Apartment Trends - Condo Caution
Multifamily apartment projects have been volatile month-to-month for the last five months. Based on the Architectural Billing Index (ABI) for the multifamily sector, it may be slowing, however multifamily project permits were high last month - so we might see another pickup in apartment project starts.
We have had quite a boom in apartments projects since 2012. The drivers were 1) very low supply, and 2) strong demand with people moving from owning to renting based on more restrictive lending practices by banks. In 2011, the national rental vacancy rate was 8%. Today, the vacancy rate is holding at 4.2%, the lowest level since the end of 2001. This is only the third quarter in three decades that the rental vacancy rate has fallen below 5% causing values for apartment projects to rise.
Apartment to Condo Conversations & Claims
Renting is filling a housing need today. However, look around and you will also see apartments being converted into condominiums by developers. One of the nation's largest publicly held builders introduced a line of homes marketed as being more affordable than some monthly rents. Boosting condominium conversions are high rents, low interest rates and a rise in the popularity that condo buyers feel is a "maintenance-free" living environment. However, based on industry claims data including a SmartRisk Survey of A/E Law Firms, condominium projects continue to be one of the most litigious project types for developers and design firms. Twenty eight percent (28%) of claims were related to condo projects in the survey. From an industry wide perspective - multi-family, condo projects constitute for only five percent (5%) of design fees, however account for twenty percent (20%) of the total losses. The most frequent claim categories for condo projects are related to:
- Foundations
- Roofs
- Waterproofing
- Soundproofing
- HVAC
Risk Management Recommendations
If you are designing an apartment project that has the slightest “possibility” of being converted into condominiums, there are certain precautions you should take to mitigate your risk.
1) The quality of design and construction for rental to for sale homes varies greatly.
2) The inherent risks associated with condominium projects relate to the community environment - individual unit owners and the homeowner association (HOA).
3) Homeowners who generally move into these communities are first time buyers, or owners down sizing from single-family homes with unrealistic expectations, and lack the understanding of their responsibilities for maintaining the property.
To help protect yourself, it is suggested that specific language is included in contracts for apartment projects that may be converted to condominiums at a later date.
Consider contract language similar to the following:
CHANGE IN PROJECT USE - Client shall waive any claims against CONSULTANT, defend CONSULTANT against any claim and indemnify CONSULTANT for any costs, loss, or damage to CONSULTANT resulting from any claims brought by any party against CONSULTANT related to any change in use of the project. Client agrees that this obligation shall survive the termination of this Agreement.
Consider contract language such as the following specific to condominiums:
CONDOMINIUM CONVERSION - The Client acknowledges the risks inherent in condominium projects. Therefore, the Client agrees if the project is converted from apartments to condominiums, the Client shall include in the Project’s “Declaration of Condominium,” the condominium’s by-laws, individual unit purchase agreements, and/or similar documents, inspection requirements by owner prior to purchase, maintenance requirements of individual owner and the Homeowners’ Association (HOA), right to repair, right to inspect, pre-litigation process, certificate of merit and other risk mitigating practices for condominium projects. The Client further agrees to the fullest extent permitted by law, to indemnify and hold harmless the CONSULTANT, its officers, employees and consultants (collectively, “the CONSULTANT) against all damages, liabilities or costs, including reasonable attorney’s fees and defense costs, arising out of any claim for design or construction defects brought by a homeowner or the HOA, for up to ten years after completion of the Project, except to the extent that the CONSULTANT negligence or willful misconduct is a proximate cause of the claim.
To help protect your firm as well as the builder on condominium projects - it is strongly recommended that a risk management strategy and agreement is developed between the parties. This agreement outlined the risks, and specific strategies and responsibilities of the parties for managing condo project exposures. SmartRisk has worked successfully with numerous firms developing such a program. If you are interested in obtaining more information, please contact SmartRisk.
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Thank you.
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