Catastrophic Condo Failure Is Not Caveat Emptor – Buyer Beware

The Bellavera Green Condo, Leduc Alberta, has suffered a massive, catastrophic, failure requiring all 150 of the residents (85 units) to vacate the premises. The reasons: code-failing fire alarm system, missing or damaged firewalls, condemned exterior staircase, non-sustained heat and electric, a second phase abandoned – unsafe and unsecured, and inability for emergency vehicles to access the building.

It is unclear who has title to the units (it’s not clear if the developer handed over title to occupied units), who to go after for costs, and the developer – Kevyn Frederick – has conveniently disappeared. As with catastrophic failures of this type, residents who have mortgages will remain responsible for their payments even if they can never return to their units, or have other costs until such time they could reside again at the Bellavera Green.

In all, 150 people (and those that rely upon them) have suffered grievous fiscal harm due to the mismanagement and greed of yet another developer. And I lay the blame clearly and solely at the foot of the developer and none others. Developers have full and final control over the building and plans. It is their choice to follow legislation, or to cut corners and ignore building codes. The rest of the infrastructure – including building inspectors – is just there to try to catch errors. But these errors are not there because they haven’t been caught; they are there at the failure of the developer. Trying to pass responsibility off on inspectors is a lot like saying “you didn’t catch me, so I’m innocent.”

That’s why fools who imply that the Bellavera Green owners who put down money and purchased mortgages have a responsibility to the failure of the condominium because of “Caveat Emptor” – or “if you were stupid enough to buy into this building then too bad for you” are pathetic and dim-witted.

The whole issue of Caveat Emptor, for a situation like this, was thrown out with Supreme Court of Canada judgement of Winnipeg Condominium Corporation No. 36 v. Bird Construction Co [1995] 1 S.V.R. 85, January 26 1995 (further discussion here):

First, it is reasonably foreseeable to contractors that, if they design or construct a building negligently and if that building contains latent defects as a result of that negligence, [purchasers] of the building may suffer personal injury or damage to other property when those defects manifest themselves.

In this case, the act of negligence: that it fails to meet code, and there is a real and true concern over devastating fire; so that personal injury or damage: the effects of such fire, that –

The reasonable likelihood that a defect in a building will cause injury to its inhabitants is also sufficient to ground a contractor’s duty in tort to subsequent purchasers of the building for the cost of repairing the defect if that defect is discovered prior to any injury and if it poses a real and substantial danger to the inhabitants of the building.

And the ruling seems to support my thought that the sole responsibility for catastrophic failures like this lay solely in the hands of the developer:

Apart from the logical force of holding contractors liable for the cost of repair of dangerous defects, a strong underlying policy justification also exists for imposing liability in these cases.  Maintaining a bar against recoverability for the cost of repair of dangerous defects provides no incentive for plaintiffs to mitigate potential losses and tends to encourage economically inefficient behaviour.  Allowing recovery against contractors in tort for the cost of repair of dangerous defects thus serves an important preventative function by encouraging socially responsible behaviour.

In the end, the owners are in for a long term amount of lost monies and (more importantly) time that will be required in moving forward with their lives. It’s a sad thing, and the province needs to put better protection in place to help stave off this type of abuse by developers in the future.

Multi-Housing Development OK If Not For The Poor

Residents of the Woodbridge HOA in Sachse Texas have begun to complain that a proposed low-income block will mar their community with lowered property values, an overloaded school system, and a general discouragement of new business.

Sachse is an affluent neighborhood – only 6.5% of the community lives below the poverty level compared to a state average of 17.2%, and their median household income is 70% higher than the state average.

For a zip code that has over 21,500 residents – adding some 350 people (100 low-cost rental units x 3.46 average household size for the region) – increasing the population by 1.6% of low income individuals won’t have any substantial change to the area. Indeed, this might raise the total below poverty individuals to 1750 (including what the residents claim will be 200 new children) or so individuals in the whole community.

