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Case Study: The Champlain Towers

The Champlain Towers collapse was a terrible and devastating disaster claiming the lives of ninety-eight people.  It was an abject failure by everyone involved, the only innocent party being the people who perished that evening.

The only unique thing about the Chaplain Towers collapse was that the building came tumbling down.  All of the bad planning, decision-making, financials, board failure, management failure, and state oversight failure happen every single day in condominium associations across the country.  This case study examines the failures of Champlain Towers for the purposes of informing buyers as to the common deficiencies and failures in homeowners and condominium associations so that they can be armed with the actual knowledge of the condominium associations and their challenges before they purchase in a community.

Financials of the Champlain Towers Condominium Association

The financial condition of the Champlain Towers condominium association was terrible.  The condominium association was broke, and had no money in reserves to cover the estimated fifteen million dollars in repairs that were necessary for the condominium. Champlain Towers elected to carve itself out of the Florida state law that used to require an association have reserve funding, which means that the association has included in its dues the future money necessary to cover the maintenance of the building (see state law discussion below). It was this lack of funds that created all the delays that made the collapse possible. Raising fifteen million dollars for condominium repairs is not an easy or quick undertaking, especially when the average unit had to come up with $110,000 to cover their individual cost of repairs, or sign off on a high interest rate loan to finance the project.

Board and Management Failure of Champlain Towers

There is a Latin phrase “res ipsa loquitur”, and it is translated to mean, “the thing speaks for itself”.  When a condominium building comes down and all of the parties involved knew there was damage and engineering problems, clearly and irrefutably there were management and board failings. For condominium associations, board members are a never-ending, rotating carousel of owners who volunteer to run the association with other owners.  I have a saying I have created over the last twelve years of working in the condominium association space, and that is, “The kind of people who want to run the association are the kind of people you don’t want in the first place”.

They are inexperienced, unpaid, and conflicted, and in most cases run to change a certain provision or practice that they don’t like, and then resign from the board having accomplished their goal.  They are not independent and are therefore conflicted, because the financial and operational decisions they make for the association affects them directly as owner.  Making matters worse, most condominium board members have qualified immunity from lawsuit, because no one would run for the board if they had the constant fear of being sued for decisions that were bad from the start or turned into being bad.

The Champlian Towers failure case study. Condofax provides detailed information on a condo associations financial well being.
Making matters worse, condominium management companies have a very short shelf life of managing a particular association and are booted regularly with little or no notice (Half of the associations manage themselves, making operations particularly dicey).  The average amount of time a condominium management company services a given association is about 18 months, not long enough to affect any meaningful change, but just long enough to add to the problems facing HOA’s. Condominium management companies have no pull or clout; they only follow the directions of the board whether they are good decisions or in compliance with the law. It is a low margin, grind of a business and therefore doesn’t’ attract high-level talent or firms. You get what you pay for in condominium management and most boards want to spend the least amount of money possible, and that includes the condominium management of the association.

State Law and Enforcement of Condominium Associations

Not surprisingly, both the state law and the enforcement of condominium associations are abysmal.  Every state has a codified body of law that governs condominium association (there is no federal condominium laws) on what they can or can’t do. And since there is zero enforcement, condominium associations do whatever they want to do without fear of accountability for their bad practices and policies.

In Florida, their state condominium association laws used to mandate reserve funding. Reserve funding is the requirement that a portion of the monthly dues are allocated and contributed to the reserve fund to pay for capital repairs and improvements as they become due. This is to prevent a special assessment, which is how most associations operate. Big, out-of-the-blue charges to make up for there not being enough money to cover capital projects. Bad financial practices.

They want to keep dues low for their own monthly payments and to make the condominium association units more attractive to prospective buyers. This practice deceives the condominium buyers, who have no knowledge of condominium laws, practice, policy, or good standards, and are therefore unaware of the financial deficiencies they are inheriting.

Unfortunately, Florida changed its condominium laws that allowed associations to vote to eliminate reserve funding altogether, a practice many Florida associations elected.  Who wouldn’t want to vote to reduce their condominium association payments, especially at the expense of some future maintenance need?  It is much easier to kick the can down the street, which is exactly what elderly housing groups argued for when they lobbied for this change using two arguments. One, that they were on fixed incomes and therefore could not afford higher monthly dues. Second, that as elderly people, they likely wouldn’t be alive when the repairs needed to be completed.

