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How Minnesota got ‘a step ahead’ of an issue that may have contributed to the Surfside condo collapse

A law passed in 2017 was aimed at increasing the supply of condos and townhomes. But it also required developers, and condo associations, to fund upkeep of the buildings. 

condos
Minnesota law encourages, but doesn’t require, condo boards to accumulate adequate reserves through annual dues. If the board and owners vote against doing so, they must agree that they'll pay special assessments for those costs in the future.
MinnPost photo by Peter Callaghan

Kari Dziedzic said one of her first thoughts after seeing the news about the horrific collapse of condominium tower in Surfside, Florida, was about a bill she’d sponsored four years ago.

In 2017, the Minneapolis DFL senator was trying to help increase the supply of housing, especially the types of condos and townhouses sought after by empty nesters and younger buyers. At the time, some developers claimed that the state’s confusing laws on building defects and warranties — and the litigation that resulted — were keeping them from constructing condos in any price range.

State Sen. Kari Dziedzic
State Sen. Kari Dziedzic
The 2017 law did end up clarifying the rules around litigation over construction and design flaws left behind by developers. But the bill, SF 1455, also stated that developers and, subsequently, the owners associations of condo and townhouse complexes, must take steps to monitor and fund upkeep of the buildings, including creating a maintenance plan — and to create a budget for paying for it. The plans must be reviewed every three years, and boards must inform owners of the results and the future costs every year.

Dziedzic said after the news of the Surfside condominium collapse, she recalled how much work it was to reconcile the interests of developers, homeowners associations, plaintiff’s lawyers and defense attorneys in putting the legislation together. But she also remembers feeling like it was worth it, “if it keeps anything like that from happening,” she said.

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Regulations ‘a step ahead’ of other states

While the causes of the collapse of the Champlain Tower South in Surfside are still being investigated, it has been reported that the board and homeowners were aware of damage to decks and foundations but had balked at the high cost of those repairs. Because the owners had not been accumulating money over time and had allowed the problems to worsen, condo owners were facing massive “special assessments” — one-time, per-unit bills — to cover the cost of the work. In Surfside, the assessments ranged from $80,000 to $360,000, depending on the size of the apartment.

Surfside, where 98 residents died, illustrated a phenomenon common to some of the 380,000 self-governing associations in the U.S. — the challenge of getting a majority of residents to support repairs, especially those that come with high costs. Members of the association often either doubt that problems are as serious as engineers say, or simply don’t want to pay the cost of repairing the problems. 

In Minnesota a 2010 amendment to a state law governing townhome, condominium, and other homeowner associations— what are known as common interest associations — required such groups to budget for “adequate” replacement reserves and keep those funds separate from regular budgets. The combination of that amendment and the 2017 law puts Minnesota ahead of many states in preventing the types of delayed maintenance and repairs that likely contributed to the Surfside collapse.

Minnesota law encourages, but doesn’t require, condo boards to accumulate adequate reserves through annual dues. If the board and owners vote against doing so, they must agree that they’ll pay special assessments for those costs in the future. Such votes must happen every three years.

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Reserve requirements and funding
Community Associations Institute
Reserve requirements and funding
While there is no government oversight, condo boards that do not follow the law are open to lawsuits from unit owners. They also face potential scrutiny from lenders if they need to borrow for repairs, and they could face unhappy owners if the inadequate reserves hamper the ability to sell units.

Tanner Oldenburger, a regional engineering manager for Reserve Advisors who conducts “reserve studies” in 26 states and six other countries, gives Minnesota a good grade, if not a perfect score, for its laws governing condo associations. “We work all over the country,” said Oldenburger. “I’d give it a B for its requirements.” 

“We are a step ahead of others,” Dziedzic said. “There’s no enforcement if you don’t do it, but it sets it up that the association should be aware of it and should be doing certain things so people are aware of what issues are out there.”

Phaedra Howard, a lawyer with Hellmuth & Johnson who’s an expert in real estate law and homeowners associations, echoes that assessment, saying Minnesota is better off than some states but also not as good as some. “We’re not bad, but we could be a lot better,” Howard said. 

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One issue not fully answered in Minnesota law is the definition of adequate reserves, she said. “The better way, rather than addressing reserves, would be to require a professional reserve study. Because that is not required now,” Howard said, though most associations do conduct professional reserve studies and condo management companies strongly encourage them. 

