High Density Means High Employment

I’ve just read a great editorial by Ryan Avent in the New York Times called ‘One Path to Better Jobs: More Density in Cities’

Ryan defines the things that make a city a city and a not-city a not-city is the fact that a city is dense and a not-city isn’t.  And, he argues that when it comes to economic growth and the creation of jobs, the denser the city the better and that density brings many benefits.

Economists studying cities routinely find that after controlling for other variables, workers in denser places earn higher wages and are more productive. Some studies suggest that doubling density raises productivity from between 6 and 28 percent and other economists have concluded that more than half the variation in output per worker across the United States can be explained by density alone.

I’ve always thought that higher density (compared to suburban sprawl) is good for the economic viability of cities and here’s some more support for that proposition.  So, there’s another reason why strata and community title development, ownership and living is a good thing.

Ryan Avent is also the author of the Kindle Single “The Gated City” from which his editorial was adapted.

Francesco …. 

Schemes within Schemes

In there’s an interesting trend in more complex integrated developments that the latest figures in community title schemes reveal.

In NSW there’s currently –

• 589 Community Schemes           
• 24 Precinct Schemes           
• 1295 Neighbourhood schemes
• 69565 Strata Schemes

Neighbourhood schemes also split into –

• 1064 stand alone Neighbourhood Schemes
• 230 Neighbourhood Schemes in a Community Scheme

There’s 644 subsidiary Strata Schemes within a Community Scheme.

And, there’s 20228 strata lots in Community Schemes

These figures reveal that strata schemes within a community scheme have an average size of 31 lots per scheme. This compares to an average of 10 lots for strata schemes generally.

So, whilst the number of community plans remains quite low in comparison to the overall number of strata schemes, the size and scale of community schemes make them an important subdivision option.

And, it seems that larger strata corporations are becoming concentrated in multi-tier and layered developments. Which means the focus of managers, service providers and regulators needs to shift (or bifurcate) towards this more complex and challenging buildings.

So, see you at the multi-scheme meeting/s.

Francesco …

What do Fanny’s have to with US Strata ?

I was reading about US strata corporations losing Fannie Mae and Fannie Mac approval and wondered why it was a big deal.  So, I investigated it more and found out some fascinating things about the drivers of the medium and high density real estate sector in the US.

The story goes something like this.  And, sorry, it’s a long story.

In the USA the residential real estate mortgage market works a bit differently to Australia.  Apart from the mainstream banks who provide mortgage finance there are organisations like Fannie Mae and Fredie Mac that sit behind banks and underpin residential mortgages.

GSE's Explained

So, what’s a Fannie Mae or a Freddie Mac?

Fannie Mae and Freddie Mac are government-sponsored enterprises with a mission to provide liquidity, stability and affordability to the US housing and mortgage markets and to increase the amount of funds available in order to make homeownership and rental housing more available and affordable. Fannie Mae and Freddie Mac work with mortgage bankers, brokers and other primary mortgage market partners to help ensure they have funds to lend to home buyers at affordable rates.  These kinds of loans have low rates and very low down payment requirements (usually 3%) and the government guarantees those loans so the lender is protected in the event of default.

Fannie Mae, Freddie Mac and other GSEs (government sponsored enterprises) buy loans from lenders – allowing the lender to offer a low interest rate since it sells the loan (and the risk) to one of these entities.

The Federal Housing Financing Agency (FHFA) is a government agency created to regulate and oversee GSEs like Fannie Mae and Fannie Mac and to make sure the GSEs operate in a "safe and sound manner".  So it reviews business practices of the GSEs and effectively sets the parameters for mortgage lending.

So when someone wants a Fannie Mae or Freddie Mac backed mortgage in a condominium or community association the condominium or community association operations must satisfy the FHFA requirements … otherwise there’s no loan at these lower rates and favourable terms.

