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.

Case Study: Harrison West Tower Re-pipe

Introduction

The Harrison West Condominium Association required a re-pipe of their historic 24-floor residential tower situated in the desirable PSU area of Portland Oregon. Community Engineering Services, PLLC formed a team with engineering specialists Dan Robles, PE,  David Coles, PE, Architect Richard Bosch, AIA and a CM consultant.  Through the client’s commitment to research, analysis, and insisting upon the services of  experienced Engineers and Architects, many unique opportunities were discovered while substantial costs and risks were avoided.  The resulting renovation is now considered among the most robust in the Pacific Northwest. 

Case Study: Harrison West Tower Re-pipe

Step 1: Piping Condition Assessment

The purpose of the piping condition assessment was to determine without doubt, the actual condition of the existing piping system.  This knowledge would drive many decisions such as schedule, material, priorities, proposals, and techniques that could or could not be used when performing the repipe.  A typical Coengineers piping condition assessment may be referenced here (Assessment report)

Step 2: Material Selection Process

The HOA board was especially concerned about various piping materials and requested a review of Epoxy Liner, Copper, and various plastic products.  Epoxy was rejected (Epoxy Report), Copper was compared alternates such as PEX and Polypropylene (Tech Study Report)

Step 3: Contractor RFI/RFP process

RFI process sought to find the most qualified mechanical services  firms who would be willing to undertake such a project.  For each, we requested a rough estimate for performing the job in each of three materials; Copper, Copper/PEX, and Polypropylene. The Board selected Polypropylene. The RFI approached a dozen qualified firms in the Portland Area. 

Step 4: Contractor RFP process

Of the five top candidates from the RFI process, three were selected for the RFP process. Polypropylene (PP-R) was somewhat unfamiliar for many contractors and represented many unknowns.  Ultimately, the board selected McKinstry, Inc due to their excellent reputation and prior experience in PP-R.  The polypropylene piping material and complete plumbing system was supplied by Aquatherm.  

Step 5: Detailed Statement of Work  

As the RFP prices and ideas came in, it was obvious that a different approach to re-piping the building was needed – it would not be possible to rely on the plumbers  for a solution. We consulted with Duane Tilden, P. Eng., a member of the Coengineers network, who has re-piped over 40 structures of this type.  His recommendation, based on a similar re-pipe he had performed in Canada, was to send the main risers up through the refuse disposal closet   This suggestion was a perfect fit for the Harrison West Project and ultimately defined the strategy for this re-pipe.  

Step 6: Re-piping The Harrison West.   

Steps HW Re-Pipe

Renderings by Richard Bosch Architecture, Portland OR

plan schematic
Plan Schematic (click to enlarge) c. Richard Bosch, AIA

Conclusion;

The Harrison West Condominium Association received a ultra-clean, high reliability potable water system using non-metallic components covered by an unprecedented 10-year warranty and $15M manufacturers insurance policy.  This project is unique in many important technical areas and will long be considered a landmark re-pipe in the engineering profession.  The price of the project is scheduled to compete with copper while the carbon footprint (over copper mining, smelting, transportation, and recycling) is dramatically lower.  This unique high-profile re-pipe will have a direct and positive impact on home values for this community.

5 Questions About Reserve Fund Studies

EngineerThe Reserve Study is one of the most important documents that a shared asset community can own. Coengineers, PLLC complies with the more stringent standard of the Canadian Reserve Study Act combined with the ASTM E2018-08 standard for building condition assessments where practical.   This standard of care provides the Board, The Management Company, and the community of owners with the highest level of legal and technical resilience in the industry.  Don’t sell your community short on  reserve fund analysis. No other purchase can pay for itself in multiples as a rock solid reserve study.

Adapted from www.mayflower.ca  

Who Is Allowed to Prepare the Reserve Fund Study cfl Jersey sizing (Canada)?

