Fallout at the Falls

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June 27, 2005 // UPDATED 1:55 pm - April 26, 2007
By: Jeremy Stratton
Jeremy Stratton

What repairs should condo converters do before buyers buy?

Condo conversions can be messy affairs. Renters are forced to shell out big bucks they may not have to keep their units, or move.

Wealth is less of a problem at the Falls and Pinnacle, whose 257 units are now being converted. As residents of Nicollet Island/East Bank - with the fourth-highest average household income among 81 city neighborhoods - tenants say they've waited years to own their units with spectacular Downtown views.

Yet some have had second thoughts, for a knee-knocking reason many homebuyers can understand: water intrusion.

Architectural engineers say a construction defect lets water into walls - particularly in the 87-unit Falls - damaging sheetrock, windows and floors. At least 23 tenants want assurances that building owner Crescent Heights will fix the buildings, or detail a realistic budget for association dues so buyers can honestly judge future costs.

Miami-based Crescent Heights - which bought the buildings earlier this year and has three decades' experience in more than 15 markets - will fix the problem, says Tomer Bitton, a company executive and president of Pinnacle and Falls LLC, its operating entity.

The developer put it in writing. The last page of a disclosure statement delivered to tenants on May 18 - a month into tenants' 60-day purchase option - states, "in an attempt to remedy the water infiltration problem, Declarant [Crescent Heights] will perform the repairs" recommended in a developer-arranged structural engineering review. Repairs to the exterior faade, balconies, roof and planters, tile and plaza-level wood decks were specified.

Bitton said his company will go beyond the report's recommendations if necessary, but the scope of repairs has not been determined.

However, the written word - and verbal promises - haven't eased all fears. Some tenants say the specified repairs won't fix the problem, and say language in individual purchase agreements contradicts the developer's pledge.

At this point, no one knows for sure.

Such uncertainty is not unique to the Falls and Pinnacle. Unlike a single-family homebuyer who can easily hire an inspector, it's harder for condo buyers to afford an independent evaluation of a multi-unit building's real risks.

However, in the case of the Falls and Pinnacle, at least one such evaluation exists.

Warp speed

The Falls, 110 1st Ave NE, and Pinnacle, 20 NE 2nd St., were built together 21 years ago. The Falls - a stepped-back building resembleing neighbor La Rive - was supposed to be condos, but those didn't sell, so it became apartments. The 170-unit Pinnacle, a more conventional tower, was designed as apartments.

No one questions that some units have suffered significant water damage over the years. Water leaks in from windows and exterior brick walls, softening sheetrock, warping windowsills and pooling on and damaging wood floors after heavy rains.

Dan Mather has lived at the Falls for nine years. In 2003, he moved from a 12th-floor apartment with water problems to his 1,700-square-foot apartment on the 17th floor, which had been repaired after water damage.

Two years later, his new unit has water-damaged walls, windowsills and wood floors. Sheetrock is soft and crumbling in spots; so soft that at one point a framed picture fell off the wall, Mather said. After a recent rainstorm, an outlet caught fire because of water in the walls, he added.

Bitton said that as-is apartments would receive repairs to be sold "in working order."

Still, Mather worries about the property's two-year warranty - standard for condo conversions - since that's about how long it took for problems to appear after his unit's repairs, he said.

It's unclear how many units have water damage. Tenants say one-third, but that can't be verified. Bitton said people from 12 Falls and Pinnacle units have complained about water intrusion issues. He compares that number - 4.6 percent - to the 20 percent he says have purchased their apartments.

Bitton said that that many tenant buyers is high by industry standards - and shows some occupants are confident about the building and its pro formas.

Still, tenants from 11 units wrote a May 17 letter to Bitton, asking for engineering reports regarding water infiltration, mold and window replacement, and, more importantly, an estimated condo association budget, representing estimated future upkeep once the converter flips condo owners the keys.

The tenants wrote that they were concerned "massive capital outlays" would be necessary after purchase.

The 2-inch thick May 18 disclosure statements provided some answers, but not much reassurance, the tenants say.

The disclosure statement includes Crescent Heights' estimates of association dues. At 38.4 cents per square foot per month, the owner of a 1,000-square-foot condo would pay $4,608 per year; combined, all tenants would contribute $1.3 million annually.

