Diane Francis: The Florida condo collapse and the perils of too lax regulation

I am generally a fan of a sound regulatory system that does its job.  Creating just that and also a natural culture of willing compliance is actually a difficult trick.  ultimately the right guy usually puts it together and rides herd.

Then the second raters take over and good luck after that.

At best you can establish sound technical building codes whose alteration leading to failure would be an admission of guilt.  The trick is to make them uniform and that actually occurs.  So that is an unlikely place to look for a problem.

The fact is that the industry is largely self regulating and because of ample experience, few mistakes are made.  And when one is made, it is off to court we go.

so yes we need a federal regulatory standards system best operated by the industry with legistlative oversight to tackle abuse.  But it ends there.

Diane Francis: The Florida condo collapse and the perils of too lax regulation

Deregulated, anything-goes business, governance culture should be understood before investing in high risk U.S. condos

Author of the article:Diane Francis

Publishing date:Jun 29, 2021 • 14 hours ago • 3 minute read • 22 Comments

Search and Rescue teams look for possible survivors and to recover remains in the partially collapsed 12-story Champlain Towers South condo building on June 28, 2021 in Surfside, Florida. PHOTO BY JOE RAEDLE/GETTY IMAGES

Canadians are the biggest foreign buyers of real estate in Florida and the U.S. sunbelt, but the terrible condo collapse tragedy in Florida underscores the hazards that lurk in America. Its deregulated, anything-goes business and governance culture should be understood before investing in condominiums because they are high risk propositions.

Canadian snowbirds have been a huge presence in Florida, along with Canadian tourists who rent units every year in the thousands of high-rise towers that populate the state. A few years ago I looked at buying a condo down there, then abruptly stopped.

BMO’s Brian Belski : Frothy markets? They are nowhere near euphoria

I discovered that condo corporation boards were not required to set aside reserve funds in order to pay for big future expenses. (In Ontario, reserve funds are required in order to pay for roofs, elevators, garage, or other eventual major needs. And these funds are financially audited, along with the building’s condition by engineers every handful of years.)

Article content

Ontario requires boards to hire engineering firms to survey their properties. Often these inspections find problems. If money hasn’t been set aside for those specific issues, then more must be either by hiking regular condo maintenance fees or through a special assessment. But the significant difference is the requirement to set aside reserve funds when there are no problems immediately evident.

Such a cushion of cash provides funds to immediately work on fixing structural flaws. When there is no cushion of cash — as is the case in Florida or other U.S. jurisdictions — then boards that find problems face political or legal fights to assess owners for sizeable sums of money.

Such regulation is critical, not only for public safety purposes, but also to prevent boards from postponing or ignoring problems — or owners from balking at special assessments when issues arise.

STORY CONTINUES BELOW

Article content

According to reports, this condo board and perhaps residents were warned of serious problems that needed fixing back in 2018. And yet, major work appears to have only begun this year and it’s unknown whether that work was aimed at addressing the deficiencies noted in the 2018 report. It’s also unknown whether there was a second opinion or whether local government authorities were aware of the situation, or should have been.

Given this laissez-faire approach, the question is how many of Florida’s inventory of old, concrete high-rise buildings — condos or rentals — have serious structural problems that have yet to be addressed? And what is the role of the local government in all of this?

It’s shocking that Florida law stipulated that engineering inspections be done after 40 years even though all are subjected to sea salt, hurricanes, surges, and tropical deluges regularly. Water and these events are the enemy of concrete.

STORY CONTINUES BELOW

Article content

This tragedy will result in massive litigation after the fact when it’s too late. But this is the American way of doing things — let anybody do anything they want, keep the government out of it, then eventually clean up the mess that results from deregulation. This happened in the stock market in 2007-8 and is going to happen in high-rise real estate from now on wherever free-marketeering reigned.

Clearly, Florida and other states should clean up their acts by passing rational laws that protect owners and tenants from shoddy construction practices, inept managements, and indifferent condo boards. There’s also the problem of “subsidence” along the coastline. The condo that collapsed was slowly sinking in the sand — a fact which may have contributed to the tragedy.

Article content

Arizona appears to be just as reckless when it comes to reserves funds and governance. There appear to be no statutes requiring condo associations to prepare a reserve study or to fund reserves. Arizona does, however, maintain statutory requirements obligating the association to deliver to a purchaser, or their authorized agent, specific information.

There will be bargains galore to be had down there now, but think twice before buying. Obtain copies of condo’s reserves and financials as well as any engineering reports done. Buyer beware has never been truer than down in America’s wild and woolly South.