"Thanks for saying what we can't say," seems to be the theme in most responses I get to recent posts.
You're welcome... I guess.
It's just unfortunate that issues like poor planning and reckless decision-making lurk like untouchable elephants-in-the-room at HOA board meetings. It's hard to tell people - "Hey, this mess...it's your fault."
So, in this Newsletter - something that's not "your fault." You can print this one with confidence and hand it out at the next board meeting. Because it's not your fault - it's not the board's fault - It's..........my fault! Ok, so not necessarily mine specifically, but it's the fault of many in my industry. Here's why:
HOA construction boomed in the 1970's and 1980's. Before 1965, there were an estimated 500 CID communities nationwide. By 1970 that number had climbed to 10,000. Today the estimate is well over 250,000 with more than 50,000 of them in California alone. Don't miss it - that's a MASSIVE increase in 40 years.
A logical question is of course, why the Boom? Good question.
Hang on - we're going to do history in hyper speed and I'm going to condense 100's of pages of legislation into less than 200 words
Cause: 1978 Prop 13 sucked money out of municipal coffers by rolling back and lowering property taxes.
Effect: Municipalities were looking for ways to get more income and take on less responsibility.
Cause: Developers were getting pressured by the market to make housing options more affordable as land and construction costs climbed.
Effect: High-density communities with "common" elements such as roofs, driveways, and interior walls became more desirable.
Cause: Clean Water Act of 1977 - New housing developments must not create a significant change in water flow to nearby properties.
As developers began designing means of catching and controlling the runoff water - they were faced with a dilemma - who would pay to maintain the drain inlets, ponds, and collection structures?
Effect: CID's (HOA's) were established to manage these water collection elements.
Cause: Cities short on cash needed more tax revenue while available land was being used up.
Effect: High-density ownership (Not rental) was strongly encouraged, and developers building these communities had an open door at the planning department.
Ok, so that was the civic and social environment which caused the boom. Now - what happened to the make the buildings they built - SO CRUMMY?
Think about who was swinging hammers in the 1980's...20-year-olds... who had been experimenting with altering their mental state in the 1960's.
Just kidding - sort of.
It actually wasn't that experimenting that had the most impact (in my opinion), it was another set of experiments. In the 1970's and 1980's the federal government cracked down on 3 things specifically: Lead paint, Asbestos, and "un"clean air/water. The 1970's Clean Air Act, and the banning of asbestos and lead paint in 1978 bore the essence of the Law of Unintended Consequences. A cascade of industries, processes, products, and methods that had been developing since the dawn of the industrial revolution slammed into a hastily erected wall of legislation and regulation. Hold your fire...I'm not saying I wish lead and asbestos were still contaminating our homes - that's not my point.
Here's the point - And it's ALL IMPORTANT!
In the 1970's and 1980's when multi-family construction was exploding - engineers, architects, and contractors were EXPERIMENTING with new products and processes because many of the old ones were now illegal. Lead paint was REALLY EFFECTIVE paint - but kids were dying. Replacement products had to be developed. So, the experimenting continued and into the 1990's many of the methods developed under dubious conditions became doctrinaire and were incorporated largely unchallenged. And then as I described in The 50-year problem, their failures began to manifest.
In the 1970's under-slab copper plumbing lines were often run unprotected through concrete slabs. The failure of these lines is alone a parable of construction defect.
In the 70's and 80's aluminum framed windows came into their own - with condensation and leak issues all their own.
But probably most impactful, in the 1950's a new product hit the mainstream - Caulk in a Tube. By the 1960's latex and acrylic latex caulks were flowing out of the DAP labs. And then in the 1980's - silicone caulk. The effect of the introduction of caulk on the construction industry cannot be underestimated. It doesn't take too vivid an imagination to figure out what happens to the craftsmanship behind waterproofing systems, wood joints, window installations, and concrete joints when you have a simple and cost effective construction-grade band-aid. Imagine what happens to craftsmanship when you add a tube of caulk to the carpenter's bag of tools.
Granted, for some problems, various caulks have proven an invaluable solution. But in its early years, distributed widely to an industry seeking ways to cut cost and streamline processes, it was like handing out cocaine and saying, "use sparingly." And it wasn't just that the quality of the early caulk products was poor (and it was), it was that architects and engineers began making assumptions about what could be waterproofed and sealed with the stuff. It was integrated into already dubious building systems and the effects today are disappointing at best.
It's not your fault. I hope this helps.
But, your role in resolving the problems of the past actually is your responsibility, and failure to apply knowledge - will be your fault. Understanding the political and economic environment that created many of the problems of today, is a key to moving forward wisely. Plan ahead. Build up reserves. Hire contractors, engineers, and consultants that understand the history and can help you prepare for the future.
Friday, May 26, 2017
Thursday, April 13, 2017
In the 50-year Problem Part 1, The Renter Mentality, we explored the renter-like inclination of HOA owners to offload or defer the responsibilities of homeownership to someone else. Here we will fully realize why that's a
really bad idea.
