Another Piece of the Housing ScrewJob
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2023-01-23 07:00 by Karl Denninger
in Housing , 73 references Ignore this thread
Another Piece of the Housing ScrewJob
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Oh this has got people upset....

Last May, Florida Gov. Ron DeSantis passed legislation mandating emergency reserve funds for condominiums statewide after the tragic collapse of the 12-story Champlain Towers South in Surfside.

Well actually DeSantis signed legislation -- the Legislature passed it.

The bill provides a statutory requirement for condo boards to maintain reserves for structure inspections and a good chunk of potential repairs that might be needed, with the inspections starting after a given period of time post-constructing and continuing to make sure that there isn't another Surfside collapse.

Which, in any high-rise building, is something you sort of have to do on a regular basis because all things made by man deteriorate over time; that is the nature of entropy and only through putting in more input over time do you stave that off.  There are no exceptions; this is a natural law and you cannot evade it.

The basic problem here is that anything that has a (1) reasonable or greater probability of occurring and (2) is a material expense, if you're running an organization with responsibility to others, has to be reserved against.  To not do so is to violate your fiduciary responsibility to said people.  In this case that's the condo owners who voted you onto the board to protect the common interests of all of the owners and, by being on said board you accept that fiduciary responsibility which, in the case of an individual condo owner likely is into the six figure range each or more.

The screaming being heard in the media now about this being "terrible" is really an admission that across the state many boards did not meet this responsibility, on purpose, and thus are under-reserved.  They have no reserves against such events because although they know full well they are likely to arise to some degree and the inspections may disclose trouble the cost of the inspection, although known, isn't being reserved for.

This of course has elevated the value of said condo sales -- after all, if you have to pay a $100/month reserve for this every month then that's $1,200 a year that is imputed back against the value of the condo.  In a decade that's 12 large before inflation.  Hmmm.... do you see the incentive here yet to not do that if you can get away with it?

And get away with it you might -- or might not.  But if "not" then it gets really nasty because there is either a huge special assessment to pay for that work or worse, there's an incentive to hide things you see that should draw an inspection and potential corrective costs because if you investigate you have to get the money to do the investigation and fix whatever you find.

Pinion explained how this could financially hurt landlords and Airbnb hosts, who may now have to pay additional housing costs under the new law.

"You're talking about people who have the Airbnb that they thought, ‘Oh, all these people with their Airbnb business, this would be great, I was going to rent this property or I'm going to own this property, and then the actual income is going to eclipse what I have to either pay for that monthly rent or that monthly mortgage,’" the CEO explained.

Oh, so you mean that person who bought an investment property didn't bother check the books to see if there were adequate reserves for what was an entirely reasonable and expected set of expenses over time?  Who's fault is that and why is it so terrible?  I guess it is terrible because the AirBNB owner won't be the one laying in the bed when the building collapses and they're buried under 4,000 tons of debris?

Somehow I am having trouble discerning what the problem is with Florida shutting this garbage down and forcing as a matter of statute compliance with what has always been a reasonable and expected accounting requirement, never mind the fiduciary responsibility of the condo board to the owners -- something that, until this law passed, appears to have only been enforceable if and when an owner brings suit, and then they'd have to pay both sides since the board will assess the owner(s) to pay for the lawyers to defend the suit!

I get it that plenty of people are "shocked" that suddenly their outside patio has to be redone and the bill is going to be $30,000 to do it - per unit.  Yes, right now that concrete cracking may look cosmetic but once salt air and water gets into the attachments or rebar it won't stay that way and the only way to know that hasn't happened is to remove all the spalled concrete and look.  I'm sorry that costs a lot of money but someone has to pay for the work and if you don't pay then what happened at Surfside will happen again, whether its as dramatic (and deadly) as Surfside or just "your" balcony collapsing on the head of someone underneath your unit.

The shock of "catch up" payments required under this law is going to hurt plenty of people but your ire ought to be aimed at the condo boards who did not properly reserve against these inspections and expected lifetimes of the elements of the building before refurbishment and mitigation would be required on a reasonable and fiscally-sound basis.  They didn't do that because to do so would have made your monthly assessment much higher over the previous years and that would have depressed prices for the units themselves.

