So, I'm getting a lot of requests to convert 2 and 3 family homes to condos.
I know the risks in doing condos - and have been talking to my insurance company about it. I've pretty much decided it's not worth it - too complex to deal with cheap developers and reduce my liability. So I'm avoiding condos.
However, I'm getting another type of request - people who have 2 or 3 family homes and want to renovate - maybe turn them into condos some day, maybe not. Obviously, this is potentially just as risky as a straight condo conversion.
It's got me thinking though - isn't any apartment building have the potential to be turned into condos at some point? Should I be avoiding any multifamily residential?
And, is a 2 or 3 unit condo building really the problem - when it comes to liability in condo project? Isn't it larger buildings - say 10 units and up - that have the issues?
x-jla
Apr 2, 15 1:11 pm
i always thought up to four units was in a differnt category?
x-jla
Apr 2, 15 1:14 pm
also, yes some apartment buildings sell random units and rent others.
Scott Deisher
Apr 2, 15 1:20 pm
can someone explain the liability issues of condo conversion?
stone
Apr 2, 15 1:30 pm
My E&O carrier always advised that it's not necessarily your direct client who poses the greatest liability risk, but the unsophisticated unit buyer(s) who purchase from your client -- they're the one's who always a) pay too much for the unit they buy; b) seem to expect perfection and c) blame the architect when perfection doesn't exist.
Personally, I don't think there's much direct correlation between risk and the size of the project. If a disgruntled purchaser wants to sue you, you'll get sued. For that reason, our firm always shies away from multi-family residential design when there's any serious possibility the units will be sold individually - life's just too short.
Oh, and at renewal time each year our E&O carrier takes a close look at the project types we design. In years past, when we did do any meaningful amount of multi-family residential work, our rate increase always seemed to be a bit higher than we otherwise would have expected.
chigurh
Apr 2, 15 4:39 pm
classic developer technique..."oh, we just want to do a renovation"...6 months later...condos.
gruen
Apr 2, 15 9:24 pm
Sound like I'm not crazy.
Maybe also an issue for investor clients who are rehabbing single families too.
more reasons for getting the F out of residential arch all together.
awaiting_deletion
Apr 2, 15 9:30 pm
condos. for example
20 units all the same means potential 20 lawsuits instead of 1.
the crazy guys in NYC were doing condos in the boom time without insurance since it was cheaper to take the risk and pay the lawyers yourself.
owners wised up and now ask for it.
if the project is massive, the owner themselves often has to carry the costs of insurance for the job.
cajunarch
Apr 2, 15 9:54 pm
my 2 cents:
1) try not to do condos (or anything that smells like it might become a condo) : )
2) If you need to design condos for your practice, either get Owner/developer to buy the insurance (and get as much hold-harmless language in your contract as you can) or get a project policy for the FULL length of the liability period in the state where the project exists - that can help keep your regular E&O policy reasonable
Carrera
Apr 3, 15 9:55 am
Here is an article from an insurance company confirming the risk with suggestions on insurance & contract language – I offer it with two provisos:
First – If you put all this language in your contract the developer probably won’t sign it and will easily find someone else.
Second – I appreciate the concept that a 20 unit condo has 20 times the law suit potential, but as other articles point out the reason it’s a risk for architects is that 99% of developers set up separate corporations for each project then evaporate when the project is sold out leaving the architect standing in a glass phone booth. My point is, fine, what’s the problem, just do the same thing.
In 40 years of practice and with some projects being north of $50 Million, we never had continually running liability insurance. We had project specific insurance for clients who demanded it and we made most pay for it. Why all the hand wringing over liability? I’ve said this before, just don’t keep any assets in your corporation or set up a separate residential corp that you can evaporate…..if you hyper analyze every project for liability you’ll never leave the house.
Donna Sink
Apr 3, 15 10:07 am
HUGE caveat to what Carerra just posted: if you hold an architecture license in a state with personal liability for registered professionals (about half the states, I've been told), you CANNOT do what he suggested. Liability is tied to your license, not your corporation, in other words, you as an individual human can be sued and not have corporate protection.