A. The 30-year reserve study
Humans are remarkably horrible at budgeting and planning ahead. Dean Buonomano Ph.D. posted Temporal Myopia: Making Bad Long-term Decisions to the Psychology Today blog. In it, he described the "I give you $100 now, or $120 if you'll wait a month" experiment. You can read it here for yourself, but in a nutshell, people chose a $100 gift far more often than the impressive 20% investment gain available by waiting a mere month.
The takeaway: Typical humans don't make wise decisions in a long-term consequence vs. short term gain dilemma.
But no matter what you think about the logic of accepting $100 now versus waiting a month for $120, it is utterly unthinkable that anyone would wait a month - even for $10,000 - if that person knew they couldn't be around in a month to collect. No sane person would ever invest in something they had almost zero chance to benefit from.
The takeaway: We're not stupid. If there is no chance of future gain, of course we'll grab ours now.
And yet the modern CID is organized as if the 2 Take-aways above don't apply to it. A disturbingly large percentage of HOAs in their 4th and 5th decade, have been victims of these two concepts.
First, corporate decisions are often made with expediency as the highest motive.
- Let's keep dues low and never pass a special assessment, to keep more cash in my pocket right now.
- Let's get this board meeting over (or I've skipped it altogether) so I can watch the game - while crucial decisions are delayed until next month.
- Let's look for a new/cheaper management company that doesn't expect so much from the directors.
The list of ways humans sacrifice future benefits on an altar of expediency is endless - as with individuals, so it goes with HOAs and board members.
Second, if my condo is a starter home, or I'm retired on a fixed income, or for whatever reason doubt I will be around to benefit - no matter what the future gains to the HOA - I won't buy-in. Why would I agree to commit tens of thousands of my hard-earned dollars to a special assessment or increased dues which will largely benefit the next set of homeowners? (And this presumes I have the available cash with which to get behind the assessment or increase anyway)
In 1985, recognizing these weaknesses, the state of California integrated the "30-year reserve study" into the Davis-Sterling Act, requiring homeowners associations to set aside reserves for future maintenance expenses. While well-intentioned, and probably better than nothing, the reserve study portion fell short of being truly impactful. The 2013 DSA update clarified some details but still failed to give the reserve study real teeth. Predictably many homeowners associations are content to implement the bare minimums while ignoring the true intent - reserving enough cash to perform preventive maintenance and executing repairs as soon as they are needed.
But worse than encouraging contentment with sub-mediocrity, easy compliance has engendered a crippling consequence; Many communities now have an "Emperor's New Cloak" of compliance to cover their failure to adequately plan ahead. They are very literally - exposed.
Many communities are stumbling toward a mid-life crisis, oblivious to metastasizing cancer just below the surface... taking yearly drags on their 30-year reserve study.
B. The 50-year time bomb
The 50-year Time Bomb - Q&A
Q - So what do short-sighted board members do when they see a complicated reserve study and a growing list of deteriorating assets? (sometimes literally growing - with mushrooms)
A - They hire a handyman to put more caulk around the windows, and tell the manager to solicit a different reserve study.
Q - What do they do when a construction manager reviews the community and tells them that they need to spend $2,000,0000 to get the community back on track?
A - They toss the construction manager and continue whacking moles.
Q - What do you do when foundations, elevator shafts, and other elements not represented in the reserve study, with a life-span in excess of 30 years, fail catastrophically in year 40?
A - No good answer.
Q - How long does it take for a tree, 20 feet from the building, to grow roots large enough to compromise the French drains, the patios, and the foundations?
A - Want to guess?
Q - What do you do as the experiments of the post-lead paint, post-asbestos, EPA-affected 1970's and 1980's systemically fail, and begin to be realized as really bad ideas? (I will go into this in detail next time)
A - You wonder what it is that they are doing right now in construction that our kids will regret in 50 years.
This is not intended as a critique of the reserve study, a condemnation of board members, or a general criticism of the industry at large; what is intended here is something not unlike the orange flag of the highway construction flagman warning you to slow because you are too quickly approaching a narrow and hazardous place - where a cement truck just might back into your lane.
Like most sociological issues, the problems in The Great Sociological Experiment we call the HOA, lie with human nature itself. Therefore, as in all sociological advances, it's going to take maturity and innovation to outsmart human nature here too and successfully incentivize and implement lasting change.
Monday, March 13, 2017
In Defining the Problem, I described the difficult and frustrating position in which many common interest developments find themselves - facing snowballing maintenance costs with no cash. Here in The 50-Year Problem, I'll begin to explore why much of the problem was naively and neglectfully overlooked.
In The 50-Year Problem I'll touch on three points:
The renter mentality
The 30-year reserve study
The 50-year time bomb
Here, we'll only cover Part 1.
Part 1 - The Renter Mentality
In a condo conversion, apartments are transformed into condos with the wave of a magic wand. This conversion is a convenient case study for understanding the renter mentality within many HOAs. In the study, we glimpse the differences between the mindset of the old investor (singular) and the new investors (plural).
Now, when I say "renter mentality", I don't mean that HOA members actually think they are paying rent. Nor do I suggest that they don't understand that they bear some responsibility as an owner, though as I will show below, many owners within an HOA will fail to grasp their long-term responsibilities to the corporation. Also, I will not be discussing the often criticized member who calls management when the toilet clogs or the disposal jams. That is indeed an annoyance, but it is only an acute symptom of the renter mentality; a symptom which often goes away, while the underlying mentality remains. So let's take a look.