The Regulations to the Condominium Act 1998 (Canada) note who is permitted:

  • Members of the Appraisal Institute of Canada
  • Persons who hold a certificate of practice within the meaning of the Architects Act
  • Certified Engineering Technologists
  • Architectural Technologists
  • Holders of a CRP (RS – USA) designation
  • Persons who hold a certificate of authorization within the meaning of the Professional Engineers Act
  • Quantity Surveyors
  • Graduates Polytechnic University with a Bachelor of Technology new  (Architectural Science) Building Science or Architecture option.

Notwithstanding the above, there are regulations on who cannot prepare the Study which include members of the Board, the condominium’s property manager, certain relatives of Board members, an owner or a resident in the-condominium. In addition, the person/company being considered cannot have any direct or indirect interest in a contract or proposed contract with any Board member outside of his/her capacity as a Board member.

Aside from professional credentials, you want someone who has demonstrated experience with condominiums. Notwithstanding the Study being a budget document, it is also a technical report that involves the review of architectural and engineering drawings and the visual inspection of common elements. A trained eye can identify building problems for which repair costs can be included in the Study. In addition, much of the future Reserve Fund expenditures will be due to building envelope (roofing, windows, exterior cladding) and structural restoration (parking garages, balconies). These costs are often very site dependent for which “costing manuals” are of little use. Companies that have designed and administered these types of rehabilitation projects will be better suited to provide budgets for similar future work that the Corporation may be facing.

The regulations to the Condominium Act stipulate the minimum liability insurance requirements; $1,000,000.

What Information Does the HOA Need to Provide?

Once you have hired a consultant, he/she will require information about the condominium corporation. This will include the following:

  • As-built drawings and specifications.
  • The Declaration and Description.
  • Reciprocal cost sharing agreements.
  • Previous reserve fund studies.
  • The most recent audited financial statements.
  • What the current annual contribution to the Reserve Fund is.
  • Repairs or replacements to the common elements that have already been completed and when. Similarly, scheduled future work needs to be accounted for.
  • A summary of problems being encountered by the Corporation that should be reviewed. As an example, water penetration concerns.

What Is The Process?

The process is as follows:

  • The consultant is provided the above information. One of the most important are the drawings. They will be reviewed prior to visiting the site in order for the consultant to become familiar with the overall design and construction schemes.
  • Site inspection. In order to have an understanding on the current condition of the common elements, visual inspections are undertaken. Problem areas noted above can be reviewed. After the first study, the next study update can be completed without a site inspection. The next update must include a site inspection.
  • The report is then prepared (see next question). The drawings are used to “take-off” quantities such as roofing, exterior wall cladding, asphalt, hallway finishes etc that will assist in preparing the replacement/repair cost budgets. It is recommended that a draft report should be submitted in order for the Board and Property Manager to review it prior to it being finalized. The consultant should be available to attend a meeting to review the report.
  • Upon receiving direction from the Board of Directors, the Reserve Fund Study is finalized and submitted.

What Is The Report Format?

Each consultant will have a different format, but in general, the Reserve Fund Study will contain a Physical and Financial Analysis:

  • Background Information about the Corporation in general; where it is, its age, a general description of the property as a whole.
  • Inspection Report. Based upon the results of the site inspection, the report will provide an itemized overview description of the major common elements. This will include general condition, the need and timing for remedial work or replacement and any other information that the Board should be aware of.
  • Information Tables. There is typically a table that summarizes the common elements in terms of current age, life expectancy, remaining service life and current and future cost budgets.
  • Expenditure Tables. The data from the Information Tables is summarized to show in a tabular format when the itemized common element repair/replacements are estimated to take place. For each year, these expenditures are summed. The annual projections must be a minimum of 30 years commencing in the year the Study (and updates) is prepared.
  • Cash Flow Tables. Based upon the estimated expenditures, different contribution plans can be provided. Often, one plan includes the contribution level currently being used as a form of comparison to other scenarios.

