Without exploiting the tragedy at Champlain Towers South in Surfside Florida, there are some very useful lessons for Australian strata stakeholders for dealing with the aftermath of a structurally impaired building that may have some relevance right now.
Introduction
It’s now more than 3 weeks since the partial collapse of Champlain Towers South in Surfside, Florida, and lessons from the tragedy are starting to emerge for all strata stakeholders.
I’m not talking about the causes of the collapse and who’s to blame as we won’t know much about that for some time whilst engineering investigations continue and the inevitable litigation that follows keeps much of that information confidential.
Rather, I’m referring to the practical lessons for buildings that suffer significant or total structural failure and damage. And, how those lessons might apply to Australian strata buildings.
The latest in Surfside news
As I pointed out in ‘It’s Time for Some Global Strata Help’, there’s an ongoing news service from the New York Times about developments at Champlain Towers South here. Plus, there’s a Wikipedia page too where you can keep up to date.
But now the whole Champlain Towers South building has been demolished for safety reasons so there’s no prospect of repair and the strata aftermath of that outcome needs to be addressed.
This Washington Post article ‘What will become of the land the Surfside condo is on?’ is a good introduction to these aftermath issues which I analyse and apply to an Australian strata building situation below.
Emerging issues for structurally compromised buildings
The latest news and developments at Champlain Towers South raise, for me at least, the following broader issues for strata stakeholders in relation to strata buildings that suffer damage that structurally compromises them.
1. Demolition of the building
At Champlain Towers South, doubts about the structural integrity of the rest of the building and the imminent arrival of Hurricane Elsa, meant that authorities urgently ordered the complete demolition of the building for safety reasons.
This appears to be logical. But since only part of the building collapsed, it might have been possible that [subject to engineering advice] the remainder of the building could be preserved and saved and the collapsed parts rebuilt. We’ll never know that now.
And, whilst total demolition may have been the eventual outcome anyway, the demolition closed off all other options; avoiding lengthy investigations, debates, and voting about what to do next at the building.
It has also accelerated aftermath issues for all strata stakeholders.
For me, this sudden demolition of Champlain Towers South highlights the issue of who decides [and who should decide] what should happen to a structurally impaired building: is it the strata owners, public authorities, an independent authority, the building insurer, a combination of those parties, and/or someone else.
Additionally, it makes me wonder whether a quick decision about this fundamental issue is better than long-running investigations, consultations, and decision-making processes.
2. Re-housing the occupants
An immediate issue that arose for the evacuated residents of Champlain Towers South was where they would go, in the short term and in the medium to longer term.
Plus, the position differs for strata owner-occupiers and renters as they have less or more flexibility depending on their legal status.
So, at Champlain Towers South that’s been solved by a combination of government emergency housing, charities and strata building insurance coverage. But, that’s not going to continue indefinitely. And, definitely not for as long as it takes to sort out all the aftermath issues and compensate the strata owners and residents.
For me, this highlights the problem that strata apartments are more than just financial assets and provide housing solutions that are not easily to replace in a hurry and in emergencies.
3. Appointment of manager
At Champlain Towers South the board of directors [like our strata committee] asked a Court to appoint an independent person to act as an administrator for the strata building and take over decision making and operational control.
In fact, the appointee was a lawyer with expertise in condominium law.
There are some good reasons why this was done for a number of reasons, including:
- because the committee members may be traumatised, injured, or otherwise unable to undertake their duties,
- because the history of disagreement in the building means the committee members are exposed to legal actions which would complicate ongoing involvement.
- so that the committee members are not exposed to future claims about how they handle the aftermath issues,
- given the significant work now likely to deal with aftermath issues, volunteers like committee members can’t do it or won’t have the time to do it,
- the committee members may have just had enough,
- appointing an independent person may avoid all [or some] personal attacks that might otherwise occur, and
- the aftermath issues require expertise that the committee members may not have.
For me, this development highlights whether there should always be an independent and expert person appointed to run buildings in serious crises rather than allowing the incumbent committee members, managers, and strata owners to do so.
4. Insurance claims, legal actions & more
As you’d expect there’s insurance for the building that covers its collapse and consequential damage and losses which Champlain Towers South can access. But, it’s not likely that the insurance claim will be finalised quickly, and given the reporting about the prior knowledge of the structural deterioration it’s possible the insurer will seek to avoid or minimise its exposure due to non-disclosure or contributing liabilities.
Plus, as the reporting shows, strata owners are also suing Champlain Towers South about the collapse and there’s likely to be more legal actions including:
- actions about the collapse by more strata owners,
- actions for losses by strata owners and residents which are not covered by insurance,
- actions by neighbours and others who have suffered loss and damage by the building collapse,
- prosecutions and other actions by regulatory authorities over past and ongoing issues relating to the structural issues, partial collapse and demolition, and
- actions by service providers and others for lost contracts, unpaid charges, etc arising from the end of strata operations at Champlain Towers South.