As an apartment, a single investor or set of investors was dedicated to the upkeep and management of the community. The regime was totalitarian but efficient. Maintenance of the whole property was guided by an asset preservation model. The individual tenants relied on the manager and owner to maintain the asset, while future profits and raw economics motivated the investor to do so. The siding was replaced because the value of the asset dropped as rot increased. The singular nature of the investor or group of investors was the key. One entity called the shots.
As a condominium, the politics change. No longer a dictatorship, the new entity is assumed to operate something like a democracy or republic. In truth, it will likely lurch and grind under its own weight and an oligarchy will emerge. The democratic ideal will remain as each owner has a vote, but apathy will inevitably and disproportionately empower a few.
So how does this create a renter mentality? In this way: As in the apartment model the uninterested tenants are relying on the "few" to maintain the asset, so likewise in the HOA, the apathetic owner assumes that someone else is looking toward the future and making decisions that will benefit him and his piece of the investment. Even the Board Member making decisions finds it easy to offload the responsibility of his decisions to the group. In each instance, the individual is assuming that the true burden of responsibility lies on someone or something else.
Sociology textbooks are jammed with examples of just this scenario: A visible problem sits ignored because each believes another is responsible.
But let's go back to those few, the oligarchy set up to be responsible. Is the oligarchy qualified to manage the asset? Did they join forces because they desired to manage this investment? Is the asset management their passion or priority?
The answer is obviously, across the board, no.
Qualified - Only possibly if they are by some chance already in that line of work.
Join forces for this purpose - No, they were looking for a home they could afford and enjoy.
Passion or Priority - Not at all, they were more than likely annoyed when they realized that there were expectations attached to the purchase of the property.
Does this mean the project is doomed? Of course not, some HOA's thrive, but it does represent a systemic liability in the design.
Now, briefly return to the Apartment vs. HOA illustration and consider the massive pressure of living in proximity to the people your decisions affect. Contrast the investor with the board member:
The investor has considerable positive peer pressure to commit financial resources to the maintenance of the investment, while the board member has considerable negative peer pressure to commit financial resources toward maintenance of the investments. The investor's peer group (other investors like her) supports her decisions to fund maintenance and renovation. The board member's peer group (Her neighbors on a paycheck-to-paycheck budget) will rarely support her efforts to raise funds for anything.
"Why exactly are you raising our monthly dues? Isn't there a cheaper management company out there?"
This is getting long and we're out of peanuts, so I'll try and land the plane. How is this part of the 50-year problem? Because we each only have a certain amount of bandwidth. Our days are full and our calendars jammed. We are adults, we can be responsible; but responsible about something 50 years in the future which I'm only 1/100 responsible for? That's pushing it. Give me a responsibility with ramifications next week and you'll get my best. Responsibility with ramifications in 10 years, that's likely headed for the back burner. Responsibility with ramifications in 50 years and I'm only 1/100 responsible for the outcome? - you've got to be kidding me.
But folks, that's where we are. Those back-burnered and ignored responsibilities of the original owners and their descendants are like chickens coming home to roost. We are facing the results of a 50-year-problem.
Question - Will we be part of the solution, or simply perpetuate?
In the next post I'll address the 30-Year Reserve Study, and if I can be concise, The 50-Year Time Bomb also. Following that we'll start talking nuts and bolts (literally), and sort out "Why Did They Build These Buildings So Crummy Anyway?"
Saturday, March 4, 2017
By Scott Swinton
"HOA's are filthy, stinking, power mad animals."
I saw this comment recently as I was skimming an article by an HOA critic and finding the predictable discontent; the path to the HOA woodshed is well worn. But what impressed me most were the comments.
Another had posted:
"Nothing wrong with HOA where I live. To each it's own."
And then the discontented reply:
"Evedently you're on the board cause it's a rip off. No one should be in control of property you own. As long as you keep your property up they shouldnt tell you what color door or what color your house should be or what your yard should look like. And they charge a arm and leg for nothing. Its taking away your freedom of choice and something should be done about it."
And these were the more objective comments that didn't reference Nazism or Gulags. Beyond the obvious ignorance, there is an undeniable undercurrent of angst toward HOA's (Home Owner Association's) or more broadly defined as Common Interest Developments (CID's). Misinformation and ignorance abounds, but let's admit it, so do a number of true horror stories, such as the hard on her luck woman in Pomona CA, who correctly argued a $200 discrepancy between what the HOA had assessed her, and what she believed she owed. In spite of being right, the court slapped her hand for missing back payments, and she was saddled with the $22,000 legal fees. And then there's the guy from Rancho Santa Fe, CA, who lost his home over his myriad rose bushes; and the stories go on and on. Are HOA's "power-mad animals? Or, are they a heroic Dark Knight, unappreciated in spite of triumph and valor? Are they some form of concentration camp, or are they a brilliant solution to 20th and 21st-century housing needs?
