By Tyler P. Berding, Esq.
The spate of conversion of old apartments to condominiums has finally abated largely due to the failed economy. For many reasons which we have previously noted, buyers prefer new construction and only buy conversions when the housing market is in a selling frenzy. Nevertheless, thousands were sold and owner claims have arisen which range from minor issues with the unit itself to major waterproofing and structural failures in the buildings which will require very expensive reconstruction for which no funding was provided by the converter.
These claims are often defended by developers with the argument that since what was purchased was not new, the owners cannot expect that the converter should pay the cost of rehabilitation. That the conversions are not new construction is not usually hidden from buyers. Everyone buying into a converted apartment project did or should know that the buildings were more than just a few years old and that deterioration can be expected.
But what most buyers do not know and should not have to expect is that the maintenance and repair funding plan which was coupled with the sale of the unit was inadequate for the eventual repair of the buildings. And why is this important? Because a condominium conversion is not just a used apartment. It is a new product which is assembled from several important pieces.
In order to sell an old apartment as a condominium the converter has to create a salable product. This includes recording a condominium map which changes a single parcel into multiple separate parcels. They have to draft and record Covenants, Conditions, and Restrictions (CCRs) which enable the new owners to jointly manage the project. They have to comply with various regulations of the California Department of Real Estate which include preparation of a funding plan adequate to meet the needs of the new common interest development. If any of these parts are missing, the units cannot be sold.
A car can be manufactured of re-cycled steel, but without wheels and a motor, it's not a "car" that can be sold. The same is true for converted apartments. Without legal status as a condominium and an adequate funding plan, it cannot be sold as a condominium. A converter must create a new product from that old apartment and the other necessary parts. This "package" carries with it certain representations of fitness, not the least of which is that the funds necessary to properly maintain the project will be available when needed.
Adequate funding could be assured by depositing enough cash into the association's accounts so that it can afford future repairs. It could also occur by completing the necessary repairs at the time of the conversion so that less cash is needed in the future. The converter could also fund the association by setting the owner's assessments high enough to pay for repairs. Or, the seller could do some combination of all three. The converter cannot, however, do "none of the above." The buildings can have defects or un-repaired conditions, but if they do, there has to be a budget adequate to maintain or repair them properly and if the funding plan fails to accomplish this, the converter is liable for the shortfall for failing to disclose the true cost of ownership.
A common misconception among conversion developers and also many judges is that the buyer of a used apartment should be subject to the same rule of "caveat emptor" or "buyers beware" as the buyer of a used single family house. The buyer of a single family home is personally responsible for all of its maintenance once escrow closes, so why shouldn't the buyer of a condominium conversion bear similar risks?
By Lucas Olona, Esq.
I am on the Board of a Homeowners' Association in a large project containing multiple buildings, including a clubhouse.
Each building has shown some construction defect issues.
If the Board elects to file an action against our builder, can we possibly obtain sufficient funds for repairs ot a project of this size?
Developers and general contractors, like the Board in a Community Association, should have insurance coverage in place should a lawsuit occur. In the context of a developer or general contractor, it is commonplace for these entities to require that subcontractors on their project carry their own insurance for any damages that may arise out of that subcontractor's own work or product. Thus, even if only two entities (i.e., a developer and general contractor) are initially sued in a construction defect suit, additional entities - carrying additional policies, will likely be involved in the suit and liable for their share of repairs and other damages.
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