“How did you go bankrupt?” Bill asked. “Two ways,” Mike said. “Gradually and then suddenly.”

~ Excerpt from “The Sun Also Rises” by Ernest Hemingway, published in 1926.

 

Most media coverage of the Champlain condo collapse focuses on the human tragedy and the lives lost – and rightly so. However, understanding what went wrong and what role the condo board played is also relevant, especially to board members of other condos. This article summarizes some information and thoughts relevant to that perspective.

The 2018 Engineering Report
Champlain Towers South was constructed in 1981 on the oceanfront in Florida. The 13-story building had 136 units. Miami-Dade County required buildings to be inspected and recertified as safe after 40 years. A Washington Post article stated that Champlain Towers commissioned an engineering review three years before the 40-year requirement. The October 2018 engineering report was the combination of two reports by two different firms. The engineering firm, Henz, reviewed electrical, mechanical, plumbing, and fire sprinklers issues, while the engineering firm, Morabito, reviewed structural issues.

Henz found numerous required expenditures in each area under review, calling for a little over $1 million worth of repairs. The wording in the report seemed generally positive, with statements such as, “electrical service is in good condition with some required minor repairs.” The listing of required repairs seemed more onerous than the description, including using the word “violations” of standards.

The Morabito report on structural issues listed eleven areas requiring future repairs and maintenance, including four items relating to balconies, tiles, and other finishings that prevented a proper review of balcony slabs. The cracked tiles and spalling concrete on balconies were evidence of sub-surface deterioration. The last three items are related to basic structural issues.²

In the report, engineer Morabito described “major structural damage to a concrete slab below the pool deck in the section. The structural survey report also found that waterproofing below the pool deck and entrance drive had failed, allowing damaging leaks. “Failure to replace the waterproofing in the near future will cause the extent of the concrete deterioration to expand exponentially,” Morabito wrote. He said a “major error” had been made in the construction of the building when waterproofing was laid on a flat slab rather than on a sloped surface to allow water to run off.¹

Most of the language in the Morabito report seems simply factual, with no direct indication of great concern or urgent need for repairs. A few sentences show greater urgency, including, “The failed waterproofing [in pool deck and entrance areas] is causing major structural damage to the concrete structural slab below these areas. Failure to replace the waterproofing in the near future will cause the extent of the concrete deterioration to expand exponentially.”

The expense summary categorizes the structural repairs as “Façade Remediation” and “Garage, Entrance, and Pool Deck Remediation,” which do not seem to convey a sense of great urgency. The total required expenditure for all repairs noted in both reports was estimated at $9.1 million.²

Other Factors
Residents told the media that leaks and flooding in the parking garage of Champlain Towers stretched back for decades. In the Washington Post’s article, one man said that saltwater would seep through the building’s foundation during particularly high tides. A pool contractor in the building days before the collapse was struck by the prevalence of concrete cracking and rebar exposure and deterioration.

A New York Times article said that City officials in Doral reviewed the work of the former chief building official, who had reassured homeowners in 2018 that their building, despite the many problems identified in the engineering report, was safe.³

An attorney for the condo association told the Wall Street Journal that the 2018 engineer’s report was fairly routine and did not raise alarms. “Concrete spalling, rebar deterioration—these are not unusual events when you have buildings exposed to corrosive conditions,” the attorney said.

In 2019, the construction of a high-rise luxury condo project next door led to complaints from condo residents. A board member emailed the city saying developers are “digging too close to our property, and we have concerns regarding the structure of our building.” ⁴

The Special Assessment
Five of the seven board members, including the President, resigned in the Fall of 2019, as the condo association was consumed in a contentious debate about structural repairs. The resigning President’s concern was the inability to get things done because of a poorly functioning board. She stated that prior boards were similarly ineffective at getting things done. A new board eventually voted in favour of a $15 million special assessment to pay for the upgrades to the building on April 13, 2021.¹ 

In her April 2021 letter, new President Wodnicki told residents that an updated estimate of the required expenditures was $16.2million, far more than the reserve fund’s $0.8 million. A limited amount of cash was available from two earlier special assessments for work not yet completed, and some of the reserves were specifically allocated to cover the insurance deductible. In aggregate, Wodnicki said the board asked residents to fund $15.5 million in costs with a special assessment. Wodnicki also reported that a bank line of credit was arranged to allow the repairs to proceed on a timely basis and that future borrowing was unlikely to be available as a result.⁵

The New York Times article stated that in Florida, state law requires condo associations to include reserve accounts for components that have a deferred expense or replacement cost in excess of $10,000. However, associations can waive the reserve requirement if a majority of a quorum, which could be less than a third of the homeowners, elects to do so.3 Some articles on condo consultant sites indicate that waiver of reserve funding requires a majority of owners (51%) to approve the waiver and that each waiver applies only for one budget year. A further waiver may be done in each successive year. 

Concluding Thoughts
A board member for a condo in Ontario might wonder how it is possible that crucial repairs and maintenance were not implemented promptly to prevent the tragedy. Some of the key factors involved in this case appear to be as follows:

1. There is no evidence of a requirement for regular engineering assessments, especially if a condo association elected to waive the reserve requirements;
2. The 2018 engineering reports did not highlight the urgency and the extent of the risks in a manner that an unsophisticated reader could easily understand;
3. For owners and/or board members looking for excuses to delay repairs, there were opinions available to support their positions (the city official, the association attorney), and;
4. There is strong evidence that the problems developed over a lengthy period of time. However, it is hard to understand how no gigantic red flags arose due to long-term issues with saltwater on the parking floor and prevalent examples of exposed rebar.

