So this weekend we learned that condos are bizarre and pretty much guaranteed to cause problems in the longrun, when maintenance bills skyrocket, the buildings are out of date, and the land beneath them appreciates, but you can’t redevelop the property because all the owners will never agree.
You guys posted some great comments, but I wanted to highlight a few.
This weekend we learned that Singapore has a method called “en bloc” redevelopment, whereby a condo building can be sold in its entirety to a single developer, with the idea that he’ll soon tear it down, if 90 (now 80) percent of the building agrees. Canada, on the other hand, is just starting to deal with the issue, but so far the only option for redevelopment is going to court – much messier compared to how it’s done in Singapore.
And today, Japan and Israel! Turns out they’re dealing with the issue of aging condos pretty much the same way as Singapore.
First comes Philip Brasor’s comment about Japan. Philip has a great blog and writes a column for the Japan Times about real estate in the country. In his comment he sums up a JT article he wrote on the topic which covers pretty much everything you wanna know about redeveloping condos in Japan:
The problem is that many of the condos built in the 60s and 70s are now quite old, and unlike in the West, where it’s expected that property values will always increase over time, many in Japan are not worth much of anything unless they’re in the center of major cities. Until 2002, there was no specific law dealing with redevelopment of resident-owned condominium buildings, so if residents wanted to tear their building down and put up something new they had to gain 100% approval in accordance with the Civil Code.
But in 2002 the government passed a law allowing for redevelopment if four-fifths of the owners approved. Some believe the law was pushed by the construction and real estate industries to spur more development. As pointed out in the Market Urbanism article, Asians seem to prefer new buildings, and in Japan there is virtually no incentive to buy used condos. Though there have only been about 160 such redevelopment projects carried out on old condo buildings in Japan, the number may increase as more buildings become superannuated.
And then here’s Shlomo, on how it’s done in Israel:
Israel is much more densely populated that the US but is not as dense as Singapore. Israeli urban areas mainly consist of 3-4 story condo buildings constructed as far back as the 1930s. Recently an “en bloc” type law was passed (called “pinui-binui”, i.e. evacuation-building) requiring just 75% of owners to agree in order for a building to be destroyed and a new, taller building built on the site. I think all original owners are guaranteed ownership of a unit in the new development once it is finished. This has been used to replace many decaying buildings in central areas which where wholly unsuited for the current high property value of the site.
Here’s Levin Law Offices, an Israel real estate law firm, explaining “pinui binui” in further detail:
“Pinui Binui” projects are ones in which apartment owners are temporarily evacuated from their apartments, so that the buildings may be demolished and rebuilt. The owners then return to new apartments in the new building. The contractor pays all costs for demolition, construction, relocating apartment owners and renting their temporary homes during construction. In exchange, the contractor adds new apartments in the building which he can sell in order to make his profit. As with “Tama 38”, the value of the apartments in the building is increased and the owners receive a new, larger and safer apartment than what they previously had. This beautifies the city and adds more apartments to the market.
I suppose it’s only a matter of time before something similar comes to Canada – judicial resolution doesn’t seem like it would scale very well – and eventually the US. The Singapore en bloc method (of just giving you cash) seems much more efficient than the Israeli method (where they have to give you an apartment and pay for you to stay somewhere in the meantime).
In Texas — which follows the Uniform Condominium Act — terminating a condominium, by default, requires the assent of all owners & lienholders. But unanimity can be waived by the condominium declaration, to as low as 80%. I don’t know what the current practice is, to be honest. If Texas developers think it is worthwhile, though, they can write the declaration to allow for termination at 80% rather than 100%.
http://www.statutes.legis.state.tx.us/Docs/PR/htm/PR.82.htm#82.068
Just another comment on the Isreali issue – The Israeli ministry for housing has financed the planning of over a hundred of these “pinui-binui” schemes over the past two decade. Out of all this planning effort (and over 100 million NIS of public money or about 30 million USD) about three schemes have actually started to be executed since in most cases this scheme is too big too succeed (evacuating a few hundred families is not practical). And the worst thing is that we are still building this kind of suburban apartment-owned buildings (only taller) that will be impossible to redevelop in the future.