Howard disagreed that the 2017 law change was needed to address lawsuit concerns and to spur construction of condos and townhomes. “It was more them trying to get away from being responsible for doing crappy work,” she said. 

The result, however, has been an increased focus on preventive maintenance to extend the life of buildings. The previous law, which took effect in 2012, spoke to creating reserves to pay for replacement costs.

In an article, Howard wrote that “the vast majority of the associations that I have dealt with over my career are not adequately funded to pay for the maintenance, repair and replacement of all portions of the property for which they are responsible,” citing both developers who fail to provide for reserve needs before turning the building over to a homeowners association and associations who either don’t know of building needs or succumb to homeowners’ desires for lower dues.

Both boards and owners are responsible, she said. “Sometimes it’s the owners who vote down everything the board is trying to do, and they get stuck and can’t do what they need to do,” Howard said. “Or the board members don’t want to do what they need to do.”

Giving condo associations ‘some backbone’ 

Mark Becker, a construction law attorney who worked on the 2017 law on behalf of developers, said that law was meant to reduce the number of legal claims by reducing the number of defects, especially those related to maintenance and the normal life cycle of buildings.

The mechanism the law uses plays into the current concerns raised by the Surfside collapse in that it requires developers — and then homeowner associations — to plan for and pay for repairs and replacements. 

Having both entities involved was the compromise that helped the law pass. “It puts people’s focus on what it will take to maintain the property,” Becker said. 

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Becker agreed that what happened with the Surfside board and owners isn’t uncommon. “People are cost-conscious or they don’t have the money, so they vote not to spend the money,” he said. “Maybe that works in the short term, but in the long term there’s going to be a failure and they’ll have to come up with the money to do it.”

Oldenburger said the state law, combined with the studies that firms like Reserve Associates conduct, can be forceful in persuading boards and owners to do the right thing, what he termed “giving them some backbone.”

“It’s a difficult job,” he said of the volunteers who are elected to condo boards. If they were passed down underfunded reserves from previous boards, they have to push for increased monthly assessments on owners.

States that don’t have requirements make it even more difficult. “It’s an uphill battle we face when we’re trying to sell them on increasing their dues to boost their savings accounts so they can reduce special assessments or deferment of maintenance,” he said. “It’s what we fight day in and day out.”

Oldenburger said he thinks the Surfside disaster will pressure many states to improve their laws. “There are 10 states that have no guidance or recommendations on reserves at all,” he said. “With what happened at Surfside, I cannot imagine that staying that way.”

Ray Dehn
Ray Dehn
Former Rep. Raymond Dehn, the DFLer from Minneapolis who co-sponsored the 2017 bill in the House, said the debate then was about where liability lies and who has responsibility. Dehn, an architect, said there were instances where suits were filed 10 years after construction — the end of the standard warranty period — with courts having to decide who or what led to a defect.

“I came from the point of view of the architect working with developers, realizing that 10 years after a condominium project was complete, attorneys would contact associations … and seeing if there were any deficiencies in the building irrespective of appropriate maintenance,” Dehn said. “They would tell condo owners that they can get things like windows replaced at no cost by suing the original development team, including architects, engineers, manufacturers and all those other people.”

The new law requires buildings to have a record of maintenance issues, repairs and costs from day one. It also made decisions on filing litigation more transparent and more burdensome for unit owners.

But Dehn said he isn’t sure the new law has dramatically changed the supply of condos or townhouses, despite the removal of what developers said were the liability risks. Part of that is the market, but he said there may also be a need for further refinement of liability law. 

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What’s next?

Current state laws fall into three categories: states that require reserve studies; states like Minnesota that provide guidance for reserve studies but no government-enforceable requirement; and states that have no requirements at all.

The national association representing homeowners associations and its Minnesota chapter are reviewing laws implicated by the Surfside collapse and will make recommendations. “They’re asking people, just hold off,” said Howard, who serves on the legislative action committee of the state chapter. “We should have that in the next 30 days or so. That will set guidelines with how we move forward, if there’s a legislative response needed in particular states and what that should look like. ” 

As Howard noted, Minnesota’s law does not require associations to hire professionals to conduct studies. 

Dziedzic, who has lived in a townhouse within a condo association since 1999, said that is something she’d like to review in January. “We think we’re in a good place but there might be some changes,” she said.