Legal/Legislative Update – March 15, 2015

Published on: March 16, 2015

CONDO REVIVAL.   Don’t get too excited yet – or too far ahead of the data – but some industry analysts are beginning to report evidence of a condominium revival. “While nobody’s ready to condo like it’s 2005, in markets across the country, for-sale multifamily has a new appeal,” a recent article in Multifamily Executive News), an industry trade publication, observed. The article includes Boston – along with Philadelphia, Washington, D.C., Atlanta and Chicago ―on a list of markets that are beginning to see “a reawakening of condo sales and starts.”

Statistics compiled by the National Association of Realtors (NAR) provide some support for that optimism. The inventory of condos available for sale has been averaging 5.2 months for the past two quarters, the NAR reports. That compares with an average of 9.7 months in 2011, when the market was starting to recover. Separately, the National Association of Home Builders reports that the multi-family production component of its new construction index hit 50 in the third quarter of last year. That’s up from a low point of 9 in the third quarter of 2008.

“Condos are back, at least in selected markets,” Jordan Ray, managing director of the debt and equity financing group at Mission Capital Advisors, told the trade publication. “You’re seeing it in markets with strong job growth and increasing home prices, so I wouldn’t be surprised if you started seeing condominiums in Los Angeles or similar markets.” But the revival is not universal, Ray emphasized, noting, “We’re not jumping at the opportunity to raise capital for ground-up condo deals in Dubuque, Iowa.”

HARDER TO SUE.   Responding to complaints from home builders about the negative impact of construction defect litigation, lawmakers in several states are moving to make it more difficult for homeowners to sue for construction flaws. A Wall Street Journal article identified six states in which legislatures have enacted or are considering legislation to curb construction defect suits. The list includes Nevada, where a new law will require owners to describe defects they are alleging in detail and give builders an opportunity to fulfill warranty requirements before owners can file suit against them. Pending legislation in Colorado would require owners to attempt to resolve their complaints via mediation or arbitration before going to court, while a proposed measure in Washington State would require a professional to inspect and verify alleged defects before owners could reject a builder’s settlement offer or file suit. Builders say these and similar measures reflect their willingness and preference for resolving defect complaints out-of-court; consumer advocates say the measures make it more difficult for aggrieved owners to pursue legitimate complaints.

SPRING THAW?   Industry analysts have been arguing for some time that a dearth of available homes for sale is a major reason, if not the only one, for the less than robust housing recovery. But there are signs that this ice dam, at least, if not the ones on New England roofs ─ may be melting. Realtor.com reported recently that inventory levels in 20 major markets have been increasing, with the Boston-Cambridge-Newton, Mass.-N.H. market ranking 20th on that list of markets that are “heating up.” Waco-Fort Worth-Arlington, TX; Santa Rosa, CA; Denver-Aurora-Lakewood, CO; and Vallejo-Fairfield, CA are at the top.
“The biggest macro trend is that we’re finally seeing inventory grow,” Jonathan Smoke, chief economist for realtor.com, noted in a press statement. “This is a very important trend for many reasons,” he said, “in particular, because it will help keep prices at a more moderate level down the road.”

DISAPPOINTINGLY WEAK.   Despite increasingly optimistic assessments of the housing market outlook from industry analysts (see above), January reports reflected what most agreed was a “disappointingly weak” start on a path toward a solid year for home sales.

  • Existing home sales declined by 5 percent compared with December, falling to their lowest level in 9 months, although remaining about 3 percent ahead of the year-ago pace, according to the National Association of Realtors (NAR).
  • New home sales also declined, although only slightly (by 0.2 percent), suffering less than analysts had feared from the severe winter weather that crippled some parts of the country. However, single-family starts and permits both declined, closing the door on expectations that sales will improve in the near term and leading some analysts to predict another imminent downturn.

“The housing recovery is faltering,” David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices, told Housing Wire. “The softness in housing is despite favorable conditions elsewhere in the economy: strong job growth, a declining unemployment rate, continued low interest rates and positive consumer confidence. Before the current business cycle,” he noted, “any time housing starts were at their current level of about one million at annual rates, the economy was in a recession.”

A ‘WOW’ REPORT – MOSTLY.   The February employment report produced solid reviews and more than a few “wows,” as employers added 295,000 workers to their payrolls. The strong performance beat both more conservative estimates and the January jobs total, which was revised downward. It also marked the 12th consecutive month in which payrolls increased by 200,000 or more. The unemployment rate, which had ticked up in January, ticked down again, falling from 5.7 percent to 5.5 percent.

Wage growth, the critical missing ingredient in the economic recovery, continued to disappoint, however, with earnings increasing by a scant 0.1 percent. Analysts concerned that anemic wage growth will short-circuit the housing recovery and undermine economic growth became more concerned.

But some economists see evidence of underlying strength not yet reflected in the earnings data. Among them is Mark Zandi, chief economist for Moody’s.com, who thinks demographics rather than structural weakness explains the slow growth in wages. He points specifically to the shift resulting as retiring baby boomers, at the top of the earnings scale, are replaced by younger workers several rungs below them.

Zandi also sees indications that the wage freeze is beginning to thaw. For one thing, he notes, turnover is increasing – a sign that workers are optimistic about their ability to find new jobs; and employers are beginning to feel pressure to increase wages in order to hold on to workers. Walmart and TJMax recently announced increases in their minimum wage and other companies are expected to follow, Zandi and other similarly optimistic analysts are predicting.