Think about it - humans have always lived communally. Yet, while single family home neighborhoods are revered as one of the sacraments of the American Dream, that model of community is not the historical norm. The Pueblos shared clay brick walls with their neighbors, Romans built apartment style insula, and nomadic tribes had no concept of a fixed home and a landscaped lawn. The suburban USA norm is not the historical norm. But, in America, we can do it better right? In rigorous pursuit of the American Dream, our suburban homes with tidy green lawns, are the evolutionary inevitability of the modern enlightened age, right? Maybe, but probably not.
Also, in the United States, 37% of the population is in some sort of rental, and nearly half of them are living in apartment buildings. Step into the cities, and those percentages quickly skew toward high-density rentals. In these cities where so much of another sacrament of the American Dream, Employment, is centered, it's obviously geographically impossible for all of the residents to live in their own single-family home with rose bushes and an oak tree. So, no matter how much you dream, unfortunately a cursory sociological glance proves that living in close proximity to other humans is integral to our thriving culture. For a large segment of society, the green lawn and oak tree will never be reality. High-density living, whether in apartments, condos, or tightly packed single family home subdivisions, is here to stay.
So, if humans have adapted to living together in close quarters over the millennia, what's the big deal with living stacked in a condominium or side-by-side in a row of townhomes? After all, if apartment living has proven a successful and cost effective housing solution, then what makes living in something so similar - the condominium, so contentious? Why do homeowner's association members seem so discontent? Why the lawsuits? Why all the angst? What has made this particular condition of living communally so dynamic compared to apartment living?
To begin to understand these questions well enough to answer them, requires a few steps back and requires answers to another set of questions a bit simpler to answer. When did this system of CID's begin? And, what are the philosophical underpinnings of Common Interest Development? We'll start there.
But before we do, a well-behaving contingent of HOA's needs to be applauded and excluded from the broadly brushed criticisms into which they've been painted. By no means are all HOA's "filthy," "Stinking," or acting like "Mad dogs." I am an owner of a unit within a mid-sized CID, and in my daily work, CID's make up 90% of my customer base. I have seen well-run, well-managed communities thrive in the same environment where others violently implode. What follows, is not a criticism of HOA's. Much to the contrary. What follows is a behind-the-curtain look to see what might be contributing to the madness where it exists, and hopefully a pulling aside of the curtain to let in some vitality and light.
- A Brief History - From a California Point of View
In Common Interest Developments - Housing at Risk? written in 2002 at the request of California Senator Tom Torlakson, Julia Lave Johnston and Kimberly Johnston-Dodds, discuss their research into the origins of CID's. According to their research, the modern CID was conceived among the other Utopian ideas of Ebenezer Howard in the late 1800's and was tested in part during the roaring 20's in the Community of Radburn in New Jersey. Unfortunately, as Johnston and Johnston-Dodds put it, "Radburn failed to become the garden city envisioned by its planners. Howard wanted to create quality affordable housing for working people. This utopian ideology did not work with American capitalism, which was building for profit, not philanthropy."
Profit vs. Philanthropy. Where have we seen that before? This crisis of concept, Utopian ideas vs. Capitalism, is a key, or maybe better described as a thread that weaves its way through the fabric of modern CID's. Has there been an intrinsic conflict of interest ever since the very beginning of this concept - the Common Interest Development? We'll come back to that.
Floundering as a Utopian idea, the CID concept incubated for several decades, and didn't find a catalyst for rapid growth until late in the century. From 1900 to 1965 the total estimated number of CID's developed in the United States was 500. Among those was Lakeshore Homes Association in Oakland whose website boasts it to be the second oldest CID west of the Mississippi. Established in 1917 and advertised as "a veritable fairyland of rolling hills and wooded dales right in the heart of Oakland," and claiming that "nothing approaching Lakeshore Highlands in attractiveness ever has or ever will be offered to the seeker for ideal home conditions in the Bay Region." The historical record on their website demonstrates that as a single family home community, they have found relative success over the decades working together under a set of uniform governing documents, and were only substantively disturbed from the outside after losing in their combat with the 580 freeway. Even then, in a testament to the power of community, they hold the distinction of winning a mandate of "NO TRUCKS" on that section of 580, a regulation unique from any other highway in the United States.
Lakeshore Homes boasts a rich heritage in the San Francisco Bay Area, and though possibly shy of "fairyland," it seems a pretty nice place to live. But drive less than 3 miles down the hill toward San Francisco Bay, and things look markedly less Utopian. Countless small developments dot the sloping terrain, sharing none of the glory or heritage of fairyland. Why, and from where then, did these dispirited communities sprout?
In the expanding economy leading up to 1978, California property taxes were increasing at a rate considered by most California homeowners to be, "out of control." Older, fixed-income residents were losing their homes as neighborhood property values drove their own property taxes to unaffordable levels. Demand had usurped supply in the California economic balance, and bidding wars on average homes raged. Property values soared, but with them rose property taxes and the gilded dreams of the municipalities collecting them. The taxpayers were soon clamoring for relief; their property values may have risen, but their monthly incomes had not.
