Thursday, July 08, 2021

Condo Owners and Climate Myopia

 by Michael C. Dorf

"Success has many parents, but failure is an orphan," goes a familiar adage made popular by President Kennedy (though its actual provenance is more complex). The sentiment is correct as a description of people's eagerness to boast and reluctance to accept blame. As an attribution of responsibility, however, it is false. Failure, especially catastrophic failure, is typically the result of many people's missteps.

That is no doubt true about the tragic collapse of Champlain Towers South in Surfside, Florida. Investigations now underway will determine whether lax government oversight was partly to blame. To the extent that global warming contributed to the conditions that made the building vulnerable, humanity itself bears responsibility for our failure to act sooner and more aggressively to mitigate the damage. (More about that in my conclusion.) For now I want to focus on another locus of responsibility: the very nature of a condominium association and its relation to the board.

A recent article in The New York Times details the conflicts between the condo board and the building unit owners over the last several years. An outside engineer hired by the board estimated that the building needed $15 million in repairs. Unit owners' individual assessments were in excess of $100,000. Animosity ensued, leading to board turnover. Repairs were delayed. With the exception of the tragic outcome, reading the story gave me a sinking feeling of recognition, because I served as treasurer and then as president of a condo board in Manhattan two decades ago.

Many New York City apartments are so-called co-ops, in which one owns shares in the cooperative building venture and technically rents one's apartment. The horror stories you read about co-op boards screening potential new residents are largely an artifact of this somewhat odd form of real property. For historical reasons, there tend to be more co-ops for older buildings. Newer NYC buildings are frequently organized as condominiums, which is also the most common type of apartment ownership in other parts of the country. (There are also hybrids, known as "cond-ops," but let's not bother with them.) Condo owners have title to their individual apartments as well as a proportionate share of the building's common areas.  Although New York State and New York City laws no doubt differ in various ways from the operative laws in Florida, the Times story was so resonant with my own experience that I shall put aside such differences.

In 1995, my partner and I purchased a condominium unit in a pretty new building near Columbus Circle. The building had (and still has) 120 units. Some unit owners in condos are investors who collect rent from tenants. In the building in which I lived, there were a few such tenants but the vast majority of the unit owners lived in the apartments they owned.

Condo ownership entails four main streams of financial obligations: (1) mortgage, if any; (2) utilities; (3) real estate taxes; and (4) building dues. When we purchased our condo, we paid attention to the expected monthly total. Because our mortgage was substantial, that was by far the biggest component. As a whole, the first three categories were highly predictable. You expected to pay a bit more for electricity in summer months due to air conditioning use; if interest rates fell substantially, you might refinance your mortgage; taxes might go up (or more rarely, down); but for the most part, planning around the first three categories is straightforward.

So too for the fourth category in normal times. Building dues went mostly to pay the salaries and benefits of the building staff: doormen (they were all men); custodians; the building superintendent; etc. Dues also covered other expenses associated with the upkeep of the building, such as supplies, heating fuel and electricity for the lobby, etc. Roughly once a year, the condo board, in consultation with the management company, would evaluate the prior year's revenue and expenses to decide whether to increase (or more rarely, decrease) unit owner dues. During my first few years of residence, dues increased each year roughly in proportion to general inflation.

There is, however, a potential highly volatile element of condo dues. If there is an unanticipated building-wide expense, the board may levy a special assessment on unit owners to cover it. Typically, the unanticipated expense would be a repair that goes beyond routine scheduled maintenance.

I joined the condo board because a neighbor who was on the board and with whom I was friendly implored me to do so. She explained that another neighbor--I'll call him Vlad--wanted to fill a vacancy that had arisen, and that Vlad would be a poor choice. Vlad was a real estate agent. Having a real estate agent on the board is a mixed blessing. Such people have useful knowledge but can easily develop conflicts of interest. And Vlad had a reputation for dishonesty. I reluctantly agreed to be appointed to fill out the remaining year or so on the departing board member's term. Turnover on the board led to my becoming treasurer and then president.

As treasurer and then as president, I was concerned that we had an inadequate reserve fund. If the building got hit with an expense of anything more than a few hundred thousand dollars, we would need to levy an assessment. I proposed gradually raising dues to build up the reserve fund. The other board members pushed back. Unit owners would be upset. One board member who worked in finance put it this way: "I'd rather invest my money as I see fit, rather than have the condo board invest a portion of it. If the building has a big expense, we can assess for it, but in the meantime, I'm better at managing my money than this board."

