The HOA Conundrum

Have you or any of your friends owned a condominium? If so, you have probably heard frequent complaints about the HOA (Homeowners’ Association), their fumbles with managing the building or, even worse, a lawsuit they have filed about construction defects and the difficulties they’ve had addressing the claim.

While I was working as an architect, I strongly resisted accepting commissions to do condominium buildings, largely based on the number of lawsuits filed against architectural firms. Typically, 9 ½ years after the certificate of occupancy was issued, and 6 months before the statute of limitations had run out, the architect, contractors and others involved were sued by HOAs.  In some areas, this pattern was rampant. For example, in San Diego County alone, 100% of condominium HOAs had filed such suits.

I’ve pondered this HOA conundrum for years, especially after having had to pay the price once or twice. We had one project that particularly annoyed us, since it was initially built as an apartment building and converted to condominiums 9 years later. Sure enough, a lawsuit was filed against us after a subsequent 9 ½ years.  Everyone – contractors, subs, suppliers, and, of course, us – were sued nearly 20 years after construction. We all threw money into a kitty to make it go away, despite the fact that most of the problems were due to faulty maintenance by the HOA. With a little investigation, we found a number of law firms were assigning summer interns to run around with cameras and dictation machines, documenting new condominiums under construction in order to build an archive for possible litigation 9 ½ years later.

This was back in an era when “exclusionary” zoning was being rewritten to be “inclusionary,” meaning cities and lenders that felt it was too risky to underwrite a mixed-use building were finally modifying their approaches to encourage and fund mixed-use projects. As a consequence, there was added pressure from many of our clients to take advantage of this new trend in urban development, mixing retail with housing and office uses.

With some of the risks mitigated, I studied the condominium lawsuit issue and discovered that most of the problems had to do with leakage through the exterior skin – particularly at balconies, where the exterior finish was interrupted and not properly maintained – and with elevators and mechanical systems. At the time, I proposed wrapping all of these elements under a Master Homeowners’ Association to maintain and service each of these elements for the entire building, including units that were rentals. Sounded great at the time, but I couldn’t get anyone to bite, especially the insurance companies. They’d never done anything like this before, and no one wanted to be a pioneer.

As a principal in West 2nd District (www.west2nddistrict.com), a massive mixed-use project in Reno, NV, I chose to pick up the banner again. One of the biggest problems we would face in the market, I believed, would be individuals who had owned a condominium or who knew someone who had dealt with an HOA lawsuit. We wanted to alleviate that concern by doing what I had proposed years before and adding to that approach, engaging each contractor for each building with a 20-year maintenance contract. This way, the onus would fall on the contractor to inspect and repair any problems that arise, rather than the HOA having to do a “cash call” whenever a repair is necessary.

As developers and architects, we must address the issues with multiple uses in each building; my development partners understood the HOA concerns. They also felt the marketing advantages and the actual experience of living in the West 2nd District meant taking this approach to risk mitigation was worthwhile.  After all, what does a typical HOA board know about the exterior skin, the elevators and mechanical systems, the appropriate reserves to hold for maintenance and repairs and when to spend them?

The next time our insurance carrier was in the office, I was asked to present my idea. Their response? “Why doesn’t everyone do it this way?” How times had changed. They were open to and supportive of the idea.

We’re now in the process of precisely defining what’s in the Master HOA, which will cover many buildings, leveraging our purchasing power, versus the typical HOA which covers individual buildings. The Master HOA, much like the typical individual building HOA, will cover cleaning and interior maintenance, replacing light bulbs and carpet, patching and painting walls when required and, of course, rules and regulations that govern the behavior of the owners, their visitors and their pets.

We’re also in the process of documenting these ideas so we can finalize our Covenants, Conditions and Restrictions (CC&Rs). I’ll keep you posted on our progress, and, along the way, we’ll report on our track record and the results to our homeowners.

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