Years ago I got into it with the Okaloosa County School Board over exactly this issue.  They wanted a sales tax increase to cover replacing chillers in the cafeterias in the schools.  My question to them, at their meeting, was why they weren't all in prison for violating their fiduciary responsibility to the taxpayers since chillers all have an expected service life and they should have had a sinking fund running for the previous 20 years so when the present ones wore out they had the funds.

The vote put on the ballot was defeated.  Good.  Unfortunately the handcuffs did not come out and they should have.

That Florida has taken one tiny little step to put a stop to this in a place where its not just a drip of water coming in when it rains but a collapsed structure that can kill people is, in my opinion, a good thing.

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Printlife 228 posts, incept 2018-05-22
2023-01-23 08:52:32

We went to an older hotel in Port Saint Lucia over MLK weekend. I noticed rusted rebar visible through some cracks in the outside hallway. Thought about how the Romans made reliable structures by only using concrete in compression. Here the walkways were cantilevered off the building in a thin structure. Only possible with the rebar there to take the tensile load.

The hotel had been the circus themed Club Med but had been sold off when it wasn't making money. The new owners may have a low basis but there is a lot to be repaired.

How much bulkier will buildings have to be when we stop using concrete in tension?

Vaccination required? Not if we leave.
Now in Florida, heart rate dropping, nicer people
Joancrawford 543 posts, incept 2013-10-14
2023-01-23 08:52:33

I'm the president of my condo association, a position I've held on and off for the past 20 plus years. It's a mid rise, 100 year old building with balconies. About ten years ago or so, visible cracks in the concrete beds of the balconies developed cracks. Needless to say, it was only a matter of time before moisture seeped in and the beds, without inner bracings, would pancake down-a real hazard.

So the board at the time decided to bite the bullet, and have all the old concrete removed, new concrete reset, along with new replacement wrought iron and aluminum railings. This was a herculean task not to mention an expensive one.

We've always been proactive concerning maintenance on the building; in particular plumbing, which is the bane of any old building. The balconies, however, were never given a second thought-until we saw the cracks. So for the very first time, we had to have a special assessment which owners had the option to pay over time.

As you say, Karl, man made structures, no matter how solidly built, are subject to the laws of entropy. And this time we made certain we installed inner braces for the concrete pads on the balconies. We're very lucky nobody got killed.

Time may be a great healer, but it's a lousy beautician.-Dorothy Parker

Boys don't make passes at girls with fat asses.-slightly modified DP
Tonythetiger 794 posts, incept 2019-01-27
2023-01-23 08:52:33

Sadly, we now have to legislate in order to get what used to be common financial prudence. Another repercussion of letting the rule of law be optional. The other path, which should already be the standard but probably isn't, is to make the members of those boards personally liable for such disasters any time after their tenure and involvement in ignoring the prudent course(s) of action.

Sign of the times.

"War is when the Government tells you who the bad guy is. Revolution is when you decide that for yourself." - Benjamin Franklin
Thelazer 1k posts, incept 2009-05-11
2023-01-23 08:52:33

Having lived in an area that had a bunch of condo's built as part of a residential "master" plan, I can tell you first hand.. NIGHTMARE.

There was plenty of shoddy work, lawsuits and repairs.
Some condo's couldn't be sold due to these lawsuits.
Others, people bought at a discount hoping the final repairs and such would be done.

It's STILL all a mess over there and the #1 I NEVER bought a condo as any type of investment vehicle.
Forever_young 75 posts, incept 2022-11-22
2023-01-23 08:52:33

and they should have had a sinking fund running for the previous 20 years so when the present ones wore out they had the funds.

I'm not arguing because I think the same way.


I've never run my own business so I'm going off second-hand accounts and my own limited understanding here, but don't most businesses work to show as little in the coffers as possible for tax reasons? Do these accounts/funds have some sort of shield from that?
Billhrny 201 posts, incept 2019-06-19
2023-01-23 08:52:33

I just saw a video about this about a week ago from a realtor that does walk throughs in Miami neighborhoods. He as commenting that some condo owners are starting to get notified that their HOA fees are going to go up my multiples of what they are now. He gave an example of one where the HOA fee is going to triple ($500 to $1500 I think). That's huge and will directly effect the value of the condos in those buildings. It's a strange situation since some HOAs have been well run and have plenty of reserves. I started to wonder if the HOAs that blew it can get sued by the owners for effectively reducing the value of their property?
Tdurden 1k posts, incept 2015-01-29
2023-01-23 08:52:33

Here in land of the worthless nut, when a school levy fails, they put it right back on the next ballot until it passes, while turning people against their neighbors. School boards and administrations approve contracts that they damn well know will blow hole in the district's balance sheet x years out and they'll tell you with a straight face "that's just how the system works." One of the big reason I got far away from the Columbus suburbs.