What is the Funding Plan?

As part of the Financial Analysis, the study must in recommended funding plan projected over 30 years from the date of the study. The plan must show:

  • The estimated cost of major repairs and replacements based upon current costs.
  • The same costs adjusted to account for an assumed inflation rate. The inflation rate must be stated in the study.
  • The opening balance of the reserve fund.
  • The recommended amount of contributions to the reserve fund determined on a cash flow basis that are required to offset adequately the expected cost in the year of the expected major repair or replacement common elements and assets.
  • An estimate of the interest earned on the reserve fund contributions based upon an assumed interest The study shall state the assumed interest rate. The Condominium Act requires that interest generated by the Reserve Fund is reinvested into the Fund.
  • The percentage increase in annual contributions to the reserve fund for each year of the 30 year study.
  • The estimated closing balance of the reserve fund for each year.

Service Life of Building Components

1495721_0The standard reference for service life of building components such as HVAC systems, Plumbing, air handlers, Digital Controls, and elevators, etc. may come from many different reference books whose authors have deduced, observed, or tested a sample of similar components to produce a “mean” service life.  It is unlikely that any single author has lived long enough to test each sample in service, so some assumptions need to be made when arriving at these estimates.

The “mean” is a similar number to an “average” and represents the number of years at which half of the sample will have failed.  The assumption is that the failures occur on a perfect “bell curve”.  A bell curve is a way to describe a symmetrical pattern where the first sample to fail and the last to fail are equal distance from the “mean”.

However, the likelihood of all components failing at the exact same time is very slim.   On the other hand, the likelihood that you want to replace worn out components all at the same time is very high.  Herein lies the dilemma for the building maintenance staff.

To make matters worse, there are many other factors that will impact service life of a system and its components including improper maintenance, variable duty loads, high-cycling, abuse, neglect, proper adjustment, etc.

For example; a college dormitory may have higher loads in the cooler months than in the warmer months when school is out. Commercial buildings are subject to internal heat loads from computers and machinery. Residences are subject to internal moisture from showers, dishwasher, and condensation, etc.  Each condition has a different impact on the service life of the components.

Many facilities have highly capable maintenance staff. Only they can, and should, make a final determination when a component or system should be replaced.  The owner is always in a better position to compare maintenance costs with replacement costs in determining when a component should be replaced.

From an engineering point of view, a major remodel of any building is best conducted simultaneously among several systems when the building is unoccupied. Workers generate disruption, dust, downtime, and operational hazards – it is always best to do as much remodeling as possible at the same time.

A major remodel is generally due in 20 years increments.  20 years coincides with mean mechanical limits of things like seals and bearings and fan blades and valves.  The 20 year mark also coincides with technological advances for systems such as digital HVAC Control Systems, elevator switches and controls,  lighting system or lighting technologies, etc.

In addition, 20 years also coincides with the time after which many manufacturers will no longer support older equipment with OEM spare parts or service agreements.  Finally, after 20 years of service, depreciation schedules, insurance policies, and integration with new  components further diminish the practical service life of the component.

For these reasons many Property Condition Assessments will recommend further analysis to mitigate immediate building needs, a sturdy maintenance plan to rebuild or replace sub-components of major systems, and a well-planned major remodel at 20 years, 40, years, 60 years, etc.  We can debate service life of a HVAC compressor all day long, but the most practical way to own a building is with proactive maintenance and periodic major remodeling.

Blow-in Epoxy Pipe Liner

Summary: Epoxy is an amazing substance when applied correctly. But what if it is not?

Epoxy is a magnificent substance used in many important applications where strength, hardness, moisture protection and strong adhesion are a requirement. Epoxy coatings are used to protect industrial applications from factory floors to reinforcement bar embedded in Al Kaline Jerseys concrete. When applied correctly to a strong surface, few coatings are as tough as epoxy.