A solution emerged when Howard Jarvis spearheaded the famed Proposition 13, which rolled back the current 1978 tax rate 2 years. The rollback was substantial on its own, but it wasn't the full extent of the Proposition. While before Prop 13, property taxes were increased at the self-serving whims of the municipality, often as much as 100% from one year to the next, after Prop. 13, the assessed tax was set at 1% of the property's value, and could only rise 2% each year after that. Only when the home was sold would it be reassessed and then only taxed at 1% of the sale price. Taxpayers stood and cheered as the plug was pulled on the rising flood of taxes. But it was a different story for the municipalities as they watched the revenue tide going out, and out, with no certain hope of a reversal. The municipalities were forced to maintain services with less income.
Compounding the effects of Prop 13 were the lingering effects of a somewhat obscure court case, Serrano V. Priest, from earlier in the same decade. The "Equal Protection" clause of the 14th amendment was invoked as Mr. Serrano sued the San Antonio Independent School District over the lack of equal opportunity for his children. California public schools were being funded by property taxes. In more affluent communities, the schools thrived on tax based income; a comparatively low percentage of the average home cost. In less affluent communities, the same quality schools were impossible, even if a much higher percentage of the home prices were calculated. It was impossible for a low-income community to have "Equal Protection" or equal opportunity with regard to their public schools. This was the basis for Mr. Serrano's argument. He won his case, and many municipalities were suddenly scrambling to meet new requirements with less cash.
So, a few years later when Prop 13 landed on the desks of city planners, a brave new world challenged their balance sheets. What does this have to do with Common Interest Developments? Much.
The 1970's rise in property values, was making home ownership more and more elusive. Developers were looking for creative ways to provide homes that buyers could afford. Cities had their revenue streams constricted, and were also looking for creative solutions. The stage was being set for an innovative solution ready to come into its own. But one more critical element was yet to be introduced. The 1970's EPA provided yet another catalyst that would draw HOA's out of the incubator with a seemingly irrelevant piece of legislation that fully matured in 1977.
This further catalyst was the Clean Water Act of 1977. Tucked neatly inside the over 200-page document, was the regulation that new housing developments must not create a significant change in water flow to nearby properties. In other words, what developers develop, must not affect the impact of rainwater on the neighbors. This seems simple enough, until you begin paving parking lots and collecting rainwater from rooftops. Seasonal streams can be inadvertently created and carve canyons through adjacent lands if careful storm water engineering is not implemented. So how did this help hatch the incubating HOA's? As developers began designing means of catching and controlling the runoff water - they were faced with a dilemma - who would pay to maintain the drain inlets, ponds, and collection structures? With property taxes simultaneously being bludgeoned and municipality coffers being drained, the cities were in no mood to add storm water structure babysitting to their budgets. So then who would be responsible?
A young, naive, and upwardly mobile member of the community stood ready to assume responsibility for these structures - The Common Interest Development. Coming of age, the CID bravely accepted the responsibility to maintain the storm water facilities, and then deftly passed along the cost to its members. It was brilliant, effective, and addictive. It was win, win, win. Homeowners had access to more affordable housing, developers had a solution to the Clean Water Act problem, and municipalities benefited from higher population density for taxation, while sidestepping responsibility for a portion of the Clean Water Act mandates.
The HOA construction boom was on. And boom it did as the Great Social Experiment got under way. Before 1965, there were an estimated 500 such communities nationwide. By 1970 that number had climbed to 10,000. Today the estimate is well over 250,000 with more than 50,000 of them in California alone. Though some of the catalysts for HOA growth noted here were unique to California, similar environments were concurrent in other states and encouraging similar growth.
- The Engineering
This new way of living was opening new doors, literally, for thousands of happy homeowners. But many of them had absolutely no idea what they were buying into. Truly, even today it is my experience that most first time buyers of CID homes have no idea that they have just joined a corporation and have taken on responsibilities and risks consistent with those accepted by shareholders in major corporations. Many HOA's are worth millions of dollars, in which each homeowner becomes a shareholder, and each newly elected board member, often unwittingly, and almost always naively, takes on an executive responsibility to manage this multi-million-dollar endeavor.
The HOA's corporate legal status is derived directly from the existing corporate model. Business owners incorporate for their personal protection from a company's liabilities, and similarly, HOA's incorporate for the individual protection of homeowners from the community's liabilities. In a typical scenario, before breaking ground the developer files unique corporate status for the new community, sometimes as a non-profit 501(c)4, but most often as a typical taxpaying corporation. Under the guidance of the developer, the first board of directors emerges from the pool of happy new home owners. As soon as the community reaches full occupancy, the developer removes himself from the Board of Directors, and the new corporation steams away under its own power.
The new community chugs happily along for a few years. Board members learn their corporate roles and minor squabbles are put to rest. Then something breaks - a window for instance. Who fixes the window? The Covenants, Conditions, and Restrictions (CC&R's) for the community will ideally give direction. A well-written set of documents will, among other things, tell the Board of Directors where common area and private space divide. Sometimes this is at the property line in single family home communities, or for condos, possibly at the back of the stucco or siding, or sometimes between the drywall and the stud wall. What about that broken window? Again, sometimes the whole window belongs to the owner, sometimes only the glass pane, while sometimes, the owner is responsible for the entire window, while the HOA is liable for leaks that originate in the flashing or siding around the window. When the CC&R's are clear, life is good; when ambiguous, the Board of Director's role can be a daunting one.