CONDOS AND THE “FREE” MARKET AND “MARKET” URBANISM
Re: Why do condos EVEN exist [given the problems they seem to present for their owners down the road]?
When looked at without the word “even” (and without the added text within brackets that fleshes the word “even” out), the question seems to me to be one that has already been addressed quite a bit (at least in New York City newspapers). But with the word “even” (and along with the added text), I think there are a number of interesting questions that come up regarding condos and the “free market” and “market” urbanism.
Not being a lawyer and just having picked up my information from the newspapers, I’d always assumed that condominium agreements ALWAYS contained provisions for some set percentage of owners to be able to upgrade or even sell a condo high-rise (or complex) despite the objections of some of the other owners. (Of course, I’m not saying that this is true; I’m just saying that that was my “man-in-the-street” assumption.)
My thinking was that the government wouldn’t even allow people to sign such a “foolhearty” agreement requiring 100% agreement. Such an agreement seems to me to be an “unconscionable” agreement where the signers are just “asking” for “holdouts” and for trouble — like signing an agreement to sell yourself into slavery or “selling” a $100 U.S. bill for $25.
Furthermore, from just reading the papers, for instance, I know that the conversion of rental apartment houses to co-ops is highly “regulated” — as are many other commercial transactions — and I’d always assumed that similar regulations existed for agreements regarding condos.
Since this seems to be incorrect though, this brings to mind a number of interesting questions for “libertarians” and those (like myself) who aren’t “pure” libertarians but nevertheless believe in the wisdom (most of the time) of the “free” market and “market” urbanism.
1) Does the U.S. government have the ability to outlaw such agreements/contracts? Assuming that the U.S. government has the ability to outlaw such contracts (which I’m assuming it does), “should” it (or state governments) do so — and thus “protect” people from signing what seem to be very problematic agreements.
2) I’m kind of surprised that anyone would sign such an agreement, and I wonder if the prices for condos covered by such contracts (i.e., with condo by-laws requiring 100% agreement of all condo owners for sales to a redeveloper, etc.) are lower than those covered by contacts requiring less agreement. I would think that the lower the percentage (maybe down to a supermajority 66% or a majority 51%, etc.), the higher the price for the condo (all other things being equal), as the lower percentages would strike most people as “fair” and ones that would enable them to get the best resale price for their condo when sold at a premium to a redeveloper (and without being hampered by a near impossible contract requiring 100% agreement).
3) For those libertarians who disagree with the idea of statutes saving people from their own “misguided” actions (e.g., smoking, drinking 16-oz of sugary soda pop, etc.), do 100% (or 95%, or 90%) agreements create for cities (and other political subdivisions) “market failures” — likely deteriorating maintenance and difficulty for redevelopment — and does the “market failure” problem warrant the passage of laws forbidding 100%, 95%, 90%, etc. agreement?
4) Maybe a real estate attorney can chime in here — If such agreements have been allowed in the past in the U.S. / New York, how can the problems they’ve created be dealt with given our legal system?
5) Again not being an attorney, I did once read about something called “friendly condemnation” (or was it “friendly eminent domain”?), where a landowner wanted to sell the property for I think a power plant, but was forbidden to do so by a restrictive covenant and “requested” that his property be seized by friendly eminent domain. Maybe this is one possible way to go?
Benjamin Hemric
Tues., July 3, 2012, 5:55 p.m.
I think the problem with calling 100% agreement condos (read: all condos) a “market failure” is that the condominium form doesn’t appear to have been created by “the market” – at least according to that paper I cite, they were spurred by tax subsidies. (And in Singapore they were created by the government outright, so clearly no market failure there.) The prewar co-ops may have been to some extent “market failures” since they require the same 100% consent, but AFAIK they were very rare and only for the superwealthy, which makes me think that people were aware of the difficulty with co-ops and other forms of individually-owned apartments (especially back during a time when redeveloping property after 30-40 years was the norm), and so only those who could afford to essentially buy land that they could never sell would buy into them.