Approval Guidelines

These requirements are detailed and complex and include things like –

• there are two or more units
• the project is 100 percent complete
• construction has been finished for at least one year
• 100 percent of the units have been sold
• no one owns more than 10 percent of the units
• the budget funding replacement reserves for capital expenditures and deferred maintenance (at 10%)
• home owners are in control of the association
• at least 50 percent of owners occupy the property
• there’s adequate hazard and liability insurance (including flood and fidelity insurance where necessary)
• less than 25 percent of the total floor area in a project is for commercial purposes
• the commercial portion of the project must homogenise with residential use
• less than 15 percent of unit owners fee payments are in arrears 
• only 30% to 50%, of the units can be funded under FHFA approved lenders (with exceptions available)
• there must be a satisfactory independent budget review establishing that the budget:

   - is adequate,

   - includes allocations to ensure sufficient funds to maintain and preserve all amenities and features of the project

   - provides for funding of replacement reserves for capital expenditures and deferred maintenance at least 10% of the budget

   - provides adequate funding for insurance coverage and deductibles

In some cases a reserve study may also be required.

And, FHFA approvals expire after a period of time so also need renewal.

Unsurprisingly, many of the current operational and management practices in US condominium and community association exist to satisfy FHFA approval, rather than because of legislative requirements or simple market forces between managers and owners.

Current Issues & Developments

In the past strata corporations viewed FHFA financing negatively.  But declining real estate values and the banking crisis has eliminated many options from conventional lenders who will not finance properties if the loan is not acceptable to the secondary market (Fannie Mae, Freddie Mac and the like).

So today, Fannie Mae or Freddie Mac approval may bring more buyers for units  

because financing will be more readily available. Additionally, the increased marketability of those units currently for sale in a Fannie Mae or Freddie Mac approved project not only helps the current sellers, but also serves to increase the value of all units in the condominium. This will not only help owners currently looking to sell or refinance, but will also help those unit owners who may wish to sell or refinance their units in the future.

The November 2009 guidelines temporarily increased the number of permitted FHA insured loans in a particular project from 30% to 50%.  100% of the loans can be FHA insured if the project meets all of the basic condominium standards and the additional items. 

Fannie Mae recently auctioned close to 100 South Florida properties.  Those properties were only offered to owner-occupants (individuals and families who plan to live in the homes), not investors, in an effort to stabilize neighborhoods severely impacted by foreclosures.

There are some obvious benefits to GSE financing and some obvious detriments.  One benefit is flexibility - government backing allows Fannie Mae to offer hardship relief to home/unit owners.  For example, Fannie has the ability to offer loan forbearance to mortgagors plagued with chinese drywall (allowing them to skip 6 months principal payments so owners can catch up other financial obligations.

See you at the next Fannie Mae mortgagee sale.

Francesco …

What Makes Cities (and Buildings) Liveable?

I was reading the Australian Government’s discussion paper Our Cities and was intrigued by their identification of the things that make a city liveable.

They say that that “liveability” is “the way the urban environment supports the quality of life and wellbeing” including “mental and physical health, happiness and life satisfaction plus supportive social community relationships”. 

And according to the Australian Government the key factors for cities are –

• Balancing infill and green-field development
• Facilitating the supply of appropriate housing
• Supportive affordable living
• Improving transport options and reducing our dependence on private vehicles
• Improving the quality of the public domain
• Improving public health outcomes
• Redressing spatially concentrated social disadvantage

You can read more about these issues (and the Government’s approach to them) in the discussion paper.

On a different dimension the Economist Intelligence Unit runs the world cities Liveability Index every year and ranks cities on 30 qualitative and quantitative factors across five broad categories –

• stability
• healthcare
• culture and environment
• education
• infrastructure

Each factor in a city is rated as acceptable, tolerable, uncomfortable, undesirable or intolerable. 

You can read more about these factors in their summary report.

But what are the factors that make a strata building liveable?  Are they the same, similar or different?  And, if not the same should they reflect the same themes?

I’m not sure but am certainly ready to start a debate.  So, my strata building liveability factors are as follows. 

