INTRODUCTION
In the wake of several high-profile balcony collapses, California’s Balcony Law—with mandatory inspections set to start in less than one year—has become hot topic with real estate lawyers, agents, HOAs, and management companies. The Balcony Law consists of a set of regulations designed to enhance the safety of exterior elevated elements (“EEEs”) in multi-unit dwellings of three or more homes. While the law’s intent is laudable, its implementation has triggered a cascade of unintended consequences, particularly for smaller homeowners associations and their members.
WHAT IS THE CALIFORNIA BALCONY LAW?
The Balcony Law, codified as Civil Code sections 5551 and 5986 within the Davis-Stirling Common Interest Development Act, mandates a two-pronged approach to EEE safety: (i) mandatory inspections; and (ii) repair and replacement.
In short, the law requires visual inspections (or if necessary, invasive testing) of load-bearing components and associated waterproofing systems of any balconies, decks, porches, stairways, walkways, or their railings made of or supported by wood (meaning virtually all EEEs). The inspections focus on evaluating the integrity and safety of load-bearing components, identifying any signs of deterioration such as dry rot, termite damage, or water intrusion that could compromise structural integrity.
HOAs in California must perform their initial inspections no later than January 1, 2025, with subsequent inspections required every nine years. [For buildings constructed after January 1, 2020, the initial inspection must occur within six years of issuance of the certificate of occupancy.] The nine-year interval was the legislature’s attempt to balance the need for regular oversight with the logistical and financial burden placed on HOAs. While the nine-year frequency aims to identify deterioration early—i.e., before a problem escalates into a safety hazard—if an inspection reveals damage or deterioration that poses an immediate safety threat, HOAs are required to make immediate repairs/replacements. For less urgent repairs, however, HOAs are permitted to prepare their own timelines/budgets for completing the work while taking into account the relative severity of the issues and their respective HOA’s financial resources.
To help ensure a necessary level of expertise, the Balcony Law requires that the inspections be conducted by licensed architects, civil/structural engineers, or certified building inspectors. The inspection’s scope includes evaluating visible and accessible elements, as well as conducting probing and testing where necessary. Inspectors must document their findings comprehensively, and once the inspector has completed the inspection, he or she must provide the HOA with a detailed written report: (i) identifying the components/systems tested; (ii) identifying the condition of the association’s EEEs—including any safety concerns; (iii) indicating the expected future performance/remaining life of the load-bearing components and associated water-proofing systems; and (iv) recommending necessary repairs and/or replacements of those items. (Civ. Code, § 5551(e).)
WHAT TRIGGERED PASSAGE OF THE BALCONY LAW?
While some people might think that the 2021 Surfside Condo disaster in Florida played a role in the passage of California’s balcony law, that’s actually not the case, as California’s law actually predated the Florida disaster. It was actually the 2015 balcony collapse in Berkeley, California—which resulted in the tragic deaths of six young people and injuries to at least seven others—that served as a stark reminder of the potential dangers of poorly maintained EEEs and triggered passage of the new law. Indeed, investigations conducted after the Berkeley tragedy revealed that pervasive moisture and dry rot, exacerbated by improper waterproofing and maintenance practices, severely damaged the balcony’s wood framing. To be sure, the tragedy underscored the critical importance of proactive inspections and maintenance to identify and address structural vulnerabilities before they could result in catastrophic failures.
But it could’ve just as well been the Florida disaster. Like Florida, California’s housing stock includes many older buildings with aging balconies and decks that may have suffered years of deferred maintenance. The same can be said for many other jurisdictions, such as in New York City, which established its own balcony law (Local Law 11) in the late 90’s after part of a building collapsed on Madison Avenue.
As was the case in Florida, and New York before that, as well as in many other locations in various other states, the Berkeley tragedy galvanized political will and created a sense of urgency to address the issue of balcony safety. Lawmakers began to feel mounting pressure from constituents and advocacy groups to take decisive action, and that action came in the form of the Balcony Law. That pressure proved so powerful, in fact, that even focused opposition from some influential industry groups, including real estate associations and property management companies—who argued that such a law would impose undue burdens on HOAs and homeowners—proved insufficient to stop the law’s passage and implementation.
THE CONSEQUENCES OF THE BALCONY LAW
There can be little doubt that the Balcony Law’s primary objective—to improve safety—is being realized. Regular inspections and mandatory repairs have undoubtedly identified and addressed potential hazards, thus reducing the risk of tragedies like the one that occurred in Berkeley (which would absolutely have been avoided if an architect, engineer, or building inspector had taken even a cursory look at the load-bearing components of the balcony during the years prior to the tragedy).