Sample_set_epoxy_FailRecently, epoxy manufacturers have developed a lining process to coat the inside of an old potable water system with epoxy. The blow-in epoxy pipe liner method is touted as a fast, 60 year, non-invasive, and inexpensive alternative to re-piping a whole building. However, when applied incorrectly, epoxy coatings can create a dangerous sense of false security especially where hidden from view such as the internal surface of a pipe.

Many blow-in epoxy pipe liner failures are appearing in the field where litigation is often protected by gag orders thereby never reaching the public domain. This document identifies a wrinkle in the market that supports the rapid liner industry as well as the consequences of an unseen failure, should they occur.

This article arrives at the following conclusions:

  • The potential for epoxy liner failures may be high in galvanized steel potable water systems.
  • There is no reliable way to inspect the adhesion of epoxy inside a pipe.
  • If an adhesion failure is found, there is no practical way to repair it except re-pipe — so, why not just re-pipe?
  • Blow-in Epoxy pipe liner failures may typically occur at the precise location where the galvanized steel pipe is already at its weakest.

These observations are very important for the insurance underwriter who would otherwise classify a water system that has been repaired with epoxy liner as a “new” system. These observations are important for the forensic analyst that may determine the cause of a major water system failure on a condition other than being weakened by the epoxy coating. These observations are very important to the insurance broker who may inadvertently force a condominium community into an epoxy liner “solution” as a condition for maintaining coverage on their property.

Recommendation
Insurers should allow their condominium clients to perform a condition assessment without threat of cancellation. A small leak does not necessarily mean that the big rupture is imminent. In any case, epoxy does very little to eliminate the risk of a large rupture and possibly increases the likelihood. Then the insurance industry should work with the community to save enough money to perform a superior re-pipe with new materials such as polypropylene or copper. Together, a strong case can be made for the reserves or lending process. In the long run, a superior re-pipe may cost several times less than an epoxy “solution.”

The Vicious Circle
Something as simple as a pinhole leak can generate thousands of dollars of water damage claims. Imagine what a fracture in a main riser cascading down 10 floors of luxury condos can cost? Unfortunately, many insurance underwriters believe that after a few small water claims, the big one is imminent. This may not necessarily be the case. Yet, many a condo is put on notice that they will lose their coverage unless the whole system is immediately replaced.

Long before the first pinhole leak, insurance companies stipulate in their policies that they are not responsible for a pipe failure if the condominium board is aware of the problem and fails to take corrective action. This condition essentially removes the incentive for the condo board to perform a quantitative piping condition assessment — if they don’t know that there is a problem, they are insured. If they do know that there is a problem, they are not insured. This creates a compound moral hazard because they have no basis for saving reserve funds for a replacement.

After awhile, a few small leaks may appear leading to some minor insurance claims — this can trigger the threat of insurance cancellation for the condo. But this is the least of their worries; the condominium construction market is renowned for litigation, and many insurance companies make it very difficult or impossible for a contractor to be insured for condominium work. Condominium homeowners associations quickly learn that many contractors are simply unable or unwilling to work on condominiums.

If the homeowners association fails to save for a re-piping project, they are forced into an expensive bank loan from lenders who are equally wary of litigation … this can become a Orlando huge mess far beyond the knowledge and capability of a condo board to manage effectively. The inability to manage a project in a litigious environment leads invariably to more litigation!

Herein lies the wrinkle  in the market caused largely by the insurance industry betting against itself thereby creating a vicious circle that has very little to do with actual plumbing. In the midst of this condo / contractor / insurance / banking madness arises the epoxy liner salesman who is quick to provide everyone with exactly what they need — a cheap, fast fix.

The Epoxy Liner Process
The blow-in epoxy pipe liner process involves isolation of sections of the existing pipe, drying the pipes with hot air and then sandblasting the inside walls with pressurized air and an abrasive mineral that is supposed to remove all corrosion, leaving bare metal in order to prepare the pipe walls to accept adhesion of the epoxy liner. Once prepared, the paint-like epoxy is blown through the pipes in a liquid state using pressurized air. The epoxy is then “cured in place” either by the application of heat and/or the passage of time (pot life).