For me, this development highlights that there are more than just personal and property issues in the aftermath of a strata building structural crisis, but also a myriad of complex, ongoing, and [sometimes] unexpected legal issues.
5. Sale and redevelopment of the site
The Washington Post article focused on the debate about what to do with the land at Champlain Towers South now that the building is gone.
The debate has personal, emotional, financial, and social implications for everyone.
The most likely options for the site include:
- rebuilding by the strata owners,
- redevelopment into another apartment complex by developers,
- redevelopment into a commercial building [probably a hotel], or
- creation of memorial and/or park.
Leaving aside the difficult issue of who decides those questions [most probably the strata owners] and the external issues that may affect the which I partially cover below, it’s likely that the outcome will be dictated by practicalities and economics. In other words, the easiest and most cost effective outcome is most likely to occur.
For me, this development highlights that tragedies like the collapse of Champlain Towers South can provide opportunities for outsiders to play a part in the future of the strata building site when public interest or social issues weigh heavily or even town planning opportunities exist.
6. Money shortfalls
The reporting suggests that Champlain Towers South could realise $48 million from insurance and $130 million for the sale of the land for a total recovery of close to $170 million.
There were 136 apartments at Champlain Towers South so that’s maximum a gross average recovery of $1.25 million per apartment or strata owner.
But from that there’s a lot of costs and expenses that will need to be paid covering the myriad of direct costs associated with the collapse, strata owners and resident’s alternate accommodation and losses, damages under legal claims, legal costs for defending and taking actions, expert costs, the administrator’s costs, etc, etc, etc.
Even if those costs are only 20% of the recovered money [which I’d say is a bit conservative], that leaves $1 million for each strata owner [on average].
A quick look at prices for apartments in Collins Avenue, Surfside where Champlain Towers South is located on Zillow shows prices ranging from about UA$500,000 for a low-level 2-bedroom apartment to US$32,000,000 for a 5-bedroom penthouse.
So, it’s not looking like any strata owner is going to get all their capital back. Which of course triggers issues for lenders on strata apartments in Champlain Towers South. The Washington Post article reports on a few owners likely financial ruin.
Plus, receiving that amount depends on complete success with the insurance claim and a profitable sale, and the money won’t be paid to strata owners [in full] until sometime down the track when those processes and the winding up of the strata building is completed.
For me, this development highlights three things:
- that there are very significant differences in the value of usable real estate [even if it is in a dilapidated state] to unusable real estate,
- that real estate markets and property prices never factor in the true risk and exposures that exist in strata buildings, and
- that despite mandatory building valuations and insurance to cover the rebuilding of strata buildings, if a total loss claim ever needs to be made it’s unlikely to properly compensate owners.
7. Government assistance
There’s been a fair bit of government assistance so far at Champlain Towers South including emergency services for residents, emergency services relating to the collapsed structures, experts investigating the collapse, emergency housing, emergency food, etc.
But, as the article indicates, some stakeholders are looking for more assistance by asking the government to buy the land and create a memorial or park.
That’s unlikely since the commercial value of the land as a memorial or park than for redevelopment purposes so selling it to the government will recover less money and it’s hard to see why other taxpayers would be happy subsidising the Champlain Towers South strata owners’ losses by paying above market value.
But, maybe there’s another way the government can assist the Champlain Towers South strata owners? That’s by rezoning the site and/or changing planning controls to allow for higher density construction and/or higher value uses so that the sale to a developer or other commercial owner can be for a higher value. Obviously, that may face the usual NIMBY objections and some hurdles, but as a one-off solution that doesn’t cost the government [and taxpayers] money, it’s worth considering.
For me, this development highlights the need for government assistance when serious strata building crises occur and reveals opportunities for non-financial support by rezoning or changing planning controls to add value to the site for resale.
An Australian strata building crisis
Sadly, we have a partially comparable strata building in Australia at Mascot Towers in Sydney.
That’s a 131 apartment strata building is Sydney that suffered significant structural damage [allegedly] due to the undermining of its foundations by the excavation work for an adjoining strata apartment development.
Whilst there have thankfully been no deaths there, the building is structurally compromised and was vacated in June 2019 and no strata owners or residents have been able to return to it since then.
Two good articles about the situation are by ABC News ‘What we know about the Mascot Towers cracks’ and the Sydney Sentinel ‘The leaning towers of Mascot’.
So, how do the 7 lessons I’ve identified from Champlain Towers South apply to the situation at Mascot Towers?
Lesson 1: Demolish or not?
No one has made any decision about the demolition of Mascot Towers since it’s possible to restore the structural integrity of the building. It’s just that the work will be at a considerable cost which the strata owners won’t or can’t pay.
So, public authorities have only gone so far as to issue orders that the strata building can’t be occupied but not that it should be demolished or that remediation works should be done to it.
But after 2 years and with no imminent decision by the strata owners about what to do and no structural repair works underway, maybe it would have been better that someone made an earlier decision to forced the issue here?