WHAT, ME DOWN SIZE?   Past generations of retirees have scaled back their living space and their housing expenses, but baby boomers don’t appear to be following that pattern. Many of the baby boomers responding to a survey conducted by the Demand Institute said they are actually planning to buy larger homes with more upscale features. Analysts say the results reflect the “delayed dreams” of boomers, who suffered financial setbacks during the recent downturn.

“While many have been forced to adapt their retirement and housing plans to new financial realities, they haven’t abandoned those plans entirely,” Louise Keely, president of the Demand Institute, said in a press release. Researchers interviewed 10,000 consumers between the ages of 50 and 69. More than one-third (37 percent) said they intend to move and of those, nearly half (46 percent) said they intend to spend more on or have more space in the next home they buy.

Nearly two-thirds (63 percent) don’t intend to move, however; they plan to invest in their existing homes instead. But they won’t be adding grab bars and other age-related features; their focusing on renovations that add value or style.

A recent survey by Trulia produced similar results: 26 percent of the respondents (aged 55 and older) said they wanted a larger home, compared with 21 percent who said they wanted a residence smaller than their current home.

“Age doesn’t tell the whole story about why people might want to downsize,” Trulia Housing Economist Ralph McLaughlin observed in his analysis of the survey. “It could be that certain kinds of households — such as those without children, and living in the suburbs or in affordable areas — might be more likely to live in larger homes than they need.”

LEGAL BRIEFS

IMAGINARY NUMBERS.   Mathematicians give tangible meaning to imaginary numbers, but an Illinois Appeals Court was unwilling to do the same for residential lots that were proposed but did not yet exist. This dispute (Southbury Master Homeowners’ Association v. Southbury Land Venture, LLLP), involved a phased residential development divided into 9 pods. The defendant (Southbury Land Venture) owned two of those pods, which were to contain a combined total of 295 units.

The declaration specified that assessments would be due on each lot “upon the earlier of (i) conveyance of title to a Lot to the first purchaser of a Dwelling Unit on such Lot or (ii) the initial occupancy of a Dwelling Unit.” But this provision also provided that if the developers had not constructed the number of dwellings specified in a proposed build-out schedule, assessments would be due on the “closing shortfall.”

The homeowners’ association argued that based on that language, the developer should have paid assessments on all 295 lots in the two pods it owned, totaling $339,250 including late fees attorneys’ costs and legal fees.

The trial court read the declaration differently. Focusing on the language indicating that an “assessable lot” was created when title was conveyed to the first purchaser of a dwelling unit or upon the initial occupancy of a dwelling unit, the trial court found “no evidence that either of these two events occurred in either Pod 3 or Pod 8.”

The trial court also rejected the association’s argument that the “closing shortfall” language made the lots assessable, even though no units had been constructed. The problem here, the court found, is that the parcels in the two pods did not meet the declaration’s definition of a lot as “any parcel of land occupied or intended for occupancy by one dwelling.” The final plats for all the e other plots (with one exception) reflected the locations of streets and individual lots. But no final plat had been recorded for the disputed pods, and without the plat, the court concluded, there could be no assessable lots, as defined by the declaration.

The association appealed, arguing that the lower court ruling failed to interpret the declaration’s plain language—specifically the provision creating an assessment liability for any “closing shortfall.” The absence of a final plat and whether the parcels in the pods qualified as “lots” were both irrelevant, the association contended. The appeals court disagreed.

Any contract must be interpreted based on the intentions of the parties as reflected in the contract as a whole, the court noted, “not by viewing a specific provision in isolation or by looking at detached portions of the contract.” And the declaration’s plain language, “construed in its entirety,” the court concluded, reflected an intention to make pods assessable only after a final plat had been recorded. The declaration defined pods subject to assessment as those reflected on the preliminary plat and “finally located on each final plat for each pod.” The operative word in that provision, the court said, was “and,” meaning that both conditions ―included in the preliminary and final plats — must be met.

“The declaration’s plain language reflected a clear intent that a ‘Pod’ would not be assessable … until reflected in a final plat,” the court said.

Supporting that interpretation, the court noted a separate provision defining property subject to the declaration, which stated: “[It is] anticipated that each pod will be subject to its own separate, recorded final plat…and that each plat must be prepared and recorded.”

The court wasn’t persuaded by the plaintiff’s argument that rendering the build-out schedule “impotent” would allow developers to determine when or if they would begin paying assessments and to delay indefinitely final development of the property. “This delay seems to be one of the reasons an enforceable build-out schedule is included,” the association argued.

The court found this argument “unavailing.” The parties subject to the terms of the declaration were “sophisticated,” the court said, capable of defining their concerns and protecting their interests. “If they were concerned about the possibility that builders would delay developing lots and accessible lots on pods, then they could have contractually mandated builders to develop a specific number of lots within a specific timeframe,” the court said. They could also have specified that developers were required to record a final plat instead of simply incorporating a build-out schedule they descried as “proposed.”

Concluding that the declaration was not ambiguous and said what the parties intended, the appeals court upheld the lower court’s judgment that the developer did not have to pay assessments on his un-developed parcels.

WORTH QUOTING:

“The Administration remains ready, willing, and able to work in good faith with members of both parties to complete this important but unfinished piece of financial reform. As memories of the financial crisis fade, we cannot become complacent. The best time to act is when the housing market is well along the path to recovery and credit markets are normalizing, not on the precipice of a new economic shock when there is little time to be thoughtful.” ― Michael Stegman, U.S. Treasury Department Counselor to the Secretary for Housing Finance Policy, signaling the willingness to tackle reform of the nation’s housing finance system.