But maintenance and common area delineation are hardly the only things the CC&R's identify. Frequency of board meetings, pet restrictions, parking regulations, and sometimes hundreds of other corporate regulations are defined in the document. What often comes as a surprise to those both outside the HOA, and ironically, often even within the HOA, is that at the time of purchase, owners sign an agreement to abide by these rules and by any new rules enacted by any sitting board of directors. This is a tough pill to swallow for many liberty loving Americans. Ignorance of the CC&R's is the basis for pervasive and continuous contention. Misinformation and ignorance continues to make the rapid expansion of CID's tricky and troubled.
The 70's and 80's brought the adolescent industry growing pains, and as problems arose laws were passed, scattering legislation throughout the California civil codes. The 1980's HOA legal environment was not unlike the 1880's make-it-up-as-you-go wild wild west. Then in 1986 the now revered Davis-Sterling Act provided rails on which the CID locomotives could run more predictably. This added segment, section 4000 of the California Civil Code, consolidated the regulations surrounding Common Interest Developments. The 25 pages of regulations were then revamped in 2014 - adding an additional 75 pages to the California Civil Code
Davis-Sterling brought clarity to issues such as assessments and foreclosure, liability of owners and directors, financial reporting, and elections. Professional management of these communities became big business as regulation brought protection and guidelines. Other industries also capitalized on the new stability. Insurance companies, attorneys, and accountants were now specializing in CID's, along with blue collar vendors such as maintenance, landscaping, and pool companies. Countless organizations and associations rallied to offer education and stability to this new economic subset. California Association of Community Managers (CACM) established in 1991, and the Community Association Institute (CAI) founded in 1973, fill an important role informing legislation and educating the industry's professionals.
- The Ramifications
The ramifications of the Great Social Experiment have been vast, and while a 45-year social experiment would seem likely to be producing great data, analysis, and insight, the way forward still lays, too a large degree, shrouded. Is HOA governance working? Is the status quo the best method, or are options such as alternative corporate status, professional boards or mega management companies the better way to go? Are we expecting too much from board members who have little, to no training in their roles? What is the long-term impact of tethering a corporate structure to private property rights, and then submerging the whole thing into the rolling boil of divergent personalities and priorities? Who is ultimately benefiting from this structure? Who is losing out? Are Utopian objectives driving the concept forward, or are darker motives born of greed and selfishness at the helm?
Today's HOA's are no longer adolescent, and as such, can no longer rely on immaturity as an excuse for their various dysfunctions. Yet, were there incipient developmental dysfunctions that are still imposing lingering negative effects on the industry; Was the concept flawed even at conception? After all, who was the intended beneficiary of the CID? What forces conceived the embryo that matured into the CID?
As discussed above, among the key beneficiaries of the early CID model were large corporations and local governments. Did these entities swindle eager home buyers? It's possible. Home buyers out on the fringes were by definition the most likely to buy-in. Lower income families, first-time buyers, and retirees continue to be the backbone of the HOA population. These uninitiated shareholders/buyers have responsibilities which are traditionally managed by governments, foisted onto their shoulders. Realtors are still renown for downplaying the ramifications of buying into such communities, and in the first decade of the new millennium, banks were over-eager to provide loans for condos and townhomes. Corporate and municipal greed, or at least self-service, seems to be a major player in the industry.
But professional crooks and swindlers cannot possibly be responsible for the entire problem and could not be the sole force at conception. Here is where we must confront the paradigm of the American Dream. The American public is an all too eager foil. After all, what has been preached to the nation since, at least the end of the Great Depression? A home, a garage, and a car to put in the garage are all indicators that you are approaching the American Dream. "You don't own your home? - better keep dreaming," we seem to say. But wait, is owning a condo really the fulfillment of the American Dream? Is it possible that the new condo owner feels duped, being told she has become a part of the dream, but not really feeling it? Are HOAs nothing more than a "grasping at" of the American Dream at best, and at worst, proof that the dream was simply that - a dream? If so, this a key to the innate discontent.
What is the American dream after all? Is it not, at its core, simply a desire for something a little better? Depending on your philosophical bent you may or may not see this as a healthy state of being. Wanting something better is certainly built into the human psyche, though most would caution that any dominating discontent can only be malignant. But, it should not be assumed that all dreamers are discontent. And, that is not the point here, rather, the pursuit of this particular dream, home ownership, likely does not include the many compromises required of those living within an HOA. Steven Dubner of Freakonomics fame may have said it best, "The best way to find happiness in life is to meet or exceed expectations, therefore keep your expectations low." The homeownership piece of American pie is tantalizing for many and filled with high expectations. Yet when beyond the typical difficulties of homeownership come the additional burden of living in an HOA, expectations are often shattered. I believe it is these unmet expectations that drive much of the angst within the industry, especially among relatively new owners.
