Downtown view of Houston Texas

Condominiums Crumble Under Market Pressures

Condominium boards across Texas are quietly reflecting on the parallels between their own Associations and those of the now collapsed Champlain Towers South Condominiums. What has surfaced of a frustrated Board, an abrupt change in association leadership, sparing with the membership, a funds shortfall, and infrastructure worsening by the day paints a picture that could easily be any number of local condominium associations.

As a professional who specializes in preventing disasters like Surfside, I regularly hear from boards who have made the decision to solve a decades-long financial problem that can no longer be ignored. The truth is there are surprising numbers of aging condominiums that face funding shortfalls that will eventually lead to infrastructure failures, and we work with them to fix it, but why is this so pervasive? The same reason our power grid is failing: there is no incentive to take care of infrastructure in condo associations.

Every market pressure promotes short-term interests, deferring large maintenance, keeping costs low to remain competitive with other condominiums. This kicking-the-can-down-the-road approach inevitably leads to a do-or-die scenario: pay exponentially more for overdue repairs or run the risk of a catastrophic failure.

Attempting to raise last-minute funds can be impossible if not unaffordable to the homeowners. Bank financing is no guarantee with stringent underwriting guidelines. The Surfside disaster was caused over the course of forty years and, without change, we will see similar disasters.
However, there is a remarkably simple solution and now is precisely the time to implement it. First, we must understand why condominiums are so vulnerable to market pressures: Association Board Elections.

Condominium Board Members are elected officials with serious jobs. Contrary to a for-profit enterprise, the Board’s prime directive is not shareholder value. They are accountable to their fellow owners to ensure the present and future of their condominium association.

However, often a board seeking to fund reserves through higher maintenance assessments is met with protests and threats rather than thanks. Why? Because higher maintenance assessments drive down the sales price of units and hinder the cash flow of investment properties.

The temptation to maximize return to its members rather than ensuring the financial future of the Association is ever-present. Decisions to defer or avoid necessary financial measures can easily be rationalized through this lens.

Many boards rationalize that selling units for higher prices while underfunding reserves is in the interest of all the members of the association even if not in the interest of the Association itself. Infrastructure maintenance such as roofs or foundations simply does not have the same impact on sales prices for condominiums as it does on single-family homes. Others simply believe they should not be required to pay to fund assets they may not be around to enjoy- a deeply flawed argument.

In fact, the long useful life of infrastructure provides years of cover before being forced to confront underfunding problems during which time a unit may sell several times like a game of hot potato.

Exacerbating matters is the election outcomes which often reflect local politics. Many elections become the battleground to air dysfunctional neighbor relations or misinformation which alienates some of the most qualified from participating.

With serious financial implications such as how to pay for infrastructure determined by-election winners, it is reasonable to want the best and brightest governing the association rather than the person most willing to collect proxy ballots from the absentee owner.

Finally, there is no requirement in Texas that a condominium association obtains or performs any kind of long-term infrastructure replacement plan (called a Reserve Study). These are designed to forecast costs to replace aging infrastructure and are entirely voluntary.

While an Association does have an annual financial audit this does little to forecast its financial future and is not required to be disclosed as part of a unit resale. A condominium association needs both Reserve Study and Long-Range Funding Plan that uses the data to answer questions on when funding will be needed and where it will come from.

Without this most associations are heading toward a financial cliff. Worse still, some may know it is there and are doing little to course correct it. This means it is entirely possible for new buyers to come into the community without any way of knowing of an impending fiscal cliff.
The solution, however, is remarkably simple: require balanced Long Range Plans to be disclosed as part of any real estate transaction. This alone will allow the market to determine the value of a sufficient reserve and sales prices will adjust. This creates an incentive for boards to begin adequately funding long-term reserves when buyers begin to avoid underfunded communities.
If Long Range Plans identify a need for future special assessments buyers can make informed decisions about purchasing into a community and this removes the incentive to delay needed fundraising by the HOA.

My final solution: Run for your board and be the agent of change. Give unpopular opinions. Choose short-term pain over long-term pain. Be a true leader in your community. Choose what is right over what is easy.