This is all fine and dandy, but what condominium buyer in the country, or agent or lender for that matter, is aware of the particular state law and the exemption from it?  None, which is why condominium buyers have been catching a latent falling knife since the 1960s.

The enforcement of the state condominium association laws is basically non-existent.  All of the laws that exist on the books were promoted and lobbied for the protection of the board, Management Company, owners, and HOA.  None of the laws protect the buyer until he becomes a member. The condominium buyer is the aggrieved party, but because he lacks the knowledge of these converging and conflicting problems, he has to discover the problem after they buy the condominium.  And even then, what is their recourse? They can complain to the state body charged with the enforcement or they can SUE his new neighbors and those leading the association, both a distasteful option for most people.

How does a Condo buyer complain about problems | Condofax condo buyer report | Financial records of condo associations

Insurance Policies of Condominium Associations

Let’s take a look at the insurance policy and payout that covered the Champlain Towers casualty, because of course the state law would require sufficient coverage to rebuild the property right?

The insurance company just paid out the claim for the insurance on the building’s destruction.  Forty-six million dollars was what the insurance paid to ostensibly rebuild the property.

The Champlain Towers was a twelve-story, high-rise, beachfront project with 136 units encompassing four hundred thousand square feet of interior space. Dividing the square footage by the insurance settlement and it works out to $115 a foot to rebuild the condominium. You couldn’t rebuild a treehouse at that per square footage cost, especially with the rampant inflation causing construction costs to skyrocket. Florida condominium laws need serious revamping, as do their insurance requirements.

Real Estate Agents and Lenders for Condominiums

A condominium buyer might reasonably think that surely either his agent or his lender checks out the condominium association and its financials to make sure it isn’t a risk to the buyer or the mortgage company.

Nothing could be further from the truth.

Real estate agents, while charged with representing the buyer and knowing the state laws and practices that govern common interest ownership, haven’t the slightest clue about condominiums or the laws that govern them. They don’t touch, review, or have anything to do with the condominium documents supplied to the buyer by the closing agent, nor do they encourage or require the buyer of the condominium to have the association investigated for their myriad of failures.  If you are a potential condominium buyer and were alone at the closing table when you were given the stack of condominium association documents, you know what I’m talking about. Condominium Agents don’t want to jeopardize their commissions.

The condominium lenders similarly have no knowledge or interest in checking out the condominium for their bad practices and compliance with the state law, because they don’t want the loan to sour over this and have their commission lost in the process. A lender has loan level underwriting they consider but has no interest in discovering or investigating the condominium association beyond these rudimentary criteria such as owner occupancy or investor ownership percentage. It really is the fox guarding the henhouse.

Still have doubts this is true? Let’s take a look at Champlain Towers.

There were thirty-five condominium purchases and mortgages since 2016 when all of Champlain Tower’s problems were evident in the engineering reports, construction estimates, minutes, financials, and city inspections.

Why would any intelligent person buy in this condominium association had they known the full extent of the problems, especially in light of the special assessment that was looming?

Why would an agent have encouraged their buyer to make an offer had they had the knowledge about how compromised the association was?

Why would a lender have done the same?

Agents and lenders suffer from two things when it comes to selling condominiums.  They don’t know, and they don’t care. Buying a condominium is buyer beware on steroids.

One thing is for certain, an enormous amount of scrutiny is being brought to bear on condominium association laws and practices due to the Champlain Towers fiasco, the only positive outcome for an otherwise abjectly horrific event. Condominium buyers need to investigate the condominium association exactly like they investigate the value with an appraisal, the condition with a home inspection, and the title with a title report. A condominium association has sometimes million-dollar budgets, board members, minutes, rules and regulations, lawsuits, insurances, reserve studies, management companies, and huge common areas that are not part of a buyers inspection or appraisal of the property.  Condominium buyers would be wise to be much more proactive and investigate the condominium association before they purchase, to ensure they don’t make the mistake that thirty-five people did since 2016 by buying in the Champlain Towers.

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