As good an idea as the Balcony Law may be, however, it has had some significant real-world negative consequences, some of which were absolutely unintended, and none of which should be ignored.
Substantial Increase in Massive Special Assessments
One of the more broad—and the most significant—consequences of the Balcony Law has proven to be the immense financial burden that it imposes on HOA members throughout California. The costs associated with mandatory inspections, repairs, and maintenance have led many HOAs to levy substantial special assessments on their members. Indeed, in the last few years, the number of HOAs in California who have levied crushing special assessments on their members—assessments ranging between $20,000 and $60,000 per household—has skyrocketed.
That’s not to say that the law is a bad thing, or that this particular consequence is something requiring governmental intervention. The fact is that the HOAs seeing those massive special assessments are the very associations that spent years—often a decade or more—ignoring their maintenance obligations and/or routinely failing to adequately fund their reserves. In short, in most cases where we’re seeing HOAs levy massive special assessments for balcony repairs, it’s because those HOAs suffered from years of systemically negligent and short-sighted leadership and management.
Unfortunately, quite often it seems as if the very homeowners who can least afford to pay sudden and substantial special assessments—such as lower income homeowners and senior citizens on fixed incomes—are the ones experiencing the highest incidences of such special assessments.
Insurance Nightmares
The Balcony Law has also played a role in California’s current insurance crisis. Some insurance companies in California have raised premiums or declined coverage for HOAs with EEEs, citing the increased risk of claims due to the law’s requirements. This makes sense. The HOAs seeing the largest special assessments have typically been the same ones that ignored their maintenance and reserve fund responsibilities for years on end, and many members of those HOAs have sought legal counsel to pursue claims against their HOAs in an effort to recoup their special assessment. As a result, some HOAs have faced difficulties obtaining or renewing insurance policies due to the heightened awareness of potential structural issues, while others have had their balconies excepted from coverage by insurers whose HOAs couldn’t provide proof of compliance with the Balcony Law.
The argument offered by these homeowners usually proceeds along the following lines: (i) I’ve just been specially assessed a large sum of money to effectuate necessary repairs to my association’s balconies; (ii) had our current/prior boards not been grossly negligent in their duties to the HOA (by conducting timely and regular maintenance and repairs), our balconies would not be in such bad shape, and I wouldn’t now be on the hook for thousands of dollars; and (iii) since my HOA acted in such a grossly negligent fashion, it should be able to turn to our insurance company to defend my (and my neighbor’s) claims.
Both that argument and the line of thought supporting it are rather compelling.
Depressed Property Values
As I mentioned above, we’ve seen a dramatic uptick in the number of HOAs that have imposed special assessments in excess of $40,000 per household (I’ve seen as high as $60,000). Members in those HOAs have not only found it virtually impossible to sell their homes, but even the ones who did get a few nibbles, quickly found that buyers wanted incredibly steep discounts—well beyond the amounts of the special assessments demanded. I’ve been calling this the Negligent HOA Tax, and it seems to have hit a higher percentage of HOAs located near the beach, as well as those with a high concentration of older buildings. For obvious reasons, this has caused a significant financial burden for many homeowners, and in some cases, it has also depressed property values beyond the confines of a particular HOA.
Depressed, Angry, and Desperate Homeowners
The Balcony Law has placed a substantial strain, both financial and emotional, on hundreds of thousands of California homeowners, particularly those living in older buildings with deferred maintenance.
Many homeowners, especially those in lower-income brackets or on fixed incomes, may struggle to afford the unexpected costs of special assessments. This financial burden has resulted in many homeowners having to make difficult decisions, such as taking out loans, depleting savings, or even selling their homes. The financial strain has also lead to increased tensions within communities, as homeowners who disagree on the necessity or timing of repairs and assessments clash with those who demand immediate repairs to all EEEs.
Impact on Rentals
While the law primarily focuses on HOAs, it indirectly impacts renters as well. Increased costs incurred by HOAs are often passed on to renters in the form of higher rents, further exacerbating affordability issues. Given the historically high rent rates in California’s more populous areas—Los Angeles, Orange County, San Diego, and the Bay Area—this problem is only going to get worse in the next few years.
The “Balcony Premium”—a Market Response to the Balcony Law
In some cases, properties with recently inspected and repaired balconies may command a “balcony premium” in the market, as buyers seek the assurance of safety and the avoidance of future assessments. This market response stems from a variety of factors, including the following:
- Buyer Confidence: In the wake of high-profile balcony collapses and the implementation of the Balcony Law, buyers are increasingly aware of the potential risks associated with aging or poorly maintained balconies. A property with a recent inspection report indicating a safe and compliant balcony offers buyers peace of mind and assurance of safety. This enhanced sense of security can translate into a willingness to pay a premium.