Carrera
Apr 3, 15 11:02 am
Donna, there are two types of liability for architects, professional and financial. If your bridge falls down in your next Hyatt Hotel there is nothing that can protect you…..assume we are not talking about that type of liability, believe all the fray over condos is about people being too hot or too cold…things that are not life threatening and in that regard nobody’s getting there license pulled for that sort of thing. Architects are offered the same veil of protection as any other business….if what you state were true why would architects bother to incorporate? Just not true financially.
bklyntotfc
Apr 3, 15 11:33 am
Carrera -
How would a condo owner's suit not fall under professional liability? The roof leaks...the heating system doesn't work...etc. All PL issues that you're going to have to deal with even if you set up and disbanded an LLC for that project. Are you saying you've severed any liability in these cases? If so, I'd love more details, and my insurance guys have said it can't be done.
I guess if there was a lawsuit over the financial status of the condos - that you'd be shielded, but that seems like it would be the rare exception to the rule.
One thing I have heard of - but not had time or resources to investigate - is that there are ways to set up mechanisms that can actually shield your personal assets. I believe this involves setting up your assets under a trust - so that the trust owns them, not you. I think the applicability of this varies state to state though.
Donna...maybe this would be a good topic for a Sessions podcast some time.
Donna Sink
Apr 3, 15 11:41 am
Bklyntotfc if you hold property in partnership with someone, like a spouse, that property is protected from seizure. Another awesome thing about marriage!
Carerra, this is what was explained to me: the license is held by an individual, and in some states that individual does not have corporate protections. Architects incorporate for all the tax and other reasons that one would choose to incorporate, but my understanding is that in addition to suing the corporation, in personal liability states you can also/or sue the person.
I'd like to get Brian Newman's take on this on the podcast, yes.
x-jla
Apr 3, 15 11:44 am
so, im a little confused here....Is the issue that there is a greater chance of lawsuits because there is a greater number of characters buying/ greater probability of dissatisfaction? if so whats the difference between 20 condo units or 20 sfr's?
Carrera
Apr 3, 15 11:50 am
To add – there are two types of suits that can be brought against architects 1) Economic Loss & 2) Tort. Tort comes into play under personal injury and the veil can be penetrated, but in most all incidences suits are economic and protected under Economic Loss Doctrines which respect the veil. Attached is a link to a good article on the subject.
It’s a big country and perhaps there are states that fail to protect….Florida have been one, but action is being taken to reverse the trend.
There is a classic ambulance chaser attorney technique to go knocking door to door before the construction defects statute of limitations is up, asking owners if there are any problems with their units. yea... the project is fucking 9.5 years old...some of the shit is wear and tear, others might be real defects, the problem is, these dirt bags try to rally-up class action lawsuit for all owners involved and pin all the 10 year old problems on design team/contractors. That is why I would never touch a condo.
Donna Sink
Apr 3, 15 12:17 pm
That's an excellent article, Carerra, and while it explains some things it also does still show how complex the law can be.
Carrera
Apr 3, 15 1:06 pm
Donna, yes it is, just responding to the condo question primarily….though don't think it's the “law” that’s “complex” it’s the “twist” attorney’s try to put on it.
bklyntotfc
Apr 3, 15 3:06 pm
Donna...for protecting assets, that was the idea, although as I understood it, the trust itself is a legal entity that 'has rights' in a way, so that even if you're the sole beneficiary of the trust, you put your assets into the trust, and as long as you don't have direct control over the trust itself (you set up a trustee to do that), then you don't own that house or car, the trust does, and they can't get to it. I've assumed that it must be expensive to set up, so only for those better off than me, but I sure like the sound of it.
Carrera
Apr 3, 15 4:05 pm
Bklyntotfc, Sorry missed your first post….if you have PL you just pay the deductible and let them handle it, problem is most carriers will turn the screws on you to stay out of it, and if they do settle it your rates are going up….and if it’s real bad they will drop you, then what?
Not saying I walked from everything, fixed/bought a lot of things because it was the right thing to do, but when it got unreasonable they had nowhere to go. Also most things aren’t your fault and you get dragged into things….once they see empty pockets they go away fast. The most likely place you’ll get sued is trying to collect money.…you’ll get countersued….if you have PL you’ll get pressure to drop your case and you’ll lose the fee. Better to fly solo with empty pockets IMO.
I have a trust but can’t have my name on it (at least in my state), also when you own anything jointly with your wife you must also give up dower rights….it’s hard to consider because if there is a divorce you won’t be entitled to any of it. That can be circumvented with a postnuptial agreement; also the trust needs to be an Irrevocable Trust not a Living Trust…..stuff is rock solid. They have software packages now where you can do it yourself, cost about $100-500., plus transfer fees for each piece of property ($20-100.ea)….small price to pay vs losing everything, regardless how small. Also do it early because courts will reverse them if done too close to a crisis.
