Crowdfunding Condominium Renovations

shutterstock_crowdfunding-1280x960(Summary; crowdfunding condominium renovations with emerging platforms can lead to substantial savings when proper engineering assurance is also performed.  Contact us for more information)

The 20/10 Rule

After the first 20 years, a condominium building may see a major system repair every 10 years for the life of the building.  After year 20, a building may start to see increased maintenance costs on major systems.   They start as small problems such as a roof leak, a broken water valve,  some wood rot under a window sill, a blown compressor, etc.  As the frequency and severity of the problems increase, the cost of repair and insurance claims exceeds the price of replacing the system.

The Funding Paradox

Once a system enters a mode of cascading failures, a major system renovation needs to happen immediately.  The cascading failures also happen in the financial side: an insurance claim triggers higher premiums, a water damage disclosure devalues real property, frequent shutdowns cause resident complaints, and the cost of constant repairs is progressively more significant.

The backlash from enforcing special assessments on residents can be severe.  People are willing to pay their fair share, but it is not fair to ask a current resident to subsidize past residents who enjoyed a trouble-free system.  Nor is it fair to ask them to subsidize future residents who will enjoy a trouble-free systems after renovation.  At this point, banks have you backed into a corner.  Bank loans must be collateralized by liens on the community cashflow, bank fees can cost between 0.5-1.5% of the cost of repair, and interest rates can average 5% (effectively doubling the price of the work over 15 years)

The cost of having the problem has a compound negative impact on the ability to fix the problem.

Crowdfunding

Humans have a remarkable ability to adapt to constraints on their environment. When money is constrained by economic factors, people are figuring out new ways to get the job done.  Today, new crowdfunding platforms are appearing for every known cause from funding start-up companies, to paying medical bills, education expenses, community coops, even public services.

Coengineers, PLLC is encouraged by what we have seen in the crowdfunding movement.  These are not banks, they are a platforms that allow a community to borrow money from themselves. Instead of a special assessment, the board “borrows” the assessed value from the residents and pays it back from the dues collected over time.

3 Benefits of Crowdfunding Condominium Renovations

1. Current residents no longer subsidize future or past residents – they can carry an interest bearing loan from the HOA.  A resident can move and still collect on the debt.

2. Loan terms are (to a large part) decided by the community, interest rate, initiation rate, assets secured, etc.

3. Money stays home instead of paying bank shareholders in a far off city – all fees, work, repairs, and repayments stay in the community.

A word of caution about crowdfunding for construction

One thing that banks and insurance companies perform very well is due diligence. Old institutions have long-term memory that enables them to know what types of investments work and what type do not.  These institutions are very familiar with construction loans and associated financial hazards.  Banks and insurance entities are vigilant in requiring a certain amount of preparation and professional documentation in place before underwriting a project. This data is matched to past data and risks are pooled and diversified.  Before a community attempts a crowd fund, they should make certain that they can effectively duplicate the technical and financial due diligence that a bank or insurance company would perform.

Further, the project MUST be insurable during and after completion in order for mortgages to remain viable.  It is essential that your insurance company accepts the conditions under which a renovation is performed.  They are already very comfortable accepting the opinions of your bank, but will they accept the vetting of the HOA Board?  Future mortgage lenders must be certain that the property was renovated to banking standards or they will not lend to future homeowners.  These are serious implication that the HOA board must be aware of.

Crowdfunding Assurance Engineering

Coengineers, PLLC specializes in representing the community’s best interest by performing the condition assessment, the reserves study, the feasibility study, the statement of work, contractor vetting, and ultimately, the maintenance plan for HOA properties attempting to crowd fund their projects.  Coengineers, PLLC has developed a set of processes that may accomplish these goals specifically in support of crowdfunding platforms.

Pillars of Engineering Assurance

The condition assessment tells the HOA exactly what the problem is and the scope of the required repair. The reserve study looks at all property systems and determines their estimating service life and scope of repair over a 30-year period.

The feasibility study will compare various options that an HOA may be considering for scope, cost, and payback.  The statement of work tells the contractor exactly what needs to be performed in contractual form.

Contractor vetting is required to make certain that the contractors’s capability and solution are consistent with the objectives of the community. It is also important to verify milestones of the project and adjudicate the release of funds to the trades for work completed.  Finally, the community needs to know the precise maintenance schedule which will ensure that the new system experiences the maximum service life.

Quality is everything

One other thing to keep in mind is that anyone can buy these notes underwritten by the HOA as long as the asset is of sufficiently high quality.  Coengineers helps to assures the quality of the asset thereby broadening the investor base. Outside investors such as area merchants, future residents, insurance companies, and even contractors may carry these notes at an interest rate that beats many long term investments.  When communities are self-supporting and the money stays home, everyone wins.

Solid value

Crowdfunding condominium renovations may be an excellent choice for some communities to bring their property up from a D grade to an A grade while saving significantly over a bank loan and without imposing a special assessment on the residents.  However, it is recommended that an engineering firm is contracted to provide project assurance that will reflect positively to future lenders, insurers, future residents, real estate values, and community resilience. Feel free to contact us at coengineers.com for more information on crowdfunding platforms and the Coengineers Crowdfunding Assurance Package of services.