A Case Study
A reputable plumbing contractor in the Seattle Area provided samples of epoxy liner sections that were removed from at least three properties and which failed within 4-7 years of entering service.

Failure Modes
The following video demonstrates common epoxy liner failure modes correlated to available literature on epoxy liner vulnerability. The most common vulnerabilities of the blow-in epoxy pipe liner systems are associated with the planning and quality of the preparation as well as training of the applicator personnel.

 

Literature Review
Epoxy coating of steel is a widespread practice in construction and mainline water service2 3 4. While epoxy is tested safe to drinking quality standards by independent studies1 and national water quality standards6, any such “certification” is dependent upon actual adhesion to the surface of the pipe. The failure modes and vulnerabilities of epoxy are widely known and highly consistent in the progression7 of adhesion failure. It is also widely recognized that the project planning, surface preparation, and precise measurement and application of the ingredients to the substrate are the most significant variables in determining the probability of a successful epoxy coating assignment.

These factors are addressed in significant detail by the U.S. Army Corp of Engineers3, The American Water Works Association9, the American Society of Testing and Materials10, the Society of Protective Coatings, etc., who have all developed standards for the planning, preparation, measurement, and application of epoxy coatings. It can be assumed that if, and only if, these standards are followed and documented, then failures in epoxy coatings will not occur.

A comprehensive collection of tests and inspection criteria has been developed for epoxy coatings in any number of applications including internal water pipe coatings.3Such tests as the knife blade test or those tests specified in ASTM F2831 are simple, fast and conclusive.10

The Epoxy Paradox
Epoxy coating is extremely strong and adherent if, and only if, applied correctly.7 The question arises that if an application should fail a test, inspection, or in service, what is the contingency plan to remediate the flaw? How will the epoxy be removed and how will the re-coating be applied? If re-pipe is the answer, why wasn’t re-pipe considered in lieu of epoxy in the first place? If a single failure is found, what test sampling strategy must be applied to give a high likelihood that no other flaws exist in the system? Under what warranty claim would a failure be covered and to what extent will total coverage be warranted? These questions would be imminent in any litigation related to epoxy failures.5

Double Jeopardy: When an epoxy failure does happen, it is likely to occur at the location where the pipe is already at its weakest; i.e., pitted areas and threads. As such, a poorly applied epoxy liner could weaken a pipe considerably.6 The result could be a catastrophic high-volume pipe failure requiring a high insurance payout, which would not otherwise be attributed to epoxy coating.

Therefore, engineering and construction management representation and oversight can help assure that the epoxy liner material and contractors are aware of the expectation that industry standards will be applied. Independent testing should be applied as a condition of the contract bidding and warranty claims so that they may adjust their pricing to meet customer expectations. Again, epoxy is an amazing substance when applied correctly. But what if it is not?

References

1 Impact of an Epoxy Pipe Lining Material on Distribution System Water Quality by Ryan Price and supervised by Andrea M. Dietrich, PhD., Chair, Environmental Engineering, Virginia Polytechnic Institute.

2 Epoxy Adhesison Testing Sponsored by the Texas Department of Transportation.

3 PUBLIC WORKS TECHNICAL BULLETIN 420-49-35 15 June 2001 IN-SITU EPOXY COATING FOR METALLIC PIPE; Department of The Army; U.S. Army Corp or Engineers.