As always, hindsight is perfect. Once the end of the story is known, it is easy to see how the involved players could have taken more effective actions. With this in mind, the review of some basic principles outlined below provides further thought about how this tragedy may have been avoided. The annual economic cost of owning a physical asset, such as a factory, car, or condo, consists of maintenance and depreciation. Each component of the asset has a useful life. Depreciation is the portion of each component that is notionally used up during each year of its useful life. At a conceptual level, the annual depreciation is just the aggregate of the depreciation for the asset’s various components.

If an amount equal to the depreciation is contributed to a reserve fund each year, there will almost always be enough to pay for replacements or major repairs without a material out-of-pocket cost to the owners.

practice, the annual contribution to the reserve fund for a condo in Ontario is based on an estimate of expected yearly expenditures over 30 years or longer rather than an explicit depreciation formula. These estimates must be updated every few years to ensure that emerging information is folded into this process regularly and methodically. When this process is followed correctly, the timing and decision to implement major repairs and replacement will be based on engineering best practices because there is no direct impact on owners’ out-of pocket costs.

Most jurisdictions, including both Florida and Ontario, have laws and regulations that stipulate minimum requirements for maintaining a reserve fund. In that context, one can slip into thinking that funding is occurring because it is legally required. The Champlain Towers case is a sharp reminder that significant repairs may be necessary for safety reasons and to preserve the value of the owners’ assets. This is more than just a compliance issue. Skimping on maintenance and reserve fund contributions, even if technically compliant, may be viewed as a form of gaming the system whereby current owners do not pay their fair share and shift it to future owners.

At some point, the future owners may need to fund a shortfall with a special assessment. Special assessments resulting from shortcomings in reserve funding generate further consequences. Unfortunately, it may take years to get an agreement, arrange loans, and develop payment plans acceptable to owners. In the meantime, this exposes the building to the risk of further deterioration beyond the point where a major repair or replacement could have been made in accordance with engineering best practices.

No doubt owners and boards will tend to claim they were let down by their professional advisers when things go awry. But it is hard to account for the apparent lack of curiosity and vigilance over the many years owners and boards did little to address the obvious signs of deteriorating conditions.

There may have been no explicit intention to pass the buck to future owners. If there’s a lesson to be learned, it’s that a dedicated commitment to paying one’s fair share of annual maintenance and depreciation costs could have saved many lives and preserved the value of owners’ assets. If legislators reinforce adherence to this fundamental principle, there may be no need for a 40-year recertification requirement. Unfortunately, by itself, the requirement may inadvertently justify delays in necessary actions. Reliance on the 40-year requirement as a primary minimum standard appears to have been too little, too late in this case.

In Ontario, our condo legislation requires reserve fund studies at least once every three years, prepared by a qualified independent supplier, with the benefit of a detailed site inspection at least once every six years, with no option to waive or disregard the requirement for reserve fund contributions.

Currently, Ontario condo owners and board members should be very pleased that our legislation provides such a material level of protection. Ontario is also not subject to some of the unique risks posed by the Florida oceanfront. That being said, we can’t afford to be complacent because Ontario faces other risks. Once again, using some wisdom often attributed to Mark Twain, “History never repeats itself, but it does often rhyme.” It is possible we will not see other risks as clearly now as we might when the next rhyming event occurs.

To conclude, we note that avoiding the comfort of groupthink and always remaining curious and vigilant will improve the overall quality of decisions and play a valuable role in helping board members avert tragic outcomes. 

 

The views expressed in this article are the authors’ alone and may not reflect the views of the boards on which they serve.

Martin Denheyer is a retired actuary who has been on the board of a Toronto condominium since 2016. His working career as a consultant focused on asset/liability modelling to help pension plan investment committees determine asset mix policy. He also served on the School of Pension Investment Management faculty for 15 years, providing educational seminars several times a year to pension plan board and committee members. He holds a Master of Arts (Mathematics) degree and is a Fellow of the Canadian Institute of Actuaries.

Marvin Ens is a retired actuary who has been on the board of a large condominium in the GTA for the last several years. His working career as a consultant focused on advising pension plan sponsors on the reserves required to meet future pension obligations. He holds a Master of Science (Mathematics) degree and is a Fellow of the Canadian Institute of Actuaries. He is a recipient of the Institute’s Award of Distinction for his volunteer service to the profession.

Sources:
¹ Majority of Florida condo board quit in 2019 as squabbling residents dragged out plans for repairs, Washington Post, June 30, 2021.
² Email-related 2018 structural field survey report, Town of Surfside Florida.
³ Infighting and Poor Planning Leave Condo Sites in Disrepair, New York Times, July 1, 2021.
⁴ Miami Area Condo Failure: Years of Warnings, but Mixed Signals, Wall Street Journal, June 29, 2021.
⁵ 2021 Letter from Board President to Owners, New York Times, July 1, 2021.

 

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