attempting to collect what they are due.

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To Sue, to Sue, Perchance to Win

Construction defect lawsuits seem synonymous with the condo industry. There are several primary reasons homeowners litigate. First, HOAs file suits before the statute of limitations expires to preserve their ability to sue. Second, there is power in numbers.

While an individual homeowner may not want to go head-to-head against a developer, a collective march into the courtroom seems plausible. Third, a HOA has a fiduciary responsibility to the owners and some are fearful of neglecting duty and the ensuing legal exposure. In his book Planned Community Living, John Linford wrote, "associations [that] bear the common area maintenance responsibilities and fail to take appropriate action to remedy the defects may be held responsible for failing to do so and for damages resulting to the separate interests because of common area deficiencies."

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Statutes of limitations vary from state to state. Idaho's construction defect statute expires in five years, limiting these types of cases. Some states, such as California, are working to remedy the problem. Recent legislation, California S.B. 800, allows a builder to correct defects prior to court action. Although well-intentioned, builders argue the legislation is flawed by short timeframes, making it impractical for the typical contractor. However, developers and builders agree legislation is moving in the right direction, discouraging frivolous lawsuits and seeking practical solutions.

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Developers and contractors take proactive stances by building better projects and inspecting their care and maintenance. One such approach is a warranty program illustrated by San Mateo, Calif. general contractor Webcor Builders. The general contractor will inspect a condominium project once or twice a year throughout the statute period. For instance, an inspection might reveal failed caulking, preventing a much more extensive leaking window problem. The warranty program creates healthy dialogue between the developer and the HOA, so that defects can be detected and resolved without court action.

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Clean Up

Common area maintenance (CAM) responsibilities typically include insurance, utilities, trash removal, landscaping, maintenance for common facilities and a reserve fund for planned capital improvements. In addition to CAM charges, homeowners may pay a special assessment to contend with unanticipated shortfalls.

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HOAs attempt to stabilize these expenses, both for individual homeowner convenience and predictability, and to avoid the work and headaches associated with erratic expenses. While there are non-controllable expenses (insurance and utilities, for example), the association strives for stability in other subcontracts. Some associations allow online payment, easing the collection process.

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Common area charges become more complex in a multi-use project, with commercial components such as a hotel. How much value does a condominium owner derive from the uniformed doorman who also welcomes hotel guests? Should charges be allocated on a per-square-foot or per-unit basis? Many condominium projects use a hybrid system, charging some services per-square-foot and others on a per-unit basis. HOAs often look to companies that focus on the operations of common interest developments. The consulting company assists real estate managers and HOAs by creating operating budgets and translating the relationship among ownership entities into a statement of cost of operations.

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Community Building Blocks

The nation's changing demographics reflect diminishing family growth and opportunities for neighbors to meet in what were traditional settings; today's condominiums are marketed to empty nesters, single professionals and childless couples. Proximity to work, retail and entertainment options trump the suburban play yard. According to Jeffrey Snyder of Carpenter & Company, developer of the high-rise St. Regis in downtown San Francisco, purchasers at price points of $1million upwards are looking for a vibrant, action-packed culture. Snyder said some things happen organically as homeowners socialize at a restaurant or local museum, but many times, an affluent demographic has a well-established social life, and the developer does not define the community.

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Karen Carr, CMCA, CCAM, AMS, has managed high-rise, mixed-use condominiums for 20 years. She said she sees a desire to establish community and socialize with fellow owners. At the 336-unit condominium she manages, Carr works with myriad committees—social, neighborhood and communication, for example—all staffed by homeowners, separate from the board. The social committee hosts regular events throughout the year, on a pay-as-you-go-basis. While the committee has a disclaimer—events aren't the responsibility of the HOA—the condominium concierge will assist with reservations and logistics. The neighborhood committee keeps an eye on local construction and has lobbied nearby billboard companies to limit nighttime lighting. The communication committee has designed a Web site for the condominium project. Each of these various committees posts information, along with a calendar, board message and manager's message. Web sites are common throughout the industry. Some HOAs post bylaws, providing individual homeowners easy reference. Others feature member services, online fee payment, tennis court reservations, and sports club information.

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Building a sense of community makes sense for associations, so wrote authors Marlene Coleman and William Huss in Working With Your Homeowners Association: "Members who are given a feeling of well-being in the community association are less likely to create conflicts and problems for the association and its members. When people are given the opportunity to participate in their own destiny, there is a greater likelihood that problems will not occur—thus making homeowner participation one of the best preventative mechanisms to avoiding legal problems later."

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Condos Go Vertical, Elegantly

The trend toward high-rise, luxury condominiums is most obvious in the western United States. Developers cite rapid population growth and land scarcity. In Las Vegas, there are 80 condo projects representing 136 individual towers on the drawing board. High-rise luxury desert condominiums evoke Manhattan, with names like Soho Lofts and Metropolis. Urbane atmosphere dominates edgy lobbies that display modern art and celebrity chef restaurants.

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Luxury and service abound in these high-rise condos. Homeowners can store special vintages in private win cellars, and there are rooftop pools for penthouse owners. At the 23-story Californian under construction in Los Angeles, four elevator banks will service the building, with private elevator access into each condominium. Developed by the Chicago-based Fifield Company, the Californian's finishes and amenities distinguish it from traditional condominium projects. Instead of a cramped 1,500 square feet, the Californian units will measure 4,000 square feet. Ten-foot ceilings depart from the industry standard of eight feet. Owners have access to 24-hour valet parking, a screening room and a business office.

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In an urban setting, managers can draw similarities between community association management and the hospitality or commercial high-rise property management industry. At the Las Vegas Residences, "condo-tel" owners can rent their units on a per-night basis and share the income with developer MGM Hotels. Increasingly, HOAs contract large staffs, including concierges and wine stewards. After an initial period, community associations assess amenity success and sophisticated HOAs will evaluate themselves against the more mature condominium markets in Chicago, Miami, New York and Toronto.

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Property Managers Need Apply

Condominiums with layers of luxury and service place demands on traditional HOAs, making professional managers a must. Commercial experience can translate well to the HOA marketplace. In Toronto, Mary Weber, vice president of high-rise management for Danridge Properties, recently received a letter of complaint regarding the fatalities of night-migrating songbirds drawn to lights in sky-scraping condominiums.

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Yes, managers and their HOAs face a whole new world.

 

Originally published in the Journal of Property Management.

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