Hawaii Monitor: Construction Defects and the Coming Condo Boom
Thousands of new condo buyers could be at risk if state and city oversight doesn't improve.
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The new year appears likely to usher in a building boom in Honolulu as Kakaako’s two major landowners move ahead with plans to develop a forest of new high-rise condominiums in the area between Ala Moana and downtown.
The Howard Hughes Corp., owner of the Ward Centers, has a master plan calling for 22 high-rise condominiums along Auahi Street and Ala Moana, and Kamehameha Schools wants to add at least seven of its own buildings on the downtown side of Ward Avenue. Meanwhile, the state is pushing ahead with a project to include the state’s tallest building, and other private developers are likely to jump in as well.
The prospect of so much growth in the urban core must excite the bankers, contractors, and construction unions, and give hope to potential purchasers that the boom will eventually result in a buyers market as developers and projects compete for sales.
And there’s one other overlooked group of professionals who are probably also celebrating this potential building boom — lawyers specializing in condominiums and construction defects. From their perspective, if past experience is any indicator, the wave of construction will likely be followed by a surge in complex and, for attorneys at least, profitable litigation.
Sadly, condominium buyers have quickly run into construction defects and developers’ broken promises in most of the new condominiums built in the last decade.
Although their problems are well known in legal and real estate circles, condominium owners are often reluctant to publicly broadcast their building’s woes, fearing it will only undermine their property values which may have already been dragged down by the defects themselves.
Code violations despite luxury prices
The latest construction defects coming to light are in the luxury 37-unit Pinnacle Honolulu condominium. Claims against the developer raised in previously confidential arbitration proceedings became public last year when lawyers representing the association of apartment owners sought a court order confirming a $2.4 million arbitration award.
The arbitrator, retired Circuit Court judge E. John McConnell, found there were building code violations in the Pinnacle that raised safety concerns.
The most serious violations, according to documents filed in court, involved faulty fire-rated partitions. These are designed to contain any fires within individual apartments and prevent their spread. In some apartments, these fire partitions stopped at suspended ceilings and didn’t extend the full distance between the concrete slabs of each floor. Although not visible once apartments were finished, the defect would have allowed a fire to spread from one apartment to the next.
Others partitions were not properly sealed where they met the floor or ceiling, or where they were penetrated by wiring, conduits, or vents, according to the arbitration award.
Additional problems were found in the fire exits, where ceiling and stair heights varied more than allowed by the building code, creating potential hazards in case of an emergency.
The Pinnacle was developed by several corporate entities controlled by the sometimes controversial Southern California developer, Michael F. “Big Mike” Harrah.
The building was raided by police and federal immigration agents in December 2007, while construction was underway, resulting in the arrests of eight construction workers believed to be in the country illegally.
In a June 29, 2012 letter urging the Pinnacle’s board of directors to agree to settle their claims, Harrah said he had the resources necessary to appeal any adverse judgement and continue court appeals for three years or more. Such a delay would likely force apartment owners to pay for necessary repairs themselves, at least until a final court judgment.
““The building will not get fixed while there is pending litigation,” Harrah wrote, pressuring the board to settle its claims. “That’s simply a fact.”
Attorneys for the owners saw it as more of a threat, court documents show.
Meanwhile, Pinnacle owners were assessed $4,785 per unit in 2011, a total of more than $177,000, to cover the cost of legal fees during the arbitration process, according to the condominium’s biennial registration.
Hidden pipes, hidden costs
Discovering potentially life-threatening defects such as those at the Pinnacle is unusual, but other types of problems are more common.
Apartment owners in the 48-story Koolani Condominium on Queen Street won a $12 million arbitration award covering a variety of problems, including the failure of connectors on pipes in the building’s water system which had to be replaced in order to avoid future flooding. Attempts to collect on the judgment are still mired in complex, multi-party litigation.
The 247-unit ultra-luxury Hokua condominium on Ala Moana also faced flooding and damage from broken water pipes almost as soon as it was completed in 2005. Owners reached a multi-million dollar settlement with the developer and contractors in 2011 after two years in court. The settlement included a $6 million project to replace pipes throughout the building’s water system.
Similar water problems are at the center of an ongoing battle as apartment owners at the 720-unit Moana Pacific condominium decide whether, or how, to correct similar defects in its water pipes.
Several things appear to contribute to the problems facing condominium owners who buy into new buildings thinking they are paying a premium for a new, problem-free residence, and instead find themselves mired in costly repairs while developers, contractors, and insurers fight among themselves over who is legally responsible.
A typical high-rise building involves layers of entities, including the developer, one or more general contractors, then a long list of subcontractors and suppliers. There are also the city building inspectors, as well as architects and project engineers, all seemingly responsible for spotting and correcting potentially dangerous code violations.
Although building inspectors check construction projects, they obviously miss a lot of the problems.
“To put it in the most charitable light, yes, they are supposed to look for code compliance,” one of the attorneys involved in the Pinnacle litigation said. “But city inspectors are under-budgeted, overworked, and can’t be expected to be everywhere.”
While developers often tout their experience and point to prior projects, most now create single-purpose entities, new corporations or limited liability companies, to manage their new projects. The whole point is to shield the parent company and its assets from claims in the event anything goes wrong.
Koolani, for example, was developed by Crescent Heights of America, one of the country’s largest builders. But it’s operated through a specially created local entity, Sunset Heights Hawaii LLC.
Although sales and marketing literature for Koolani hyped Crescent Heights’ reputation and national experience, the company later asserted Sunset Heights and Koolani were legally separate from Crescent Heights. Although apartment owners won their $12 million judgment, Sunset Heights had no money and Crescent Heights had no legal responsibility to step in and cover the costs.
Then there are the insurers. Both the Koolani and Pinnacle awards in favor of apartment owners have gone unpaid because insurers providing wrap-around liability coverage for the contractors and developers now say they aren’t liable for construction-defect claims. The process of sorting out those competing claims, with deep pockets on both sides, has already taken years and is unlikely to be finally settled before ground is broken on this next round of condominiums.
Protecting buyers from hidden costs
Before buyers line up for any of the dozens of planned Kakaako condos, more needs to be done to protect their interests in the event construction defects occur, as they undoubtedly will.
Maybe the real estate commission or the Legislature can bring the different parties, including developers, contractors, insurers, and condo owners, to the table to sort out possible policy options, although all are likely going to protect their own interests.
Disclosure of all prior or pending construction defect or similar claims against developers and their related corporate entities, as well as their contractors, might at least allow potential buyers to assess risks before putting their money down.
Perhaps the state insurance commissioner needs to take a closer look at the difference between the marketing claims of insurers, eager to sell their policies and book multi-million dollar fees from developers, and the same companies when they later deny liability if and when claims occur.
The Honolulu City Council might review the operations of the Department of Planning and Permitting, and what can be done to improve the inspection process for residential condominiums.
These and other options need to be explored before Honolulu’s coming burst of high-rise construction puts thousands of new buyers at risk.