4 INVESTIGATION REPORT ON THE FAILURE OF MAKKAH-TAIF WATER TR.

5 Canadian law suit brought against the epoxy applicators.

6 Potable Water Pipe Condition Assessment For A High Rise Structure In The Pacific Northwest.

7 Layman’s Guide to Epoxy Paint / Coating Failures.

8 NSF/ANSI Standard 61 Drinking Water System Components.

9 AWWS C210-3; Liquid-Epoxy Coating Systems for the Interior and Exterior of Steel Water Pipelines.

10 ASTM F2831 – 12: Standard Practice for Internal Non Structural Epoxy Barrier Coating Material Used In Rehabilitation of Metallic Pressurized Piping Systems.

Disclaimer
Engineering opinions rendered by any author are solely for the purpose of education and are not engineering advice. If you use any opinion presented in this document or on the website in any way whatsoever, you agree to hold The Engineer and the website harmless of your use of those opinions.

Correcting HOA Maintenance Dysfunction

HOA Horror stories

Here’s How The Problems Start

The board of directors of a homeowner’s association is entrusted by the residents to hire a contractor to perform a complicated reconstruction project. Unfortunately, condominium board members are not very good at writing contracts or issuing requests for proposal or collecting bids. When a contractor is selected, the scope of work is often poorly established. The expectations between the community and the contractor begin to diverge. Soon, a law firm is engaged my some residents to sue the contractor for damages. After a long battle, a settlement is awarded, but it is not enough to fix the problem after expenses are paid.

A Chain Reaction

Fortunately, the contractor in the suit was insured, but this does not cover the personal, professional, and opportunity hardship of defending against the suit. The insurance company also increases the premium for coverage for condo projects. Most good contractors say, “it’s just not worth the trouble.” As the pool of available contractors dries up and the price for reconstruction increases, many condos are forced into deferring maintenance in a distorted market.

Cascading Failures

After a while, a condominium springs a few leaks in their piping system. Each leak results in a relatively small water damage claim. When the insurance company notices several claims in the same building, they begin to fear that a mainline is about to rupture next, and threaten the condominium with cancellation of their policy unless the community replaces the entire system immediately. Now the insurance industry is in a double jeopardy: they force the contractor out of the market and they force the condo out of the market to basically avoid suing themselves.

The Dysfunction Deepens

Banks will not make construction loans to condominiums that are not insured. Likewise, they will not make mortgage loans to buildings that are not insured. The property values plummet and the owners are sent under water. Soon they begin to default on the mortgages that the banks already hold. More maintenance is deferred as owners move out and renters move in. Buildings fall apart and become unsafe. Banks pull out of the market to avoid defaulting on themselves. The wider community suffers.

Correcting HOA Maintenance Dysfunction

Community Engineering Services, PLLC is currently deploying The Value Game to the condominium reconstruction market with remarkable success. The Value Game is a new class of business methods that alters the incentive structure of a distorted market so that everyone acting in their own best interest is in fact acting in the best interest of the community.

Here Is How The Value Game Is Formed

The first thing is to identify the “shared asset” in whose best interest it is for everyone to preserve. In this case, the shared asset is the physical condominium building where preservation is the context about which a community interacts.

If we look at each of the players individually, we see some consistent patterns.

  • It is obviously in the best interest of the residents to have a safe and well-maintained home.
  • It is in the best interest of the contractors to have a successful and profitable interaction with the building.
  • It is in the best interest for the Insurance industry to reduce the risks that they underwrite.
  • It is in the interest of the financial industry to loan money into a viable, organized, and disciplined community.
  • It is in the best interest of the real estate industry to represent strong values and complete insurability of assets.
  • Finally, the broader neighborhood benefits from the presence of a viable condominium community.

Project Management is Incentives Management

It is actually in everyone’s best interest that the others are successful. Once incentives can be re-aligned, the project can be managed in a manner that reinforces the community instead of tearing it apart.

Social Capital has value:

Taken together, project risk is vastly reduced and social capital is vastly increased with a simple realignment of incentives and the proper communication channels appropriately open to all. Community Engineering Services, PLLC can orchestrate a tight project by managing the schedule, the design, contracts, risk, and quality; and therefore the cost.