Exterior maintenance represents $125,000 of that, with an annual reserve fund of $100,000.

Bitton said that the combined $225,000 surpasses Bloomington-based Braun Intertech's recommended $160,000 for annual exterior maintenance. Crescent Heights hired Braun to do a structural review of the Falls and Pinnacle. The report was included in the disclosure statement - a step beyond the summary the law requires, Bitton said.

The Braun report recommended $585,000 in "immediate needs" repairs. To create a working capital fund, each buyer will also kick in an initial two months' assessment fees - nearly $200,000 overall.

Bitton noted that Falls and Pinnacle LLC will pay its share of assessments on any unsold units after the first mass closing.

Thru-wall flashback

The immediate needs Crescent Heights promised to perform in the May 18 disclosure statement "in an attempt to remedy the water infiltration problem" do not include any "thru-wall flashing" repairs - even though the Braun report lists flashing as a critical routine maintenance need.

Thru-wall flashing allows intruding water to quickly exit the building, rather than collect behind walls.

In May 2003, Minneapolis-based Building Restoration Corporation (BRC) investigated the Falls exterior at the request of then-owner Sentinel Real Estate. BRC's cover letter states that past repair efforts had "focused on treating the symptom and not the cure for the problem."

BRC's cure: replacing thru-wall flashing.

Both BRC and a third-party architectural engineer that tenants hired this month say the Falls' flashing is damaged and not doing its job.

BRC President Dale Zoerb said such construction defects are not uncommon, and the Falls is by no means beyond repair. BRC has installed partial or complete thru-wall flashing on at least four other buildings designed around the same time by Falls/Pinnacle architects over the past decade.

Zoerb said between 1991 and 1993, BRC and other contractors did $2.5 million of "almost identical types" of thru-wall flashing repairs at La Rive condominiums, which share an architect, developer and builder with the Falls and Pinnacle.

BRC's Falls estimate - a little over $4 million in 2006 dollars - is for "the premium job," he said, which would include thru-wall flashing and all other masonry repairs performed at every possible location.

Zoerb said that Mary Therring, Falls and Pinnacle LLC's property manager, contacted BRC in late April about some issues at the Falls. Zoerb said that Therring was "very interested" to get the report, which BRC sent her April 27.

Bitton said they were surprised at the BRC report's content, adding that his company is looking at the "new [BRC] report to see what the differences are and why they're so big."

He was not prepared yet to comment on those differences, but said it would be part of their consideration in determining a "final scope" of needed repairs.

"If we find that the work that needs to get done at this property is more than what Braun estimated, then we'll do it," Bitton said.

Zoerb said Braun's $585,000 list of "immediate needs" sounds like it addresses maintenance, but not repairing construction defects. The third-party engineer - who asked that he and his company not be named -looked at both the Braun and BRC reports.

The engineer said that BRC's higher estimate is more likely to reflect the building's needs than the Braun report. BRC's miscellaneous costs alone - job set up, insurance and permits, scaffolding and swing staging - exceed the entire Braun cost by almost $200,000.

And BRC's $4 million estimate covers only the Falls - Braun's $585,000 estimate is for both buildings and attached townhouses.

Investigatory depth differs, too. In Braun's self-described "limited engineering review," engineers observed the building's exterior through binoculars and did not do extensive interior investigations because the conversion would re-do interiors.

By contrast, BRC removed brick in five areas to observe the water infiltration problem.

Said Bitton, "We still feel that [the Braun report] is an accurate report."

BRC's Zoerb and the third-party engineer called Braun a reputable company. Braun did not return three calls for comment.

Wading through the legalese

The disclosure statement includes a promise to perform repairs the Braun report recommends. However, it also states that the "Declarant [Falls and Pinnacle LLC] has not agreed to do any work suggested or recommended in the report."

Similar language is in purchase agreements: "Seller has simply acquired ownership of the building" and "intends to make no improvements or upgrades except as expressly set forth in this Agreement. Seller's Improvements are mostly cosmetic in nature."

The disclosure statement does state that the developer is "presently unaware of any expenses or services which are not reflected in the estimated Annual Operating Budget."