Nam Henderson
Jul 4, 16 5:39 pm
@Donna, I can't remember, did this Session with Brian Newman directly speak to this/@bklyntotfc's question/point?
So, I'm getting a lot of requests to convert 2 and 3 family homes to condos.
I know the risks in doing condos - and have been talking to my insurance company about it. I've pretty much decided it's not worth it - too complex to deal with cheap developers and reduce my liability. So I'm avoiding condos.
However, I'm getting another type of request - people who have 2 or 3 family homes and want to renovate - maybe turn them into condos some day, maybe not. Obviously, this is potentially just as risky as a straight condo conversion.
It's got me thinking though - isn't any apartment building have the potential to be turned into condos at some point? Should I be avoiding any multifamily residential?
And, is a 2 or 3 unit condo building really the problem - when it comes to liability in condo project? Isn't it larger buildings - say 10 units and up - that have the issues?
i always thought up to four units was in a differnt category?
also, yes some apartment buildings sell random units and rent others.
can someone explain the liability issues of condo conversion?
My E&O carrier always advised that it's not necessarily your direct client who poses the greatest liability risk, but the unsophisticated unit buyer(s) who purchase from your client -- they're the one's who always a) pay too much for the unit they buy; b) seem to expect perfection and c) blame the architect when perfection doesn't exist.
Personally, I don't think there's much direct correlation between risk and the size of the project. If a disgruntled purchaser wants to sue you, you'll get sued. For that reason, our firm always shies away from multi-family residential design when there's any serious possibility the units will be sold individually - life's just too short.
Oh, and at renewal time each year our E&O carrier takes a close look at the project types we design. In years past, when we did do any meaningful amount of multi-family residential work, our rate increase always seemed to be a bit higher than we otherwise would have expected.
classic developer technique..."oh, we just want to do a renovation"...6 months later...condos.
Sound like I'm not crazy.
Maybe also an issue for investor clients who are rehabbing single families too.
more reasons for getting the F out of residential arch all together.
condos. for example
20 units all the same means potential 20 lawsuits instead of 1.
the crazy guys in NYC were doing condos in the boom time without insurance since it was cheaper to take the risk and pay the lawyers yourself.
owners wised up and now ask for it.
if the project is massive, the owner themselves often has to carry the costs of insurance for the job.
my 2 cents:
1) try not to do condos (or anything that smells like it might become a condo) : )
2) If you need to design condos for your practice, either get Owner/developer to buy the insurance (and get as much hold-harmless language in your contract as you can) or get a project policy for the FULL length of the liability period in the state where the project exists - that can help keep your regular E&O policy reasonable
Here is an article from an insurance company confirming the risk with suggestions on insurance & contract language – I offer it with two provisos:
http://www.cavignac.com/publications/professional-liability-update-condominium-projects-insurance-implications-for-design-professionals/
First – If you put all this language in your contract the developer probably won’t sign it and will easily find someone else.
Second – I appreciate the concept that a 20 unit condo has 20 times the law suit potential, but as other articles point out the reason it’s a risk for architects is that 99% of developers set up separate corporations for each project then evaporate when the project is sold out leaving the architect standing in a glass phone booth. My point is, fine, what’s the problem, just do the same thing.
In 40 years of practice and with some projects being north of $50 Million, we never had continually running liability insurance. We had project specific insurance for clients who demanded it and we made most pay for it. Why all the hand wringing over liability? I’ve said this before, just don’t keep any assets in your corporation or set up a separate residential corp that you can evaporate…..if you hyper analyze every project for liability you’ll never leave the house.
HUGE caveat to what Carerra just posted: if you hold an architecture license in a state with personal liability for registered professionals (about half the states, I've been told), you CANNOT do what he suggested. Liability is tied to your license, not your corporation, in other words, you as an individual human can be sued and not have corporate protection.
Donna, there are two types of liability for architects, professional and financial. If your bridge falls down in your next Hyatt Hotel there is nothing that can protect you…..assume we are not talking about that type of liability, believe all the fray over condos is about people being too hot or too cold…things that are not life threatening and in that regard nobody’s getting there license pulled for that sort of thing. Architects are offered the same veil of protection as any other business….if what you state were true why would architects bother to incorporate? Just not true financially.