Location - The building location suit a variety of occupiers’ needs – with access to work, transport, living, health, education and entertainment needs.

Built form - The configuration and construction of the building provides for safe, comfortable, private and useful separate accommodation and matching shared spaces.

Maintenance – The building is in good order and maintenance is ubiquitous (in that it happens without people noticing except in unusual circumstances).

Expenses - The steady state operational costs should match the socio-economic mix and capacities of owners and occupiers.

Disputes – Whenever conflicts arise they are resolved quickly in fair and transparent ways.

Commerciality - Buying, selling and leasing in the building is trouble free.

Adaptation - Longer term maintenance and building upgrades are regularly considered and (if agreed) promptly implemented.

Socialisation – Occupiers have opportunities to interact with each other on different matters.

There may be others too.  But, I think that if you could rate your building over 3 stars (out of 5) on all these it would be a pretty good place.

What do you think? What makes your building liveable (or not)?

Francesco …

Getting Better Services & Products in Strata

One of the longer running debates in strata management and operations has been about how specialist businesses serving strata schemes and owners can get recognised and preferentially selected by strata schemes over those who provide similar services generally.

In some cases that is legislatively or practically achieved or advantaged.  For instance strata managers need to have special qualifications and/or come from a limited group so strata schemes must choose from amongst that group and they are all (at least) focused on strata scheme needs.  But, even then general real estate agents and in some cases accountants also undertake strata management.

In other cases the product or service only exists for strata schemes and therefore only some business can (and do) supply them.  For instance, strata insurance must comply with the legal requirements and only some insurers offer it.  So strata schemes don’t generally look elsewhere for strata insurance.  The same applies for things like strata searching, strata certification, etc.

But in most cases the product or service exists generally and there are many possible suppliers (some of which specialise in strata and others who do not) … so strata schemes could choose either.  For instance, plumbers, electricians, cleaners, gardeners, lawyers, accountants, bankers, engineers, etc, etc. 

It’s in those situations that those of us who have focused and specialised on supplying strata schemes face the biggest challenges.

It is obvious that strata schemes have features that make working for them, supplying services or products to them and making sure they comply with operational requirements more difficult; involve knowing more than usual, tailoring products or services to their needs and understanding the differences. 

But this takes extra effort, time and cost.  And, strata schemes should also experience better outcomes and value for money from these businesses.

In comparison businesses simply supplying the same product or service that they supply to free standing property owners can do so more cheaply.  But it’s likely that the service or product may not be ideal (or in the worst cases totally unsuitable).

It’s a dilemma all round.  For businesses wanting their extra efforts and investments to get recognised and for strata schemes trying to find the best suppliers at the best prices.

So, what can (and should) be done ?  


I suggest some of the following.

1.    Businesses should explain their focus on strata, how they do that and the advantages of using them.  This happens to a limited degree.

2.    Strata schemes should find out about supplier experience working in strata and consider that (amongst other factors like price) when choosing.  This also happens but less often that is ideal.

3.    Industry associations should encourage specialist businesses to join and/or participate to help identify them.  There are some (limited) opportunities to do this but it is not widespread and not largely encouraged by industry associations.

4.    Strata schemes (and managers) should recognise businesses that actively participate in industry associations.  Sometimes this happens and sometimes it doesn’t.  Sadly, often price is seen as more important.

5.    Everyone should try to identify what differentiates services and products for strata schemes (from general supply) and include those matters in selection processes.  This rarely happens (except where some businesses do so as a marketing strategy).

6.     An accreditation, endorsement and/or rating system should be developed to compare businesses so that strata consumers can find out more and make better assessments.  There is no such system available in Australia.

7.     A longer term view should be taken by everyone about the running of strata schemes (after all they will be around for a long time) which mitigates to more specialised and focused business suppliers than cheaper alternatives.  This applies to owners, committee members, managers, associations and businesses. 

Sounds good … doesn’t it ?  Like strata supplier heaven ….

Francesco …

What's going on with strata management fees ???

