Berding | Weil Community Association ALERT Newsletter
Legal News and Comments for Community Association Boards and Managers Issue #32 • November 2009
Negligent Conversion?
Is the converter liable for failing to properly assemble the parts of a new community?
By Tyler P. Berding, Esq.
The Conversion Cycle.
The latest round of conversions of old apartment buildings to condominiums has come and gone. While the cycle was quick, no professional in the community association industry could have missed it. Numerous "new" communities were created from old apartment buildings during the five years of the late, great, housing boom. Why then? Because when not only is every piece of residential real estate selling as fast as it's listed, but when there is also a waiting list to buy new homes, you had to know that developers would start looking for something else to sell — perhaps something that didn't take several years to develop and build. Immediate inventory, if you will. Old apartment buildings are made to order. Add to that the fact that in such a super-heated market the value of an apartment is much greater if it can be sold as an individual parcel than if it is just one unit in a large rental complex, and you have the makings of another conversion boom.
I say "another conversion boom" because we have seen one twice before — in the early eighties and early nineties — and each time, at the tail end of an upswing in housing prices, numerous apartment complexes were converted to condominiums. The latest version just ended, and we probably will not see any further conversions for a long time. In less superheated real estate markets, buyers prefer new construction and will pay to get it until prices reach record levels and/or there is no new inventory to buy. When that happens, the housing market will temporarily support conversion activity again.
Conversions Are Not New buildings.
Conversions are not new construction — far from it. Many apartments converted to condominiums are 15 to 20 years old at the time of the conversion. Some are well-built and well maintained, but many are not. For those that bring with them to the market extensive deferred maintenance, the developer must provide either the cash or a funding plan to offset the cost of necessary repairs. The California Department of Real Estate (DRE) issues regulations that govern the sale of all residential real estate, including conversions. Since most conversions become condominiums, the DRE rules (and state statutes) regarding funding condominiums apply, and the rules require that (1) the project be self-sufficient, and (2) the prospective buyers be informed of the maintenance and repair costs that they will be expected to pay with their monthly assessments.
Without a funding plan that allows for self-sufficiency (owner assessments are the only recognized source of income for condominium associations--they do not share in city revenues) the community cannot survive. The assessments are levied on the authority of the governing documents which are also created by the developer of this new community. Also, state statutes and DRE regulations require that all prospective buyers be provided with disclosures detailing the true financial condition of the project.
Assembling a Community.
So what we have is a collection of parts for this new condominium community — the buildings, yes, but also the funding plan, the required disclosures, and the governing documents and they all must function in harmony for the project to survive as advertised. If the condition of the buildings is not offset by sufficient funds for repair, the owners will receive a flawed project, one that is not self-sufficient on the strength of the budget (and the monthly assessments) provided. These flaws are commonly the result of mistakes (we'll leave the question of intentional errors for another day) committed by the developer in putting the project together.
Berding|Weil Q&A of the Day
By Allison Andersen, Esq.
Does an individual owner have a duty to disclose the homeowner association's construction defect litigation AFTER the litigation has been resolved?
Yes. The seller should disclose the association's prior litigation because the buyer may consider that information to materially affect the value and desirability of the property. The seller should disclose the existence of the lawsuit and the fact that the lawsuit was resolved, however seller should not endeavor to discuss the details of the suit. Once the disclosure has been made, the buyer carries the burden of discovering further facts. The association should be prepared to provide the buyer with both the defect list as well as the statutorily required disclosure related to any construction defect repairs. Calemine v. Samuelson (2009) 171 Cal.App.4th 153.

"What is a
Special Assessment?"
A homeowners association has the right to levy a special assessment under the provisions of the California Civil Code and the CC&Rs. If there isn't enough money in reserve accounts for a maintenance or repair expense, the association can raise the association assessments for a certain period of time or levy a special assessment to pay for it.
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