Addressing Water System Failures Before They Happen

water failure

In the heyday of the real estate bubble, developers flipped tens of thousands of apartment structures into condominiums – with little regard for the condition of the potable water system. Many of these galvanized steel or early copper systems are rapidly approaching the end of their service life.  Unseen, a small leak can cause thousands of dollars of damage and a ruptured main riser can amount to millions of dollars in claims and severe hardship for the community of homeowners.

Many Factors are involved

While it may be tempting to react to failure statistics, not all water systems are equal. Water chemistry varies substantially across the country, as do workmanship and materials quality – these variables may have a greater influence on mode and consequences of the failure than the age of the system itself.  The least appropriate action may be for the insurer to put the community in an emergency situation.  Poor or rushed Homeowners Associations (HOA) decisions can end up costing everyone far more than a properly replaced system that is well planned.

Insurers must first help the community to resolve to replace their potable water system.  Then, they must encourage the community to have a comprehensive piping condition assessment overseen by a qualified engineering representative. It is essential to determine the stability of the existing system without the threat of policy cancellation. Small leaks may be tolerable as long as the possibility of a large rupture is fairly remote – they are not necessarily related conditions.  Once these probabilities are known, then good decisions regarding a replacement system can be made.

Unfortunately, The HOA board is often left with a daunting task of selecting the right technology that both heals the pain and fits the budget. All pipe renewal solutions have different risks and vulnerabilities and many HOAs can fall for a slick contractor’s peddling inferior products. Potable water is a matter than requires rational analysis.

Piping Materials:

The three main classifications of piping renewal materials on the market include epoxy liner, copper re-pipe, or a variety of plastic products.  All have vulnerabilities and limitations so it is important for the insurer to take a deep hard look at the risks while the HOA can focus on the costs.

Epoxy Pipe Liner

Epoxy pipe liner is a continuous paint-like coating that is blown through an existing pipe system that has been cleaned by an abrasive sandblasting. Epoxy has the advantage of being relatively fast and minimally invasive. The problem with epoxy is there is no certain way to know the pipe is clean on the inside and no certain way to know if the cleaning process compromises the strength of the pipe.  Finally, if we were to test the epoxy, and adhesion is shown to be poor – then what?  There is no way to remove the epoxy and breaking the continuity of the coating breaks the protection. Our research has found that an epoxy failure can very likely happen at the exact place where the pipe is already at its weakest. This does little to mitigate the peril of the multi-million dollar rupture claim.  While we are confident that epoxy may be applied correctly, we are not confident the epoxy would be risk/cost competitive over a far superior re-pipe.

New Copper Re-pipe:

Copper is a very familiar to most people from its use in the penny.  The tarnish that forms on copper actually protects it from corrosion. Under the right conditions, a 50-year service life is a reasonable expectation if that tarnish coat is not disrupted. Copper plumbing has been extensively studied and many professional codes and standards apply to its use. Consequently, many copper failures can be traced directly back as failures to apply these standards; improper design, poor workmanship, aggressive water chemistry, or inferior materials, etc. All are known perils, which may be avoided or mitigated with the assistance of a good technical advisor representing the best interest of the owners.

Cross Linked Polyethylene (PEX)

PEX is a white or colored plastic that is fairly stiff but also quite flexible.  A slightly weaker form is commonly used in plastic milk jugs. PEX has been used in the US for 20-25 years, and has demonstrated an excellent track record in millions of installations.  PEX is easy to install, relatively low cost, and enjoys broad market acceptance.   PEX has two main problems – both of which are avoidable.  Lawsuits have been filed over failures due to ‘dezincification’ of low cost brass fittings.  It is extremely important to avoid some sources of fittings with high zinc composition in alloy.  Lawsuits have also been filed over the leaching of chemical compounds from types A and C PEX – the use of Type B PEX largely eliminates this problem.   Again, a good owner’s representative can help navigate this landscape. Many other plastic piping materials exist, but not without similar controversies.

New Polypropylene Pipe

A newcomer to the pipe materials selection is polypropylene – polypropylene is a common recyclable material with important uses in medical and food grade applications. Polypropylene is a very simple molecule of carbon and hydrogen – nothing bad goes in so nothing bad can leach out.  While new to the US, we have traced its use in Europe to at least 30 years back with a very low failure incident rate. Polypropylene has excellent thermal and acoustic properties and is widely considered the most environmentally friendly piping material available.  Some disadvantages include special fusing irons and specially trained installers are required.

Addressing Water System Failures Before They Happen

Water system renewal can be a confusing process – and certainly not a hands-off affair for the insurer.  A qualified owner’s representative to help navigate the landscape of technologies and contractors who sell them.  When the project is complete, the representative can help petition the underwriter, the financial industry, and the real estate market for adjustments that reflect the value of your renewed new system.   The technical representative can help eliminate engineering and construction risks without interfering with the normal dynamics of a wise and proactive homeowners association.