I've been watching the strata management space with particular interest over the last 24 months and noticed some interesting trends.  


Although, I will post more about them next year, for now let's look at strata management charges under contracts and what, I think, it means for stakeholders and the strata sector.

Trend 1 - A shift to user pays

The make up of charges is changing.

Some charges for strata schemes are increasing as strata managers do the following things -

• charge hourly rates (ranging from $75 to $200 per hour) for extras that are outside normal management services 
• charge more for internal administrative resources like printing, email, record storage, etc
• charge for pre-legal levy recovery activities like reminder notices, demand letters, briefing collection agents/lawyers, etc (from $25 to $200)

But at the same time base management fees for the 'usual', 'typical' or 'standard' services have hardly changed in 10 years.

So, what impacts does this trend have ?

Firstly, separating management services between fixed and variable charges works best when what is (and is not) included and excluded is clear and well understood. But this is not the case in most strata schemes.

Secondly, 'extra' services usually need authorisation to avoid disputes about the charges but  this does not always occur and is, often, too ad hoc.  So, there will be disputes about the extra charges.

It's easier to charge extra for automated activities or services where volumes tend to rise naturally and they are easy to provide and scale up (like printing and computer based activities).  But the marginal cost of these things should reduce over time (due to technology improvements) and as volumes increase (due to economies of scale). They haven't and there will be pressure to reduce these charges over time.

Thirdly, the ability to charge for pre-legal actions against owners who are overdue with levies does not mean open ended charges are acceptable. Court decisions have already said the recovery expenses must be reasonably incurred and reasonable in amount. But when strata manager charges to send reminders, notices and instruct collection lawyers/agents are $150 or more for a $1500 levy (approximately 10%) the proportionality is all wrong. And, it is likely to be a case of killing the goose that laid the golden egg.

Trend 2 - Price cutting to get (and keep) business

There are a range of downward pressures on strata management charges.


The continued emergence of micro strata management businesses by entrepreneurial staff who branch out from existing strata management companies … and their lower operating costs and their desire to get new business ... means they are offering management services cheaply (or at least cheaper than market rates).

And more recently some medium sized and larger strata managers are discounting ... with offers like 6 or 12 months free management or beating your current management charges by 10% or more.

So, what impacts does this trend have ?

Firstly, it is hard for strata managers to resist the downward price pressure since existing managers will (usually) need to match the lower charges to keep the business and other competing managers will be tempted to match (or beat) the charges.  So, the downward prices pressures are self generating and will cause even more downward pressure on management charges.

Secondly, strata schemes and their executives will be tempted to assess managers purely on price (if only because that becomes a predominant comparison factor in a price competitive environment).  This is as undesirable for strata management as it is for most services.

Thirdly, as managers have to manage for less money they will have to reduce the standard and/or quantity of services.  So, schemes will pay less but also get less service (and usually will not realize that until after some time with the new manager).  This will lead to either -

• increasing charges for 'extras' to get the same level of service, and/or 
• the temptation to change managers as service dissatisfaction occurs (and possibly find a even cheaper strata management proposal).

Fourthly, as strata schemes and managers focus on charges rather than value when pitching for business and choosing strata managers the overall standard of strata scheme management will fall … with consequent increases in scheme problems, operating costs, owner dissatisfaction, etc. etc, etc.  The proverbial downward spiral.

Trend 3 - Shortening management contract terms

Strata manager tenure is reducing - coming down to 12 months or less in many cases.

There has been a tradition of 12 month strata management contracts with monthly rollover even though the strata scheme is going to be there for a long time and the longevity and consistency of management is a key factor in building outcomes.  This is despite the possibility of having longer fixed terms and the ability of managers and schemes to renew agreements annually at strata scheme AGMs.

But more recently, aside from managers not proposing longer (2 or 3 year) terms and schemes refusing to sign longer agreements, both strata managers and strata schemes are allowing management contracts to stay in rollover mode (operating only from month to month) and thereby further reducing the tenure of strata managers.