Which three cases are you referring to? I have seen multiple cases within one neighborhood where small apartment building (4-10 families) is torn down to build a larger building. Perhaps pinui-binui was not needed for those cases?
What’s the alternative to owned-apartment buildings in Israel? The country is much too heavily populated for anything else, unless you want everyone to rent apartments rather than owning them, and I don’t think most people are willing to be kicked out of a rented apartment every few years if the owner so decides.
For a single small building it works alright. The pinui-binui scheme relates to multiple slab buildings (shikunim) that have to be razed and cleared before building new apartments in the area and special arrangements are needed for the interim phase. Of those 100+ planned about three have started – one in Kiriat Ono (a wealthy suburb of Tel-Aviv) and one in northeren Tel-Aviv.
Stephen Smith wrote:
I think the problem with calling 100% agreement condos (read: all condos) a “market failure” is that the condominium form doesn’t appear to have been created by “the market” – at least according to that paper I cite, they were spurred by tax subsidies. (And in Singapore they were created by the government outright, so clearly no market failure there.)
Benjamin Hemric writes:
Hi, Stephen! Interesting topic and great links!
Maybe I’m not understanding things correctly, but I’ve gotten the impression from the various newspaper articles that I’ve read over the years — and also from a quick skimming of the Henry Hansmann article (e.g., “1. Collective Decision Making” on page 34) that you linked to — that most enabling statutes that set up the condo form in the U.S. (e.g., in the New York State, which is my main interest) do not actually specify the percentage of agreement necessary for a condo to make decisions on refurbishment and resale (to a redeveloper). The impression I’ve gotten is that each condo would be free to make up its own rules / bylaws, including rules for 100% agreement, 66% agreement, 51% agreement, etc. for decision making.
I agree that if the enabling legislation actually specifies 100% agreement for refurbishment or resale to a redeveloper, than the resulting multitude of “dysfunctional” condo agreements that create virtually frozen in place condos with lesser value (because they are hard to renovate and hard to sell to developers), would not constitute a “market failure.” HOWEVER, if the enabling legislation doesn’t specify 100% and if such problematic condos have nevertheless, for some reason (e.g., due to lack of foresight on the part of buyers, etc.), been proliferating in New York nevertheless than I think this could be seen as a “market failure” because the people who are selling and buying such condos are creating a condition where neighborhoods are likely to become rundown and/or difficult to redevelop.
My guess — and it is only a guess — is that the 100% agreement condos you cite are, for one reason or another, specific only to the jurisdictions that you’ve mentioned. In other words, I’m wondering if New York actually has condos where 100% agreement is necessary. It just seems so obvious a pitfall!
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Stephen Smith wrote:
The prewar co-ops may have been to some extent “market failures” since they require the same 100% consent, but AFAIK they were very rare and only for the superwealthy, which makes me think that people were aware of the difficulty with co-ops and other forms of individually-owned apartments (especially back during a time when redeveloping property after 30-40 years was the norm), and so only those who could afford to essentially buy land that they could never sell would buy into them.
Benjamin Hemric writes:
I wonder if even co-ops in New York require 100% agreement? The impression I get is that they don’t. I’m kind of thinking of those controversies that make the papers — like those at the Dakota — the impression I’ve gotten is that 100% agreement is not required.
But co-ops are notorious for being more restrictive than condos — one of the “advantages” of condos in New York — and I’ve gotten the impression that the differences in strictness is reflected (depending on the submarket) in the marketability / price of a unit. For instance, and again I’m just guessing, when a more modest co-op is for sale — and NYC does have “plenty” of modest co-ops too, I believe — the restrictiveness might be a negative, lowering the price. When a super-luxury co-op is on sale this might not be a negative since (as your comment also suggests) people in that submarket might have different values (and in this instance, actually appreciate the super restrictiveness).
Benjamin Hemric
Thurs., July 5, 2012, 8:55 p.m.