"I'd like to live just long enough to be there when they cut off your head and stick it on a pike as a warning to the next 10 generations that some favors come with too high of a price." -Vir Cotto Ba
Radiosity 1k posts, incept 2009-03-05
2023-01-23 08:52:33

Regardless of any other issues with de Santis, good or bad, I will give him credit for calling out the WEF recently.

If you've not seen some of the videos of those assholes at their little meeting... well, they're not even pretending to hide their plans now. Oh, and Al Gore went on an epic unhinged rant about muh climate change, which would be amusing if it wasn't such a deadly ideology.

So long, and thanks for all the fish.
Andrew 148 posts, incept 2014-09-24
2023-01-23 08:52:43

Condos are bad enough when one is in the local, 2 story/connected with 3 or 4 other units in a long line.
There's a community nearby my brother and a former college buddy briefly lived in about a decade ago.
Neither were the "owners", but the brother unit said basically everything was old inside, and being in the building business he noted lots of things outside needed work too. But when he brought it to the attention of the people he was renting from, they said "the board is probably working on that at some point".
Sure they are.

I can't imagine living in a high rise condo.
Right by the ocean.
Especially one which has any age on it.
Ponder at some point that whole building is past it's lifespan.
Bzelbob 421 posts, incept 2021-09-12
2023-01-23 10:12:50

Another funny bit is the part of the article where they talk about this creating a "dichotomy" between condos and single-family homes:
Macro Trends Advisors founding partner Mitch Roschelle also cautioned that the reserves law will "create a dichotomy" between high-rise condos and single-family homes in Florida.

"It's going to make single-family homes potentially more desirable because you can control your own destiny," Roschelle said.
"The other thing that we're seeing in Florida... after the Surfside catastrophe, people don't want to be on condominium boards anymore because it's a tremendous amount of liability."

Well, duh.

The difference is if you don't maintain a reserve fund for your single family home and the roof falls in, the damage is limited.
When the roof falls in on your condo, the damage is *massive*.

It's a DIE-chotomy all right, and it's not that they can't see there's clearly a difference here, they just don't want to see it.

That squealing you're hearing is the sound of SCAM being squeezed out of the system...

"Threats are illogical. And payment is usually expensive." - Sarek of Vulcan
Jpg 828 posts, incept 2009-03-23
2023-01-23 10:13:03

@Forever_young -

This was a school district, not a business.
Guerin 144 posts, incept 2021-09-26
2023-01-23 10:13:11


From an accounting perspective, putting funds in reserve typically has no P/L effect, it is just re-classing or transferring funds in balance sheet accounts (assets/liabilities), and would not usually carry negative tax implications.

If an association assesses and collects say $1000 a month for future repairs, they would not classify that money as revenue, it would be booked as a liability toward future repairs, with the liability reduced as funds are spent.
Bodhi 5k posts, incept 2008-02-23
2023-01-23 10:13:22

Andrew wrote..
I can't imagine living in a high rise condo.
Right by the ocean.
Especially one which has any age on it.
Ponder at some point that whole building is past it's lifespan.

My aunt and uncle had a condo in Seagrove Beach in a multi-story building right on the sand. I often wondered about the safety of a building within spitting distance of the water. I guess they also wondered as they sold it 10 years ago for a unit in Panama City.

I see the units are now going for north of $700k. I can just imagine what the association fees are these days on an older building.

Be so subtle that you are invisible.
Be so mysterious that you are intangible.
Then you will control your rivals' fate.
~Sun Tzu, The Art of War
Ee4fire 810 posts, incept 2011-03-24
2023-01-23 10:13:41

My grandfather gave me some timeshares in FL about 30 years ago, which was actually a good thing. Our timeshare building is an old hotel that was converted to a timeshare. The building was built in the late 50's early 60's.