As a result, the average tenure of strata manager is coming down to 12 months or less. 

So, what impacts does this trend have ?

Firstly, it destabilises strata scheme operations and manager business stability because neither know who will be managing the strata scheme in 6, 12 or 18 months time.  This is bad for strata schemes and undesirable for strata management businesses.

Secondly, when strata management businesses cannot be sure that they will manage schemes for more than 12 months plus the notice period they must reduce the amount of time (and money) they invest to become familiar with the building and its operational issues.  These are sunk costs that only reap rewards in easier and smoother management down the track.  So strata managers know less about the buildings than they could (and should).

Thirdly, there is an irrational avoidance of discussing and considering strata scheme management issues and solutions as managers try to keep their appointment (and possible removal) off the strata scheme’s agenda.  So, strata schemes cannot easily discuss performance issues without that inevitably leading to considering changing strata managers. It would be better to get the existing manager to change and/or improve performance to better satisfy the strata scheme's needs. 

Fourthly, in the worst cases, strata schemes struggling to change strata managers (having trouble getting meetings convened, obtain proposals from other strata managers and/or having their records transferred) and managers stonewalling (or worse) to stay appointed (and paid) for longer.  This is exactly the opposite situation  from what should occur when the relationship between strata scheme and strata manager breaks down.

All of these things are unintended and (probably) unexpected consequences of these apparently normal trends in strata management.  


So, instead of managers and strata schemes actually discussing what is needed, improving services, paying for quality, getting fair value and creating medium and long term relationships that benefit everyone in (and outside) the strata scheme ... we're getting cheaper service offerings, by more small managers, who change more often and are being assessed on price (before outcomes).

That’s a shame for everyone.

I wonder what will happen with strata management charges (and services) next?

Francesco …

Clover Moore Reforms NSW Strata

The Hon. Clover Moore MP is the Mayor of Sydney and Member for Sydney in the NSW Government.

And since her electorate is inner city and contains many strata schemes (some very  prominent) she has been more interested in strata title matters than many other politicians.

So interested in fact that in 2009 Clover Moore launched a campaign to introduce a private members bill to the NSW parliament to reform strata title laws.  So far that’s involved –

• Distributing a discussion paper – contact me for a copy
• Holding a public form at Parliament House in October 2009
• Speaking directly with key industry stakeholders for feedback on reform issues
• Working with lawyers, Makinson & d’Apice to analyse legal issues & prepare documents
• Submitting a request to parliamentary counsel to prepare a draft bill 

Her latest news on the topic says that –

• She is still working on a series of bills to update strata to improve transparency, amenity, management and dispute resolution
• Substantial drafting is needed
• She hopes the bill will be ready by the end of the year

If you would like to receive a copy of the bill when it is available, contact her office on 02 9360 3053.

But, the process is slow but moving forwards.  And, probably, the NSW state election in 2011 will adversely impact her plans.

But, at this stage the likely areas for proposed reform by Clover Moore are –

• Banning original owners from executive committee and
• management positions
• Improving disclosure requirements
• Introduce a Code of Conduct for executive
• committee members
• Giving residents and prospective owners
• better access to documents
• More Tribunal more power to resolve problems
• Measures to prevent overcrowding

Regardless of all the and others’ criticisms … I say go for it Clover and fix those strata laws!!!

Francesco …

Let's Discuss Mortgage Interest Rates

Everyone’s been very excited about interest rates in Australia and what Reserve Bank action will do to mortgage rates.  And, rightly so since it affects the real estate and property related markets in so many ways (adversely when interest rates increase).

But, that made me think of another issue around mortgage interest … their tax deductibility.

Most countries do not allow taxpayers to reduce their taxable income by the interest paid on a loan which is secured by their principal residence (or, sometimes, a second home).  Australia is one of them.

But some countries do allow it … and they are the Netherlands, Sweden, Switzerland, and the United States.

It’s an interesting proposition with arguments for and against as follows.