Carrera -
How would a condo owner's suit not fall under professional liability? The roof leaks...the heating system doesn't work...etc. All PL issues that you're going to have to deal with even if you set up and disbanded an LLC for that project. Are you saying you've severed any liability in these cases? If so, I'd love more details, and my insurance guys have said it can't be done.
I guess if there was a lawsuit over the financial status of the condos - that you'd be shielded, but that seems like it would be the rare exception to the rule.
One thing I have heard of - but not had time or resources to investigate - is that there are ways to set up mechanisms that can actually shield your personal assets. I believe this involves setting up your assets under a trust - so that the trust owns them, not you. I think the applicability of this varies state to state though.
Donna...maybe this would be a good topic for a Sessions podcast some time.
Bklyntotfc if you hold property in partnership with someone, like a spouse, that property is protected from seizure. Another awesome thing about marriage!
Carerra, this is what was explained to me: the license is held by an individual, and in some states that individual does not have corporate protections. Architects incorporate for all the tax and other reasons that one would choose to incorporate, but my understanding is that in addition to suing the corporation, in personal liability states you can also/or sue the person.
I'd like to get Brian Newman's take on this on the podcast, yes.
so, im a little confused here....Is the issue that there is a greater chance of lawsuits because there is a greater number of characters buying/ greater probability of dissatisfaction? if so whats the difference between 20 condo units or 20 sfr's?
To add – there are two types of suits that can be brought against architects 1) Economic Loss & 2) Tort. Tort comes into play under personal injury and the veil can be penetrated, but in most all incidences suits are economic and protected under Economic Loss Doctrines which respect the veil. Attached is a link to a good article on the subject.
It’s a big country and perhaps there are states that fail to protect….Florida have been one, but action is being taken to reverse the trend.
http://www.westonhurd.com/upload/publication/2014%20-%20Architects%20and%20Engineers%20Newsletter%20-%20Spring%20Summer.pdf
There is a classic ambulance chaser attorney technique to go knocking door to door before the construction defects statute of limitations is up, asking owners if there are any problems with their units. yea... the project is fucking 9.5 years old...some of the shit is wear and tear, others might be real defects, the problem is, these dirt bags try to rally-up class action lawsuit for all owners involved and pin all the 10 year old problems on design team/contractors. That is why I would never touch a condo.
That's an excellent article, Carerra, and while it explains some things it also does still show how complex the law can be.
Donna, yes it is, just responding to the condo question primarily….though don't think it's the “law” that’s “complex” it’s the “twist” attorney’s try to put on it.
Donna...for protecting assets, that was the idea, although as I understood it, the trust itself is a legal entity that 'has rights' in a way, so that even if you're the sole beneficiary of the trust, you put your assets into the trust, and as long as you don't have direct control over the trust itself (you set up a trustee to do that), then you don't own that house or car, the trust does, and they can't get to it. I've assumed that it must be expensive to set up, so only for those better off than me, but I sure like the sound of it.
Bklyntotfc, Sorry missed your first post….if you have PL you just pay the deductible and let them handle it, problem is most carriers will turn the screws on you to stay out of it, and if they do settle it your rates are going up….and if it’s real bad they will drop you, then what?
Not saying I walked from everything, fixed/bought a lot of things because it was the right thing to do, but when it got unreasonable they had nowhere to go. Also most things aren’t your fault and you get dragged into things….once they see empty pockets they go away fast. The most likely place you’ll get sued is trying to collect money.…you’ll get countersued….if you have PL you’ll get pressure to drop your case and you’ll lose the fee. Better to fly solo with empty pockets IMO.
I have a trust but can’t have my name on it (at least in my state), also when you own anything jointly with your wife you must also give up dower rights….it’s hard to consider because if there is a divorce you won’t be entitled to any of it. That can be circumvented with a postnuptial agreement; also the trust needs to be an Irrevocable Trust not a Living Trust…..stuff is rock solid. They have software packages now where you can do it yourself, cost about $100-500., plus transfer fees for each piece of property ($20-100.ea)….small price to pay vs losing everything, regardless how small. Also do it early because courts will reverse them if done too close to a crisis.
@Donna, I can't remember, did this Session with Brian Newman directly speak to this/@bklyntotfc's question/point?