Tenants believe that meant Crescent Heights was telling them there wouldn't be special assessments - which they fully expect, if the developer doesn't do fundamental repairs.

However, the operating budget wouldn't be expected to cover major repairs, as for the thru-wall flashing, said David Eide, who chairs the committee on the Common Interest Ownership Act, which governs condominium conversions, as well as other common-interest communities.

Eide said state law requires disclosure of items that can "materially or adversely affects the enjoyment of the property."

If the water intrusion problem is disclosed, nothing in state law compells Crescent Heights to spend a certain amount to fix it.

Still, a seller\'s verbal and written statements of fact - or promises that a buyer reasonably relies upon - constitute express warranties, Eide said.

Also, tenants interested in buying don't have a legal claim until they are locked in to a purchase agreement. As owners, they could bring such a claim if the assessments soar - because the developer didn't disclose everything or misrepresented repairs - though there's never a guarantee they would win.

Price haggling

There's a bottom line for many tenants: they want their unit's price reduced, to account for extra repairs they anticipate.

Clay Lambert, a seven-year Falls resident, said maintenance Sentinel didn't do reduces the units' value, and Crescent Heights' uncertainty compounds the drop.

(David Weiner, the vice president of New York-based Sentinel who signed the Crescent Heights purchase agreement, returned a call to say his company doesn't comment on property sales. When asked about the BRC report, he hung up.)

Lambert believes that a 15 percent price reduction - on top of the 12 percent Crescent Heights already offered tenants - was necessary "to cover the don't knows."

Bitton called Crescent Heights' 12 percent reduction "a major discount."

"These tenants have come to us saying, 'I want a price reduction, I want a price discount,' and threatening us, 'If you don't do this, if you don't do that, we're going to go to the press." (Skyway News did not learn of the story directly from tenants, but from a brief report by a tenant to the Nicollet Island/East Bank Neighborhood Association.)

Bitton said the market has ratified pricing at the Falls and Pinnacle, terming sales from both tenant buyers and those outside the building "stronger than expected." He said Crescent Heights' average price is less then $300 per square foot (which is below the square-foot price at some riverfront developments).

However, tenants note that square-foot pricing includes outdoor decks - unusual if not unprecedented in the Minneapolis market.

"That's an $18,000 deck," said Lambert, who represented the group of tenants in a June meeting with Bitton.

Tom Melchior, a leasing agent at Larson, Allen, Weishair, called including decks in square footage pricing "very unusual." Bitton said he'd seen it done elsewhere, though he could not specify another Minneapolis project. He also noted the decks' premium views and unique layout.

Even some tenants in units undamaged by water worry about buying in, because they are yoked to each other through association dues.

"My issue is that when you buy into a condo, you're not only buying your own problems, you're buying everyone else's problems," said Chet Taylor, an attorney who signed an apartment lease May 21 to get the tenant's condo-buying discount.

From his balcony, Taylor can see De LaSalle High School, which his daughter attends. Now, he's likely to pass on a purchase, he said.

"They keep saying [verbally] that they're going to take care of the water intrusion problem. They've said that many times, many people have said that," including Bitton, Taylor said. "All the written documents say they're not going to. Amend the documents, give us a letter in writing, give us something we can rely on," he said.

Said Bitton, "We're a developer that underpromises and over-delivers."

He said his company has gone out of its way to address tenant concerns, even flying Lambert, reprsenting letter-writers, to Chicago for a meeting.

Mather and his wife have also decided their apartment isn't worth the $655,400 asking price. They'll stay until next May, when their lease runs out, unless they exercise Crescent Heights' option to leave early with no penalties.

The new owners will pay market rate: $734,048 - an additional $78,648 - though for a remodeled unit, not as-is.

Lambert, on the other hand, said he'd still purchase his unit. However, he added that he'd try to resell it before the large assessments he predicts materialize - even though his mortgage broker called the purchase a "dangerous proposition."

"I really like this place, everybody does. I waited it out, I've been there seven years because I knew something was going to happen," said Lambert. "This is disappointing."

"We're going to get in and out unless something is done with it," Lambert said. "If you can't beat 'em, join 'em."