And, perhaps Lesson 3 might be the more important lesson in these circumstances.
Lesson 2: Rehousing the occupants
So far, the NSW Government has been paying strata owners at Mascot Towers money to cover alternate accommodation costs or lost rent of between $220 and $400 per night under the Mascot Towers Assistance Package. That’s been extended recently to the end of September 2021.
It’s also unlikely that the Mascot Towers’ strata building insurance policy would cover alternate accommodation costs as the evacuation was not the result of an insurable event or was for an excluded cause. But, even if it does, typical alternate accommodation cover under strata building insurance is limited to 6 or 12 months.
So, strata owners and residents of Mascot Towers are being compensated for alternate accommodation costs for now. But, it’s not likely to continue forever [or is it]?
Perhaps the comfort of government accommodation assistance is allowing the hard decisions and actions in the aftermath of the structural crisis at Mascot Towers to be deferred and avoided?
Lesson 3: Appointment of manager
I understand that a strata manager administrator was appointed for a time by NCAT at Mascot Towers but that ended and it hasn’t been extended or anyone reappointed.
So, it appears that Mascot Towers is being run by the strata owners in a time of crisis when all of the challenges I identified earlier in this article exist and are continuing. In the meantime, Mascot Towers is effectively mothballed.
Perhaps it would be better that someone else was in charge?
Lesson 4: Insurance claims & legal actions
You won’t be surprised, that things are less than good on these fronts.
It’s unlikely that Mascot Towers strata building insurance covers the structural damage it has suffered since it results of subsidence [which is typically excluded].
And, the current legal action against the adjoining developer and associated advisors will take time and is difficult.
Plus, the inevitable legal claims from strata owners, residents, tenants, and service providers will continue as the building.
So, despite not having collapsed like Champlain Towers South, Mascot Towers may recover even less compensation for its strata owners.
Lesson 5: Sale and redevelopment of the site
As the Sydney Morning Herald reported in ‘End this nightmare’: Mascot Tower owners call for resolution ahead of possible sale’ some strata owners at Mascot Towers are urging the sale of the building to a developer.
Even if that’s the right decision, the collective sale provision in the New South Wales strata laws involves a lengthy [6-18 month] process for such a sale involving multiple meetings and Court approvals.
Plus, it’s not clear what redevelopment would be possible on-site given its location over the top of a railway station and current medium-rise only development controls in the area.
So, it’s possible under that option that a developer would buy Mascot Towers from the strata owners at a discount, do the structural repair work they won’t or can’t fund, and then re-sell the apartments at the repaired building for full market value. A very nice windfall for that developer …. so, anyone want to lend me $42.5 million?
Lesson 6: Money shortfalls
As this lesson predicts there are going to be money shortfalls at Mascot Towers.
If we do the same math for Mascot Towers things look even worse than at Champlain Towers South.
Based on a reported selling price of $42.5 million and with 131 apartments, that’s a maximum gross average recovery of $325,000 per apartment or strata owner. Take another 20% off for the various costs and expenses that might come out and we’re down to $250,000 per apartment.
With 2-bedroom apartment selling in the area for more than $750,000, that’s a significant loss.
Plus, Mascot Tower also has a strata loan it’s been using for investigations, legal and expert costs, emergency works, and potential future repairs. So, that has to come off the net balance too.
If Mascot Towers wins or settles its litigation over the structural matters, that’s extra money for the strata owners. But since the rectification costs are estimated at $15 million, the net recovery won’t be more than that [so another $110,000 each] at best.
So, I’m just waiting for the lenders to the strata owners at Mascot Towers to finally appear out of the limelight when they’re told that they won’t get their loans repaid in full to see how happy they’ll be about that.
Lesson 7: Government assistance
The New South Wales government has provided some assistance to Mascot Towers by paying for some engineering advice and with the Mascot Towers Assistance Package.
Some stakeholders are also asking the New South Wales government to buy the building from the owners. But, that will never happen at market value, so what’s the point?
Otherwise, the New South Wales government appears to be staying out of it and the cynic in me says that it is cheaper for them to keep paying rent whilst the aftermath of the crisis plays itself out.
But, perhaps the New South Wales government could assist by rezoning the site to allow a higher density building to be developed on it if the strata owners really do want to sell and get out? After all, it is at a public transport hub.
Conclusions
We don’t often experience serious strata building crises like collapses or structural failures causing long-term evacuations.
So, we need to learn from them and apply those lessons to similar and comparable situations.
I don’t know what Mascot Towers should do and it’s not for me to say, but as I’ve tried to highlight in this article there are a few useful lessons from Champlain Towers South that are worth taking and applying around independent management, faster decision making, quicker action, staying in or getting out, and, non-financial government assistance if the strata owners [and other stakeholders] want to avoid a significant financial loss.
I hope that the strata owners at Mascot Towers find a way to restore their asset values quickly and effectively.
from Francesco Andreone