In defense of the willing HOA member, I recognize that many fully understand the implications, benefits, and responsibilities of owning within a common interest development. The HOA is no burden to many. They may be living their American Dream in a condo, and rightly so. I do not infer that they have been duped, or that like many, they have had their dreams damaged. However, there is another trap that even these otherwise contented homeowners fall into. As a matter of fact, the informed owner may be the most likely to fall into this trap.
A dysfunction hinted at earlier is the conflict between Utopian ideals and purely pragmatic, or narcissistic ones. For example - where to spend HOA money? Does a proposal benefit me directly, or does it benefit the community at large? A member might say, "I'm retired, and I refuse to support your proposal to install a playground." Or, a stubborn member leads a campaign against raising monthly HOA dues - in spite of pressing community needs. He doesn't want to pay higher dues to fund the roofs going on the townhomes when his roof isn't leaking, and he doesn't see the point.
The issue here is not simply differing opinions. The deeper issue is that some people see the community as a community benefiting everyone, and others look only for how the community can benefit themselves. This distinction in personalities is normal among humanity, but in a CID the differing personalities are forced to attempt a resolution of differences that affect, often, their greatest financial asset, their physical safety and security, and their very lifestyle. Weighty psychological forces are at play in this Great Social Experiment, and it's no wonder there is so much angst. Disregarding their corporate responsibility, the discontent seem to say, "Decisions you are making are affecting my private kingdom - which I own, and paid good money for. You're messing with my dreams."
Consider also the idea of managed ownership. The psychological effect of managed ownership, such as being delegated a certain responsibility at work under an overbearing supervisor who never allows you to truly take full ownership, is almost always negative. In a sense, the CID relationship is this scenario playing out in what is supposed to be your private little kingdom - your American Dream awakening. Instead of broad horizons, many new homeowners feel claustrophobia as their neighbors play loud music and the HOA won't let them put up their favorite decorations. "This is my home, they cry. Why does it have to be this way?" Because someone else got to make the rules and set the parameters before they showed up, and continues to look over their shoulder to make sure.
And then there is Apathy. I talk with HOA board members and community managers on a daily basis. A recurring complaint is that; no one seems to care about community governance or rules. They don't care, that is, until it affects them personally. The community manager can send out a letter announcing board member elections and get 4 responses from 100 members. Don't the other 96 households care about how their community is run? No, they really don't. At least, not yet. Do they care that the roofs are failing, and the pool fencing is deteriorating? No, not yet. For a decade, homeowners will operate as if the HOA doesn't even exist - simply paying their monthly dues, using the community pool, and parking in their assign parking spot. The few willing to sit on the board of directors are unappreciated, not malevolently so, but unappreciated none-the-less. Until... Until the pool is closed in August for emergency repairs. Until a board of directors is voted out, and the new board discovers a depleted reserve fund riding tandem with looming roof repairs - and sends out a letter announcing a rise in monthly dues coupled to a ten-thousand-dollar special assessment - per owner. Apathy is an amazing affliction in that it is a rapid healer. The fix for "don't care?" Make it personal.
When "don't care" becomes "care," in an HOA, the resulting conflict is almost always laced with misinformation and ignorance. Not because the information was inaccessible, but rather because the information wasn't pursued. The typical owner has never read his CC&R's and certainly not all the way through. The typical owner has never attended a board meeting, and never will. The typical owner doesn't care, until something affects him personally. And even then, when the storm passes, he will often return to his apathy.
At no other time in history have we lived under such conditions - owning a piece of the whole, while co-owning the shell; claiming property and individual liberty rights, while insisting that our neighbors submit to our ideals. So many disparate philosophical drivers, all converging to form a perfect storm.
- The Way Forward
As noted earlier, the way forward seems somewhat shrouded. Talking to almost any group of professionals in the industry often leaves one with a nagging sense of something not unlike despair. Apathy among CID's is endemic, and maddening to anyone hoping for efficient management. Educating board members perches high on the list of proposed industry remedies. Cultivating executive level, highly trained community managers is also close-by on the list. Many living in the communities, or making their living managing them care deeply about the sustainability of the industry, but as is so often the case, the ones who care are not those causing the problems. While many choose to exist quietly within the experiment's constructs, the vocal discontent, are drowning out the vocal content. The ability of the industry to create positive energy and reconstruct its image will be critical to a smooth transition into the future.
Education is certainly among the answers to the dilemma of the CID, along with developing the role of the community association manager and transforming that role into a more highly respected profession. Organizations such as CACM and CAI are working diligently to inform community managers and affiliate organizations. They are also actively working with lawmakers to guide legislation that will actually streamline, rather than snarl the workings of HOA's. Organizations like ECHO (Educational Community for Homeowners) serves in a similar capacity for homeowners and board members. But the impression that HOA's are "power-mad animals" will be difficult to offset anytime soon. And therein is the rub - Because HOA's are here to stay. As much as they are despised, they are also a fixed element of the social landscape. No matter their progenitors, they exist and they are serving in a role that needs to be filled.