About 15 years ago the board of directors, who is elected by the owners, noticed the owners of the issues with the concrete patios, windows and doors. Our BOD got the bids and selected a contractor to do the work. Many of the owners, like other places in FL are older and on fixed incomes. There was a reserve fund that covered most of the cost. Just like the best laid plans of mice and men the amount put aside covered most but not all of the cost. Since there was going to areas shut down, they accelerated some of the repairs such as upgrading replacing the HVAC units, and ultimately saved money. We were hit with a special assessment. The BOD arranged to have financing in place to help the owners with the special assessment. It actually worked out well in the long run. I am sure there were owners who were upset, but the existing board members who were up for re-election were all re-elected in next election. The majority of the owners understood the issue.

My wife had a timeshare where the operations and budgets were controlled by a corporation instead of the owners. Her annual fees were more than double than those in FL. I did not see where they kept up that one better than the one FL.

Doing forensic work many of the failures I see are lack of proper maintenance. When budgets and funds get tight maintenance is the first to be cut, where it should be one of the last. Cudos for FL for pushing the issue. Equipment and buildings have a finite lifespan. That lifespan can be greatly extended if they are properly maintained.

(Politicians), 536 commoditized temple monkeys pawing through the ruins of America in search of bribes. (The District of Corruption) works like a vending machine. You put coins in the slot, select yo
Abelardlindsey 1k posts, incept 2021-03-26
2023-01-23 10:47:28

Condos are really a collection of rooms in a building (that you do not own). Buildings, like anything else of artificial origin, decay over time and are eventually replaced. Thus, buying a condo never made sense from an investment standpoint. Buying a house is different because you are buying the land the house sits on and thus own something of permanent duration. It seems to me you either buy a house, preferably inland if you are in Florida for somewhat greater protection from typhoons (I don't mind driving an hour to the beach) or you just rent.

Its all in the mitochondria
Tickerguy 192k posts, incept 2007-06-26
2023-01-23 10:57:19

Don't be so sure on that "somewhat inland" thing @Ableardlindsey.

Hurricanes come with two basic forms of damage: Wind and water.

Your structure having an elevation LESS than the reasonable expected surge + whatever wind-driven wave height is on top of that puts you at severe risk of being flooded. Floods suck and, if you're not there to immediately deal with it they suck MUCH WORSE. Specifically, anything that gets wet must be gotten out of the structure and dehumidification restored (e.g. A/C or dehumidifiers) IMMEDIATELY (within a few days) or mold gets going in places you can't see it and you're boned. If that happens the structure is at best a gut job.

The problem with WIND damage is two-fold. The obvious is the wind itself, but the wind does not die down immediately once a bit inland. Now if you're 50+ miles inland then ok, but 10 or 20? Not so much. In addition there are often embedded little tornadoes which are like all tornadoes unpredictable and give no warning; if you get hit by one of those you're fucked, exactly as you are with any other tornado. Building to withstand a tornado is not realistic in nearly all cases.

But -- the other part of high wind that is unappreciated is WHAT the wind blows. Its not the wind that often gets you in a well-built structure. Engineering for wind loads is something that is a matter of calculation and proper construction. Unfortunately engineering for the piece of your neighbor's roof, part of a tree or other thing that winds up being picked up by said winds and thrown at your building is basically impossible; the kinetic energy involved is well beyond reasonably-defensible levels.

Ironically bring right on the water or very close to it reduces that risk simply because there's nothing there to pick up and throw.

And then there's the other 900lb Gorilla, which is fraud. When it comes to Florida and alleged building codes there's a crap-ton of fraud. Every time there's a storm you find out who did that, the builder, roofer or whoever typically has gone out of business and set up a new LLC, you can't sue a non-existent entity and frequently you find out about this is when either your roof disappears and then it rains inside for 8 hours or worse, your neighbor's roof that was fraudulently certified comes off in 4x8 pieces and said pieces go through YOURS at 120mph.

In my 20 years of living there I never saw ANYONE prosecuted for that. NEVER.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.

Flappingeagle 5k posts, incept 2011-04-14
2023-01-23 11:07:14

And the moral of the story is:

Never buy a unit in a multi-unit building? (unless you buy the whole building.)

Always by such stuff through your Panamanian corporation?

Pay for one hell of an inspection yourself and audit the books first?

All of the above? Ok, maybe just the second and third ones?


Here are my predictions for everyone to see:
S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13
Trying to leave
Flappingeagle 5k posts, incept 2011-04-14
2023-01-23 11:10:33

IIRC, there was a condo building that was condemned in Panama City(?) after one of the Florida panhandle hurricanes. What happened was the hurricane damaged the bottom two-ish floors so badly that the structure was deemed unsafe.

