Predicting the Future of Community Associations

Published in the ECHO Journal, August 2008

An Outline for the Next 50 Years

Introduction

Co-operative, private maintenance of commonly-owned land and facilities in small villages and towns has been around for hundreds, probably thousands of years. But although early examples can be found, such forms of ownership have only been regulated by statute for a few decades in California. The first Condominium Act was passed in 1963. The Davis-Stirling Act, in use today, was enacted in 1985. We began seeing condominiums massed produced for California consumers in the early Sixties when the McKeon Corporation started building their ubiquitous fourplex buildings throughout California.[1]          

Our state’s experience with this form of housing dates back less than 50 years and with so little history to go on, predicting the future requires a lot of speculation. We do have some data, however, and from those sources we can piece together a picture of how community associations might evolve over the next half century. Some of this comes from other writer’s accounts, and some from our own experience. We tried to make practical predictions, based on present-day examples; so you won’t see anything about future moon condos here!

Instead, we look at some practical concerns. First and foremost, community associations are aging. The earliest, built in the Sixties, are now approaching 40 years old. 20 and 30 year-old buildings built as condos are not unusual, and then we have to consider all of the old apartment buildings that have been converted to condos. These buildings are wearing out and must rely on the owners to fund their restoration. Second, neighborhoods and whole cities are changing and will change a lot more in the next 50 years. Projects that were appropriate 30 and 40 years ago will become space and energy inefficient, as well as functionally obsolete and redevelopment of these projects will be necessary. Finally new methods of constructing buildings, organizing common elements, funding and managing community associations will evolve from what we see today.

The future of community associations is and should be of concern to every professional in the association business and every owner of a real estate interest in common with other owners. For one thing a professional’s livelihood depends on his or her ability to predict the future direction of an industry. For another, owners must be able to do financial planning. Finally, governments need to solve many housing problems that arise from an increasing population and serious energy concerns. Anyway, with all of those concerns and caveats in mind, let’s take a look at the next 50 years!

Redevelopment

Older community associations will be used to improve the suburbs by recycling open space, or an entire project, into higher density projects. How will that happen? Ask yourself this question: What is the service life of an entire condominium project? 50 years? 100 years? It’s not just the life of the physical components of the building. It’s also the life of the funding plan that supports it and the market in which it exists. All three must remain viable for the project to survive. But what are the chances that the buildings, the financing and the neighborhood will be viable and valuable indefinitely? Most neighborhoods underwent significant economic change during the last century. Some improved, but many got worse. We’ve written reams about the failure of funding plans and to think that a community association will always be able to rely on its members for funding is naïve. For one reason or another, all community associations will become obsolete.

But the law as written perpetuates a theory of “unlimited” useful life; i.e., no obsolescence. In California we must include in a reserve budget everything that has a service life of 30 years or less, and if so, how do we then deal with economic or physical obsolescence? The answer is obvious: recycle it. Owners can approve a partition (sale) of the property by an appropriate vote either under the governing documents or by statute; so redevelopment is largely market-driven. Owners who perceive that their property is worth more redeveloped will begin to search for ways to sell off the entire project.

We will see more pressure on old projects to redevelop as the urban core extends outward and upward to accommodate larger populations in and around existing cities. Urban density will reach 50-60 stories in San Francisco, San Jose, and Oakland. Walnut Creek will see high-rise construction reach 20-30 stories, as will Pleasanton and San Mateo. Environment and energy concerns as well as natural boundaries will prevent further development of outlying or agricultural lands. People will not be able to commute 50 miles to their jobs.

Density will increase appreciably in present urban cores and former suburban locations like Oakland, Walnut Creek, Fremont, San Mateo, and San Jose in concert with, and clustered around, expansions of rapid and mass transit options in those locations. This will be a response to European-style gasoline prices and environmental concerns that will make commuting from present-day suburban neighborhoods prohibitively expensive and socially unacceptable. Transit will include small electric vehicles that can be checked out when needed.

Architectural Changes

The generations of low-rise condo structures built during the last 50 years were constructed primarily of wood—wood framing, roofing, siding, window frames and staircases. Condominium complexes composed mostly of wood will reach obsolescence faster than buildings with stucco or glass skins. Similarly, steel and glass high-rise condominiums will survive longer not only because of the construction materials used, but also because the owners have higher incomes, and because with higher densities the cost of maintaining the structure is shared by more owners.