I believe that CID's are the Great Social Experiment of our age. Especially if the world population trajectory is any indicator, it is certain that more growing pains are in our future, and then a long road to maturity. Many communities are well managed and are thriving, and those give hope. I believe the good news is linked to those success stories. The CID concept can work. The future of CID's will combine the successes of capitalism and the benefits of community and help fulfill the dreams of many eager, hard-working Americans in the decades to come. In the meantime it will take a concerted effort on the part of community planners, lawmakers, and industry professionals to think through the real reasons for the angst and come up with viable solutions.
Wednesday, February 22, 2017
DEFINING THE PROBLEM
DEFINING THE PROBLEM
The Great Social Experiment is entering its adolescence and like the next generation - it needs a guiding hand. The question is...who are the adults?
I'm warning you now - this is longer than usual. So make sure your coffee is hot.
In my last newsletter, I introduced the topic of Deferred Maintenance and Depleted Reserves by alluding to the 2020 Kittredge deck collapse. In the wake of disaster everyone was considerably concerned about decks and hidden rot, but as disaster became case study, the impetus driving repairs diminished. What I didn't mention is that 2020 Kittredge is a fairly new building. What does this mean for thousands of California communities many times older than that infamous building in Berkeley?
In "The 50 Year Problem," and "Why Did They Build These Buildings So Crummy," I will discuss some of the reasons behind the epidemic of leaks, and runaway entropy within many HOAs. But first I want to discuss the types of problems I'm seeing, and begin to unwrap why I believe they are so elusive.
- There sits a 16-floor condo near Lake Merit in Oakland whose reinforced concrete has abandoned its role as a structural building material and is aspiring to the indignity of a bath sponge. Each storm seems to reveal another mysterious leak. Balconies, windows, doors, patio, planters - all leaking.
- A townhome community in Moraga is half-way through a deck replacement project which they can barely afford, and may now need to put on hold as their 40-year-old french drains, 5' - 6' below grade, have deviously switched from draining ground water to draining cash.
- In Napa, a once beautiful garden community cycles through community managers in search of a sorceress who can transform decades of unpainted wood siding into...well actually they can't agree on that.
- In Marin, three communities from three different management companies within a stone's throw of each other all sag against termite and rot compromised framing. All three perch grandly, on stunningly beautiful, and impossibly inaccessible cliffs, making maintenance - no less reconstruction - prohibitively costly.
What do all of these communities have in common? Besides the obvious sagging plaster, rot, rust, and dangerously ill-advised attempted fixes - they simply don't have the capital to correctly solve the problems at hand. Each one would be incapable of fully resolving even one category of blight without raising money - no less the queue of repairs looming on the near horizon. But don't imagine that these communities are slum-bound ghetto dives because they aren't. Retired bankers, iPhone toting hipsters, and stay-at-home moms all call these buildings home. So what's going on? Why are otherwise responsible homeowners allowing their homes to spiral into disrepair?
As I talk to these HOAs' managers and directors a disconnect soon becomes evident - but exactly what elements are disconnected is less discernible.
You know the process:
The clubhouse falls into disrepair, and then disuse, and then is locked for good.
The landscaping is simplified.
The architectural elements that made the community unique begin to rot or rust - and are eliminated in the pre-paint repair cycle because it's just too expensive to replace them.
Sidewalks heave and cracks are ground to oblivion because replacement and tree root abatement is too expensive.
The community's charm is slowly eliminated from the budget.
At risk of oversimplification, the problem is - wait for it - that owners have not set aside enough money to adequately maintain the structures.
Feeling a bit underwhelmed?
Like I said - it seems simple, and is - sort of. Insurance, management, landscaping, pool maintenance and probably all other costs have incrementally risen over the years and, predictably, building maintenance followed the same trend. Costs climbed, in some degree in-sync with inflation, and some HOAs matched the increase with higher dues; others inexplicably did not. But that's not really the point...
Here's the point - Building maintenance at some point suddenly leaped off the chart and began a steep unanticipated climb. Not unlike the fine print clouding a "No Doc" loan's balloon payment, HOA's have had a balloon expense hiding within their walls and roofs. Yet, unlike a cheap mortgage, the lurking balloon wasn't in the fine print. I will talk about this more in "The 50 Year Problem," and "Why Did They Build These Buildings So Crummy." Suffice to say, reserves imagined to offset these balloon expenses are mysteriously...missing.
Go ahead and point fingers. It's cathartic to a degree to blame previous boards of directors, the previous management company, or the reserve fund analyst; but in all honesty, it's hard to blame anyone directly. Boards do make bad decisions, managers do give bad advice, and mandatory reserve funding has draped the industry in a false sense of security. But can an individual or entity really be blamed? Not really.
In any one HOA, how many individual humans have shared the responsibility to discern the future needs of this multi-million-dollar structure, form a plan of action, and then pass along the vision to an unpaid, untrained, ever changing set of director/owners? The fact that any effective business is ever carried out by an HOA BOD is a marvel of mankind's ability to communicate and reason. The many stable and solvent HOAs out there deserve our admiration and praise.
But there are hundreds of communities without options. And there are many more on the horizon. Their fate will affect the whole.
In the next few Newsletters, I will transition from discouraging current events to some historical reasons for the bad news. And then, we'll start looking for that silver lining - or if necessary, get out some magic markers and start tracing one ourselves.