Indeed, at that level of “new poor”, along with the location of area – which has been zoned for apartments and commercial development for 10 years – is relatively isolated from the single detached units (you don’t have to drive through the neighbourhood to get to the proposed development), no traffic impact. Indeed – most residents could continue living their lives without ever seeing an actual low-income resident ever step foot on the sidewalk in front of their house. (Though watch out – Google street view shows a suspiciously low income looking van for sale in the Woodbridge community, along with a lot of generic low-cost, 10 year old appearing, cars.)

So – (1) the amount of development, location, and growth on the community should have negligible impact on property values, (2) the area is 70% more affluent than the region so their already have enough of a school tax base to cover new students, and (3) apparently low-income residents drive away discourages new business. That’s so silly I don’t have a better remark.

In a country that welcomed immigrants with the words “Give me your tired, your poor” – they should update it with the tagline “as long as they live far away from me”.

Little Sympathy for Residence Fighting Development for Mentally Challenged Homeless

As a start, I have a condo that is 2 block from a stroll for prostitutes, 4 blocks (the other way) to a homeless shelter, and there’s a long term facility for homeless going up as well within that distance. And I’m ok with that.

Hang with me then, when I indicate little patience for residence who fight the inclusion of a shelter for mentally challenged homeless in their community – and let’s be clear – Astoria, New York, is a large community. Even in Council Member Peter Vallone Jr. challenge to the development he indicates that there are at least 8350 residence within one block. The shelter will house 50. That’s a .006% population increase. It’s nothing.

Having .006% of your population requiring special needs because of being mentally challenged should be considered part of your civic and community based care and support network. It should be something the community says “we live in our community, and every day our community supports and assists people a little less fortunate”. Civic pride, not civic shame.

Toronto and Singapore Experience the Shoebox Condo

Some trends cover the world, but the underlying reasons may be different. For example, Singapore and Toronto both are experiencing a surge in shoebox condos (500 sqf or less) but for significantly different reasons.

With Singapore, prices on condominiums are averaging $1185USD/sqf – putting the price of anything lager than shoebox well outside the financial means of most local residents.

In Toronto, price is not nearly as sensitive (running about $630USD/sqf), but tax legislation is pushing units to list at $390k or less or suffer, and one bedroom condominiums now make up almost 60% of new construction. This forces smaller shoebox units to be built in order help create consumer choice in a market that prefers one bedroom condominiums.

In both cases though – Singapore and Toronto are both seeing massive preconstruction sales to investors and foreign buyers. This is likely a strong incentive to build shoebox condominiums, as they become more “affordable investments” and require smaller capital down. If that’s the case, shoebox condominiums are creating a new form of downtown transient population – encouraging renters to populate the cores of each city.

I live in an 1150 sqf 2 bedroom condo – with wife and 2 cats. At 500 sqf, one of those would have to go! (I love you hunny!)

$340,000 Garage – Seriously, That’s Just For a Garage

Just a few days ago I blogged about a company in the US building storage space condominiums. These units are not zoned for human habitation and are intended as owned storage on Units range up to 1250 sq.ft. and cost about $82,000. I though it was a fabulous idea – a good use of condominium controlled development, it meets a need, and reasonably priced.

They have been outdone.

A luxury car garage – 34 units total – called The Dens – has been recently been completed near Calgary, Alberta, Canada. The kicker – a 1600 sq.ft. garage was purchased for $340,000.

In other news, reported by the Globe and Mail today, income inequality is rising quickly in Canada.

Municipalities Should Never Be Residential Condominium Developers

They were teased by the success of small scale urban development projects that successfully helped their community. But when the Borough of Collingswood NJ decided on being the developer of their own downtown condominium project, they took on a multi-year headache now culminating in over 8 million in debt for the municipality.

The 120 residential units, the commercial units, and the parking facilities of The Lumberyard Condos were the cornerstone plan in revitalizing their municipality. An 18 million loan to the municipality started the project in 2006. Now, 5 years later and with only 2 of the 3 phases completed, Collingswood will issue a six million ordinance to help cover the remaining 8.3 million on the loan and now focus on renting the remaining 14 (of 24 units in phase 2) to help pay down the remainder.

In March, the Mayor James Maley indicated the project was picking up, and 8 of the 24 units had been sold. It appears that things weren’t looking up that much, and only 2 more units sold in the last 6 months.