Reasons why mortgage interest should be deductible

• Deductibility incentivises home ownership
• In countries that impute tax income on home ownership the deduction is for income-producing purposes
• The increased number of owned properties and the likely higher prices/values of properties will create other taxable income

Reasons why mortgage interest should not be deductible

• Deductibility does not significantly impact home ownership either way
• It allows taxpayers to circumvent the general rule that interest on personal loans is not deductible
• The deduction disproportionately favours high-income earners

Whilst I think that there are social equity issues, in an economy and society where home ownership is a cultural requirement and the key wealth development strategy for most people … I think we should allow home mortgage interest to be deductible.

See you at the ATO refund counter queue.

Francesco …

Strategic Strata Schemes ... is it possible or just Alliteration ??

Can (and should) a strata scheme be strategic ?  

It's a question that many people have considered and it is becoming part of the new dialogue about strata scheme governance and management.  Michael Teys of Teys Lawyers recently issued a strata training note called 'The mission, vision and values of a strata community' which caused me to think about bit more about the issue. You can get a copy of the Teys Lawyers training note here.

In my view, when it comes strategy in strata schemes there's probably none.  

Why ?  Well here's my reasoning.

The dictionary definition of strategy is as follows.

strat·e·gy  (strt-j) n. pl. strat·e·gies

1.

a.  The science and art of using all the forces of a nation to execute approved plans as effectively as possible during peace or war.

b.  The science and art of military command as applied to the overall planning and conduct of large-scale combat operations.

2.  A plan of action resulting from strategy or intended to accomplish a specific goal. See Synonyms at plan.

3.  The art or skill of using stratagems in endeavors such as politics and business.

[French stratégie, from Greek stratgi, office of a general, from stratgos, general; see also stratagem.]

But a strata scheme is neither at war, or the military, in politics or running a business (although many commentators have tried to liken strata schemes to each and/or all of these).  Rather, a strata scheme is legal construct to share the ownership of a high density building for residential and/or commercial use and intermediate the various stakeholder and public interests.

So, strategy for strata schemes is a plan of action intended to accomplish specific goals.

But since strata stakeholders are extremely varied and they rarely have the same imperatives and interests there is not likely to be many (or any) common goals.  Additionally since each stakeholder is legitimately entitled to pursue their best interest and there is no need for any compromise by any of them, they do not generally converge on strata matters.

For instance, some owners are short term and some are long term owners,  some are owner occupiers and other never visit the strata scheme, some owners have not debt and other are heavily geared, some owners paid to much and other bought bargains ... the potential differences are endless.  And this is simply the owners ... it gets worse when you consider the non-owner stakeholders too.  So, it's not surprising that finding any common goals is unlikely and when it happens it is more a co-incidence and/or shortlived.

As a result, most strata scheme operation is driven by 3 things -

• Compliance - things happen because they have to either according to law or necessity.
• Crises - things get done when they break, there is legal notification or action or simply in response to concerted demands.
• Self Interest - one or more owners actively pursue thier own interests in and through the strata scheme.

It's haphazard, wasteful, unfair and ultimately an in-efficient use of strata scheme resources.

But to become strategic will involve strata schemes, their committees, managers and owners doing the following 7 things (which are all a bit new and different).

1.   Identify commonly supported gaols.  These need to be things that all stakeholders benefit from (even if in different ways and different proportions).

2.   Research and prepare options for achieving those goals (and the different possible outcomes) and the cost/benefits of each option.

3.   Canvass strata scheme stakeholder views on the options (not just owners) to discover unacceptable options.

4.    Understand that there may never be consensus and that any decision will to have opponents and detractors (and prepare for them).

5.    Make the best decision possible (rather than avoid or delay decisions)

6.    Implement the chosen strategy/ies according to the milestones and benchmarks (built into each option)

7.   Report progress to everyone (including successes, failures, delays, problems, results, costs, etc)

What do you think ... could it ever happen in strataland ?

If so, I'll be seeing you at the next strata strategic planning workshop.

Francesco ...