I never did hear what kind of resolution the people on floors 3+ got from their insurance when their units were destroyed in the demolition. After all, there was nothing wrong with their units. Did their insurance have to pay?


Here are my predictions for everyone to see:
S&P 500 at 320, DOW at 2200, Gold $300/oz, and Corn $2/bu.
No sign that housing, equities, or farmland are in a bubble- Yellen 11/14/13
Trying to leave
Tickerguy 192k posts, incept 2007-06-26
2023-01-23 11:10:13

The problem with buying an inspection in a condo is that you're inspecting your unit. The really UGLY stuff comes when its not just your unit, but common areas. THAT stuff should have a regular inspection schedule and yeah, you should demand and look at it first along with some qualified folks in an attempt to detect what you might have missed.

But -- the unknowables are wildly bigger in a large building than a single-family house. Even significant foundation trouble can be fixed in a SFH and while its expensive, its not bone-crushingly so.

That's definitely NOT TRUE for a midrise or highrise condo; there that sort of "surprise" can screw you beyond belief.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
Tickerguy 192k posts, incept 2007-06-26
2023-01-23 11:11:15

@Flappingeagle - Likely not. Their recourse would be against the common insurance, which I think its reasonably-sure was insufficient to pay them off.

Those folks likely got fucked.

The difference between "kill" and "murder" is that murder, as a subset of kill, is undeserved by the deceased.
Redjack 1k posts, incept 2018-01-29
2023-01-23 11:12:19

Just like plants, maintenance is the first or second thing cut (after people).

A lot of mangers use things like LEAN to justify it, assuming they will be gone before the plant/building falls down. My entire career of 20 plus years has been going into places and fixing it.

No accounting department will accept "Heh, we need to spend X, which won't add anything to profits, just to keep the roof on!"

Most of the time you have to wait till the roof is off before upper management accepts there is a problem.
Step55 222 posts, incept 2009-02-27
2023-01-23 11:23:06

About 8 years ago I was using a hospital parking garage structure in Hartford CT. I noticed entire areas of floor space were cordoned off and piling had been installed near support columns with obvious spalled concrete. There was ongoing repair of a facility while still open as parking for employees and visitors had no alternative. I couldn't believe this was allowed to continue. A search this morning revealed the garage was to be demolished and replaced.

The Surfside (FL) collapse lawsuits were settled for just over a billion dollars. 98 were killed when it fell.
Jayhawk 56 posts, incept 2010-08-20
2023-01-23 11:33:44

I live in a PUD (similar to a condo) in California, which has essentially no laws on establishment or use of cash reserves. Our boards for more than 20 years have plundered the reserve for pet projects repeatedly and, when I questioned one such use in an annual meeting, a board member responded, "We didn't have enough money in the operating account, so we added it to the reserve study so that we could use money from the reserve account."

For many years the board was reluctant to raise monthly dues and as a result was unable to keep up with termite damage to wood siding, damage which was exacerbated by not painting for 25 years. Making it worse was that the the worker hired by the board, because he was the low bidder, replaced siding without checking for termites in the structure beneath the siding, so new siding was quickly destroyed from beneath. Needless to say, none of the board members was checking his work. The result was a $1.3 million special assessment to replace all siding in the community.

The board was replaced with mostly new members, and things promptly got worse. The siding project had not included fascia, which also had not been painted for 25 years and which also was was found the be rotten and termite damaged.

Rather than finding out what it would cost and hiring a contractor to do it after making an assessment to cover the cost, the board just embarked on doing the project under its own supervision (with the board president, who is a retired school teacher, in charge), and "added it to the reserve study so that we could use money in the reserve account." The project has taken more than three years and is not yet complete. No one knows how much it has cost, including the board. Our reserve account has been drained to zero.

Meanwhile, streets that are badly in need of repair have not and will not be repaired. Exterior stucco which is badly in need of painting cannot be repainted because we do not have the money to do that. Etc.

But we have shiny new fascia boards, which may or may not be properly installed.
Regrubun 1k posts, incept 2008-12-30
2023-01-23 11:39:49

This isn't the only hammer coming at Florida condo's. I have a family member on the HOA board for a beachside condo in Cocoa Beach. They were told to expect a large increase in their insurance, so they budgeted a 50% increase. Bill came in and it went from $250K to $800K. That's going to leave a mark!
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