A municipal funding software to avert one other lethal condominium collapse

Experts have yet to determine the exact causes of the collapse of a residential tower in Surfside, Florida, on June 24, in which 98 residents died. But politicians don’t have to wait for engineering reports that painfully suggest to us: apartment owners’ associations and their voluntary committees are poorly equipped to remedy serious security deficiencies in high-rise buildings. Of the 160,000 condos in the US, tens of thousands are precariously underfunded.

The public finance profession has long understood the “tragedy of the commons” in which everyone enjoys the benefits of communal property, but its selfish collective neglect leads to its downfall. At the Surfside property, the homeowners association had received a clear warning that structural deficiencies were on the rise and that collective remedial action was required. However, the building’s HOA board was so frustrated with the approval of the owners of the units that many of its members resigned and costs continued to rise. A problem that could have been resolved a few years ago expanded – “exponentially,” as one inspector put it – to the point of no going back. The Champlain Towers South disaster is considered to be one of the most terrifying and illuminating examples of the Commons tragedy in American history.

Blame and blame will go on for months, and no doubt there will be new laws requiring more frequent safety inspections. However, where local governments must also focus their political reforms on the redevelopment process itself in order to provide a low-cost binding protocol for the timely financing of structural repairs in individual cases when private property fails.

Anyone who has lived in a shared apartment with HOA fees knows how much carp is made, from fee notices to pre-financing repairs and replacing community facilities. “Why should we now pay for benefits that future owners will enjoy?” Is the all-too-familiar complaint of curlers and procrastinators. Even if an HOA is able to borrow money for necessary repairs and bill the owners in installments, payment defaults and defaults will occur. In the Champlain Towers case, the unit cost of the refurbishment has been estimated in the six figures, which is an incredible price for some residents. Would you like to work on a HOA board with such resistance and likely litigation from all sides?

A sad opportunity

Fortunately, there is a legal and financial tool that can be customized to solve the condominium tragedy issue: special auditing districts. In California, they are known as the Mello Roos districts, and most states have laws that allow municipalities to charge a special fee for a variety of public improvements that benefit property owners within a particular district or in some cases Real estate even raise a single building. Billing can be per owner or (in some states) ad valorem based on property values. The municipality that sets up such so-called SADs can take out bank loans or sell bonds, often at lower tax-free interest rates, to finance the renovations secured by the mortgage liens on the properties. For condominiums, the special loan notes would need to be secured by a senior tax lien on the underlying property, and new single-family house laws may be required in some states.

Few condominium management companies can ever hope to get long-term financing at such a low cost. Most importantly, the SAD tax levies are a lien on property and are payable in installments so that owners don’t have to pay the full cost of repairs immediately. When a unit is sold, some states and trusts require that the entire valuation be paid off to release the lien, and the new owner essentially pays that cost in the mortgage. However they are structured, SADs can do what HOAs sometimes cannot.

Of course there are downsides. For municipal tax offices and property tax collectors, the administration of these special districts is a thankless task. Most of the rating districts are relatively small and the books cluttered, so many places charge modest administration fees to compensate for the human resources required. If they’re not aggregated into an annual bond, the heap of small individual SAD debt issues can become a nuisance to financial administrators – but nothing compared to the resources required of a community suffering a building collapse. Here it is important to keep an eye on things and put security before bureaucracy.

When lives are in danger

This brings us to the implementation process, which requires well thought-out policy making. In some places, existing laws and guidelines may need to be adjusted. One example is how, on the recommendation of the building supervisory authority or the HOA board, the local administration could proactively initiate timely intervention. Usually such municipal measures require a public consultation, but authority ultimately rests with the local administrative authority. Typically, project work is contracted out by the local government, raising questions about significant domains, compensation, property access, and possibly tax regulations for private activities that may require updated laws and local guidelines.

These laws and guidelines should establish criteria for declaring a demonstrable and documented public safety interest in mandatory improvements to a privately owned building. Doing this without stigmatizing the property is an issue that needs to be addressed. According to the state law, an intervening local government should be compensated in view of the legal danger and the certified structural risks. Statutory or written criteria could provide a checklist for local officials to follow before initiating public intervention.

Perhaps for every new high-rise building, the zoning permit and regular recertification should require the creation of a dormant special assessment area that can be activated and called up immediately after the main structural renovation requirements have been certified. If time permits and depending on the severity of the defects and risks, the HOA can be given a short grace period to carry out repairs independently. But the community interest should not be hampered by time consuming protocols or delaying tactics, especially when lives are at risk. In some cases precautionary evacuations may be required, with temporary housing allowance being added to the owner’s amortized project appraisal.

This financial instrument is not a panacea and should only be used in rare cases. But its availability will provide a safety net. Local lawyers can work with political and professional organizations to lead the way for preventive legislation and local risk management guidelines.

Governing’s opinion columns reflect the views of their authors and not necessarily those of the editors or management of governing.