Development risks should really be left to developers – and not to municipalities where the cost to citizens, as in this case, is expensive against both tax revenue and in the energy expended by the municipality in working with this long losing project.

I agree that municipalities should take a very active role in wooing developers if they feel a population “mini-boom” is required to keep their city alive. I also believe in the municipality, in hand with the wooing, set out strict development requirements that would have generated a project that meets their vision and goals.

But they should always refrain from being the actual developer.

Recycling Facilities in New Condominiums Should Be Mandatory

As the president of a 40 year old 100 unit condominium complex I was completely stymied over the ineffectiveness of our recycling program.

Because of limitations on our trash compactor, along with the simple desire to offer recycling separation and pickup to over 250 residents, we converted one of the large rooms entering into the underground parkade into a separation station. We hoped to reduce our trash output (reduce the number of pickups) and become more environmentally responsible.

Unfortunately the location proved troublesome. It wasn’t attached to a trash room (each floor has a garbage shoot) which meant it was easier for owners to still dump recyclable material in the shoot. The room was very difficult for the recycling company to access – they needed access to the garage, and then building keys, along with extra room to maneuver their trailers in and out of a parkade. Without monitoring, the bins sitting right along a major owner though fare from the garage turned it into a dumping ground for garbage as well.

We pulled the program from the unit after six months.

As such, I’m all in favour of building regulations for new multi-unit residences, just like requiring things like dedicated visitor parking and handicap access, have a requirement to a recycling separation room (or rooms) that are easily accessed from a road, or otherwise build separation facilities into the functionality of the building. This should be mandated. Required. Legislated.

Sure – developers will scream that this will only add to the cost of the units they sell, but it likely will benefit the residence with lower trash removal costs and compliance with municipal recycling targets. Retrofitting recycling space is extremely difficult (or in our case impossible). It has to be included up front with all new buildings.

For those that don’t have recycling currently, many municipalities will offer free consulting and even materials (bins, notices, tenant communication) to get your condominium recycling.

GE Capital Retooling Real Estate Portfolio

It looks like General Electric Co. in the US has started to look again at retooling it’s real estate lending portfolio after losing over a billion dollars in the last year or so with their GE Capital sibling.

Over the last three years there have not only been significant losses from quarter to quarter for GE Capital, but the entire portfolio was shrunk 30% since 2008. There current $67.6 billion portfolio will be further shrunk to about $50 billion, down almost half from the $95 billion of 2008.

In the 2000 – 2007 economic boon GE Capital class lenders (vs. banks and other options) accounted for up to 10% of the loans, and they specialized in risky “value-add” developments (value add developments tend to focus on construction, improvement or rehabilitation of property – meaning the loans that require additional, and successful, development before reaching the value of the loan). In many cases during the crash, the development of property for these value-add loans failed to reach the level of the loan. Hence the significant losses and GE Capital removing itself from the lending market.

Their toe back in the water (as described by GE Capital spokesman John Oliver) is really that. They recently did an $85.5 million dollar placement.

What does this mean for the average US home owner or purchaser – not a whole lot immediately, but it may indicate that after three years of a very tight lending environment that some companies are seeing a possible (though with extensive due diligence) opportunity to generate wealth in the new-construction, improvement or rehabilitation of real estate. If that trend follows, that would mean we are approaching a nice bottom in the real estate market for selected regions and type of real estate. But at least new lending facilities are opening up period.

The US housing situation has taken a battering, and if I had my thoughts, I wouldn’t think that we’re going to see an upside any time soon. Even if the US government can figure itself out of the current budget fiasco, the makings of the fiasco still loom, and the economy hasn’t figured out what to do with the current unemployed, much less grow at a rate that can absorb all the new people entering into the workforce. To me there is still a very solid downward pressure on wage and benefits that will continue for many years, perhaps a good decade or more.

But if we can see some new growth for value-added development, not only may we see some pickup in the creation of new condominiums, but importantly for the US – maybe the rehabilitation of some of these monster-abandonment condos which now need significant funds to bring them to inhabitable status again.