- Reduced Financial Risk: For buyers, purchasing a property with a recently inspected and repaired balcony means they are less likely to face unexpected special assessments or increased HOA fees in the near future to cover the costs of balcony repairs mandated by the Balcony Law. This reduced financial risk can be a significant factor in their decision-making process.
- Marketing Advantage: Sellers and real estate agents can leverage the presence of a recently inspected and repaired balcony as a key selling point. Highlighting the property’s compliance with the Balcony Law and its enhanced safety features can attract more buyers and potentially lead to a faster sale at a higher price.
Of course, the magnitude of what I’ve dubbed the “balcony premium,” will vary depending on several factors. For example, the older the building, the more likely buyers are to be concerned about balcony safety. A recently inspected and repaired balcony in an older building may command a higher premium than in a newer building. So cities with large concentrations of older buildings (e.g., like Los Angeles) are going to see the effects of the “balcony premium” much more than newer cities/municipalities that have larger concentrations of newer construction.
Market conditions will also have a direct effect on the magnitude of the “balcony premium.” In a seller’s market with high demand and limited inventory, the “balcony premium” may be more pronounced. Conversely, in a buyer’s market, the premium may be less significant.
Ultimately, the “balcony premium” depends on individual buyer preferences and risk tolerance. Some buyers may be willing to pay a substantial premium for peace of mind, while others may prioritize other factors, such as location or amenities.
ADDRESSING THE CONSEQUENCES OF THE BALCONY LAW
Enhanced Oversight
Some of the consequences described above are necessary—i.e., they should be permitted to take their course—to address decades of systemic negligence and the breaches of fiduciary duty that the Davis-Stirling Act’s overly generous deference to boards and management companies has fostered. To correct those problems, the Davis-Stirling Act should be amended to reduce the deference provided to HOA board members who make terribly short-sighted decisions. This would serve to alter what’s known as the “business judgment rule.”
The Davis-Stirling Act should also be amended to make management companies beholden to HOA members, and thus subject to potential lawsuits by homeowners when they fail to properly advise their HOA boards.
We should also consider compelling HOAs to engage in more proactive financial planning. The Davis-Stirling Act should be amended to provide much more stringent requirements regarding reserve fund saving and spending. HOAs should be required to establish robust reserve funds, especially as it relates to the inspection and repairs of EEEs. This will ensure that the substantial costs associated with such maintenance and repairs is spread out over a large period of time, thus reducing the need to hit members with staggering (and in many cases, crushing) special assessments.
Offer Technical Assistance
Providing HOAs with access to technical assistance and resources for inspections and repairs could help them navigate the complexities of compliance more effectively. This could, for example, include training programs for board members and property managers.
State or local government agencies, in partnership with industry experts, could offer training sessions, workshops, and online resources to educate HOA board members and property managers on best practices for complying with the Balcony Law. Technical assistance could also include guidance on selecting qualified inspectors, developing maintenance plans, and budgeting for long-term structural upkeep. By equipping HOAs with the knowledge and tools needed to manage inspections and repairs, these initiatives could enhance compliance and reduce the financial and administrative burden on HOAs.
This would prove especially effective in conjunction with the amendments to the Davis-Stirling Act that I’ve proposed above requiring more proactive financial planning.
Avoid Solutions That Involve Extending Compliance Deadlines, Increasing Insurance Regulations, or State Funding
Some people have pitched a variety of solutions that involve things like extending compliance deadlines, increasing insurance regulations (i.e., forcing carriers to provide coverage), or providing state funding to homeowners to offset steep special assessments.
These should be avoided like the plague.
The last thing we need is the government stepping in to drive even more insurance companies out of California. Nor do we need the danger associated with extending the compliance deadlines—especially considering how many older buildings there are out there in desperate need of repairs. And finally, we certainly don’t need the government to step in and fund what ought to remain a private issue between homeowners, especially when doing so will actually incentivize the very type of negligent behavior that resulted in the crisis in the first place.
FINAL THOUGHTS
California’s Balcony Law represents a critical step toward ensuring the safety of residents in multifamily buildings. While the law’s implementation has brought significant benefits in terms of enhanced safety, it has also resulted in financial and logistical challenges for HOAs and homeowners. Addressing these consequences through enhanced oversight, proactive financial planning, and offering HOA board members and management companies access to technical assistance and resources can help balance the Balcony Law’s safety objectives with the real consequences faced by hundreds of thousands of HOA members across the State of California.