About a year later, a brick fell off the facade of the building. Luckily, it fell harmlessly. Per local law, we erected protective scaffolding immediately. The existing reserve fund had enough money for the scaffolding and for the required engineer's study of what caused the brick to fall, but not for what followed. The engineer determined that the building was in need of about $1.5 million in repairs. Shoddy construction only a decade earlier had insecurely attached the facade to the rest of the building. Rebar that should have connected brick to poured concrete was in multiple places simply extending into voids.

We looked into suing various entities responsible for the poor construction. The construction company itself had been a shell that no longer existed. Piercing to the true responsible parties would prove difficult. After some negotiations, the original sponsor of the condo sales offered to settle its share of any liability for $500,000. The other board members and I thought that this was a good deal, so we tentatively agreed to take it, issuing an assessment for the remaining $1 million. That worked out to an average of a little over $8,000 per unit. The unit owners rebelled. They petitioned. They called for our resignation. Eventually, we held a special meeting at which the unit owners insisted (and because of the bylaws they had the power to override the board on this point) that we reject the settlement offer and proceed with litigation for the full amount of repairs.

I thought this was a terrible idea. We would incur substantial legal fees and the sponsor's liability was hardly a sure thing. Delays ensued. About a year later, the sponsor moved for summary judgment. To save the building some money (and because I thought our retained counsel was not very good), I wrote the opposition myself. The sponsor then offered to settle again on slightly better terms than before. We called another special meeting. Several unit owners--especially Vlad--demanded that the board resign, but we survived. The settlement was narrowly accepted. We issued the assessment. The repairs were accomplished.

The dynamic in Surfside was similar except for two things: both the risk and the cost were much higher. The building in which I lived was never in danger of collapse. The risk was that over time bricks would periodically fall off the facade. The immediate danger was avoidable through scaffolding, but that's not a permanent solution. Even so, having the scaffolding up for a year longer than necessary affected the quality of life in the building and no doubt depressed sales prices for that year. Still, it was not an existential threat--and the cost per unit, while hardly trivial, was still small relative to the value of each apartment. By contrast, as we now know, the danger in Surfside was existential and the cost was much higher.

I have seen conflicting reports about just how much the engineers, the condo board, and the unit owners/residents in Surfside knew about the scope of the threat they faced. It's difficult to imagine rational unit owners being told that there's a very substantial risk that the building in which they live will collapse and still resisting an assessment to cover the repairs, even if it would entail real financial hardship. Difficult to imagine, that is, until one realizes that one sees this very dynamic over and over again. Faced with unpleasant news, the immediate human tendency is to minimize the risk, look for others to blame and to saddle with the cost of the actual risk, and to delay.

In that respect, the tragic delay in undertaking repairs in Surfside played out in microcosm what our species is now doing on a planetary scale. Scientists tell us that we are rapidly approaching a point of no return beyond which catastrophic suffering will ensue. Climate denialists try to wish the problem away. They and others object to taking costly measures in response, even though the substantial costs are clearly worth bearing, given the nature of the disaster that it could mitigate. When it comes to the planet, far too many of us are Vlad.

3 comments:

Michael A Livingston said...

We live in a condominium which leads me to two conclusions: 1. Anyone who serves on a condo or co-op board, let alone as president, is either very saintly or a bit crazy. Perhaps a little of both. Our condominium association works very hard and—far from being appreciated—is subject to routine abuse on the most foolish of matters. Even a synagogue board is treated better. 2. I think there is a good article in here somewhere on “Armageddon in Microcosm: Climate Change, the Co-Op, and the End of the World.” What’s interesting about all of this is the collapse of the concept of enlightened self-interest, which used to apply to such matters. It’s sort of like a large game of Prisoner’s Dilemma in which everyone loses. As I say, the world in microcosm.

kotodama said...

I have nothing substantive to add here (I'm sure everyone's so disappointed!). But I just wanted to say that, for me at least, that quote always brings to mind this scene from The Sopranos (obviously quite NSFW).

https://youtu.be/f_RiwOoFOPA

Michael C. Dorf said...

Hanks Michael. I wasn’t exactl a saint. I took the positions to prevent lunatics from filling them. So man roles are like this. Law school dean is another. Even chair of appointments.

Kotodama, tank for the clip