Construction materials will evolve from wood to synthetics, steel, glass, and masonry—all of which will last longer and require less maintenance than wood. More building components will be manufactured of synthetics that look and function like wood. Vinyl windows, concrete tile roofs, fiber cement siding and both steel and composite framing are all products we have now. This will be dictated not only by the obvious longevity benefits but also by environmental and energy concerns.

Structures will be taller and also larger overall as economies of scale begin to pay off. Developers will build more homes on the same parcel of land than they do now because density will dictate more volume to preserve the few remaining open spaces. This will drive the move to redevelop the low-rise, low-density wood-frame condominium projects that presently are the dominant form of attached housing in California.

Vertical steel, glass and concrete cities will replace horizontal ones. These will include mixed-use structures with not only private common areas, but also public common areas and public services mixed in with private services as well. Residences, commercial spaces, government facilities will coexist in the same shell. This multi-use mix will require carefully drafted governing documents to accommodate the needs of these diverse constituencies.

New Methods of Funding

These large expensive buildings will require reliable sources of funding to support them. Today’s condos require consensus among owners to fund critical building maintenance properly. Lack of that consensus will financially cripple those condo associations that do not have the ability to assess without restrictions. There will have to be changes in the assessment rules if large multi-family, multi-use structures are to survive in the future.

By law in California, owners of units in common interest developments cannot be assessed beyond a statutory maximum. Single-family homeowners have no such cap on maintenance expenses; good judgment, expertise, and a desire to maintain value drive those owners to pay the actual cost of maintaining their properties. Necessary maintenance is not deferred. What would happen if we eliminated the statutory caps on assessments in common interest developments and allowed owners to be assessed the actual cost of maintaining the common property? Many owners would initially abandon their properties, but eventually those who could afford to maintain them properly would occupy them or they would be sold and redeveloped.

Different methods of collecting assessments will evolve from the regular monthly assessment we see today. Deferred assessments collected out of escrow at the time of sale will encourage greater funding of reserves since the non-operating portion of assessments, those intended to fund reserves, could be paid from equity instead of income. Developers will couple these deferred reserve assessments with a partial developer contribution to reserves when the project is new to limit monthly assessment payments to operating expenses only, qualifying more potential buyers.

With some help from the Legislature, quasi-governmental special districts or Maintenance Trusts could be used to maintain large portions of projects, which would be funded by a tax rather than a voluntary assessment. This type of treatment could lead to assessments that are largely tax-deductible.

Less Litigation

To avoid litigation over construction or reserve funding issues and to encourage investment in these large projects, developers will create “hybrid” or dual-ownership buildings by separating ownership of common areas from the separate interests. The common area will be owned by investors. The investors will maintain the common areas in perpetuity. The developer would be responsible to the investors for construction issues. The community association would enforce the governing documents and deal with all other non-building related issues.

In essence, the developer or its designee investors will be a landlord who “leases” the common area to the individual owners or to a residence association. All building-related issues will be the responsibility of the “landlord” as they are in commercial buildings today. The community association will not be involved. This arrangement will eliminate the problem of underfunded reserve accounts because necessary maintenance will be performed as needed and funded by the investors from the “lease” payments of owners. Equity appreciation will be shared between the investor group and the owners on the basis of a pre-determined formula, giving incentive to both groups to maintain the building properly. Disputes over building maintenance or services will be referred to an outside mediator/arbitrator for resolution.

Member Discipline

Community associations, with many more owners living in high-density buildings, will create ombudsperson-judge positions in-house to resolve issues among neighbors and to enforce the rules. These positions will derive their authority from contractual arbitration provisions written into all governing documents and their rulings will be enforced by a simple application to local courts. 

Management

Governing documents will be maintained on the Internet with online legal and accounting advice in widespread use along with other management services, especially for smaller associations without in-house management staffs. College degrees in community property management will be required of managers of these large complexes. The curriculum will include maintenance, information technology, accounting, psychology and law. Online management “packages” will be widely available which will include financial, legal and maintenance services from consortiums of professionals.

We hope you enjoyed this glimpse into the future of common interest developments. Who knows? We could be right!