Condominium Construction on Florida’s Gulf Coast: Opportunity for Profit, or Failure?

Introduction

According to the US Census, over 50% of the United States population lives in counties which border oceans (United States Census Bureau, 1996).  The United States’ ports provide commerce and jobs for many Americans.  Additionally, many individuals desire the lifestyle provided by the coastal areas of the country.  The high abundance of outdoor leisure activities, as well as pleasant climactic conditions, makes the United States coastline a desirable destination for tourism and permanent residence.

Over the last twenty years, the State of Florida has capitalized on this leisure and tourism trend.  Florida’s population increased over 25% from 1985 to 1995.  The increase primarily stemmed from an influx of, among other things, retirement age American citizens.  The increase in population of retired, wealthy individuals spurred and sustains a construction boom in the state of Florida.  Lifestyle options, as well as an influx of wealthy new citizens, created high demand for high-rise coastal development properties.

Coastal condominium style properties in the state of Florida continue to be relatively high in demand, including those in the Northwest panhandle section of the state.  Arguably, this section of the state boasts some of the most beautiful beaches in the United States.  Additionally, one can easily drive to this area from many large population centers in the southern United States, such as Atlanta, Birmingham, New Orleans, and Nashville.  It is also a destination of choice for those traveling further from Illinois, Michigan, Kentucky, Indiana, and other Midwestern States.  These conditions make properties in this section of Florida some of the most desirable in the United States.

The condominium construction market in Florida’s panhandle remains relatively stable, even during the current economic downturn.  The competition for construction services in this market continues to increase, however.  Construction fees tend to decrease with increased competition.  This situation proves challenging to the coastal constructor, who must find better, more efficient ways to build these type projects.  The regulatory agencies in the area can prove a daunting challenge to even the most experienced constructors.  These agencies often overlap jurisdictional responsibilities.  These agencies exist to protect the natural environment, protect the rights of the property owners, and protect the rights of the local and state populous.  A constructor must find ways to work with these agencies to construct a satisfactory project for all parties involved.

Constructors involved in beachfront construction must also deal with unique materials and methods.  The natural conditions and elements along the northwest Florida coast require unique construction processes.  Naturally strong beachfront winds, as well as the potential for sustained hurricane force winds, drive strict construction codes.  Constructors must verse themselves on how to properly construct beachfront projects in order to succeed in this market.

Constructors also assume the responsibility of protecting the natural coastal environment.  Many endangered or protected species of plants and animals make their home along the Florida coast.

Large construction projects can easily disrupt the habitat of creatures fighting for survival.  The coastal constructor must take care not to disturb or threaten the fragile natural environment (Giattina, 2002).

Construction markets tend to ebb and flow with economic conditions.  The protected environments along the Florida coast create a natural and severe scarcity of available land.  Contractors who wish to construct coastal projects cannot limit themselves to small sections of beachfront.  They must obtain licensure to construct in many counties and cities to maintain a sufficient pool of potential development.  Forecasting future markets can influence a constructor’s future stability and profit.

Purpose of Paper

The purpose of this manuscript includes four goals.  First, it will enumerate the primary components of project delivery in the specific geographic area.  Next, it will expand these components through literature review, and a series of interviews with current industry members associated with the development, design, and construction of condominiums in Florida’s panhandle.  This component expansion will also include perspectives of the primary author of this manuscript, who spent 5 years in a construction executive capacity responsible for the negotiation and delivery of over $80 million in related construction in this geographic area.  The manuscript will then recap via the development of an objective survey generated and disseminated for industry feedback, and offer the authors’ discussion and interpretation of the data gathered in providing recommendations for contractors interested in pursuing work in this geographic market.

Results

Primary Components - The primary components of coastal construction are development, design and code enforcement, and construction.

Success of the development of condominium property on the Gulf Coast of Florida can generally be reduced to proformas and profitability.  Obviously, there are other benefits and goals of developers including satisfaction, sense of pride, etcetera, however this manuscript will limit discussion to quantifiable topics.  Proforma and profitability analysis includes market demand, certain jurisdictional authority requirements, land availability, permitting, and the cost of capital/equity.

Design components include jurisdictional authority requirements (particularly ASCE-7 wind codes), aesthetics and appeal to condominium buyers, and project budget constraints.

Primary construction components in this specialty market include subcontractor climate relations, weather (heat, hurricanes), skin/roof and other water penetration considerations, condominium associations, equity participation requirements, and labor pools.

Development Components

General Market Demand and Density Requirements

The short-term and long-term outlook for the beachfront condominium market remains strong in spite of current economic indicators.  This seems to stem from the current cost of capital, as well as stock market conditions.  Interest rates remain at near all-time lows and show no signs of a drastic increase.  The favorable interest rates favor further development of real estate assets.  Additionally, current stock market returns lead many investors to more favorable investments.  The current returns in the condominium market out pace financial market returns (Lewis, 2002).

Developers will, on occasion, require contractors to participate in the project’s equity.  This produces a vested interest by the contractor in the project, plus often provides needed cash flow to release bank loan funding.

Communities along the Florida coast establish density requirements to maintain the scenic beauty of the area from over development.  Density requirements may include a maximum number of living units a potential investment may construct, minimum number of parking spaces per dwelling unit, or proximity of the development to other coastal features.  These requirements establish limits for the developer’s property and impact potential income from the development. One example of how density requirements can affect coastal development includes the establishment of the Coastal Construction Control Line and the Fifty Foot Setback Line.  Buildings constructed before the establishment of the Coastal Construction Control Line and Fifty Foot Setback Line receive exemption from control line and setback directives.  If a developer obtains property adjacent to a “grandfathered” property, they may receive some relief from the restrictions of the Coastal Construction Control Line and Fifty Foot Setback Line.  The relief includes different density requirements for different development options.  For instance, developers may build as close to the ocean as structures on adjoining properties, but developers cannot construct as many units on the property as they might if they built according to Coastal Construction Control Line and Fifty Foot Setback Line stipulations (Lewis, 2002)

Scarcity of Land

Government protection of Florida’s Beach assets increased dramatically over the last thirty years.  As a result, little available land currently exists along the Florida panhandle coast.  Current development stems from renovation or removal of existing properties with the intent of reconstruction  One problem with this situation involves acquiring suitable existing properties.  Undesirable properties may surround potential development properties.  This may dictate future values of the property in question.  Additionally, new development projects may adversely affect the value of existing properties surrounding the investment property.  Developers must play a delicate balancing act with in attaining the “highest and best use” of the potential development property (Lewis, 2002).

Coastal Construction Permitting

In 1972 the United States Congress, in an effort to protect the ever decreasing coastal environment, enacted the Coastal Zone Management Act.  The Act sought to protect or restore the natural coastal environment for all to enjoy.  The Act also encouraged all states with coastal assets to develop comprehensive coastal management plans.

The state of Florida counts its beaches and dunes among its most valuable resources.  Many endangered and protected species make their home in this environment.  The beaches and dunes provide residents of the state of Florida with recreation and tourism revenue.  The Florida State Legislature, seeking to protect these environments for all, acted in 1971 (Hennessy & Grow, 2001).

Coastal Construction Control Line, Mean High Water Line, and 50 foot Setback

Each county in the state of Florida with sandy beaches stipulates its own Coastal Construction Control Line.  The Department of Environmental Protection establishes these control lines.  The DEP sets the control line landward of any beach/dune system subject to severe alteration under the influence of a 100-year storm, storm waves, or other predictable condition.  Once established, the county governments record the Coastal Construction Control Line in the public records (Hennessy & Thomas, 2002).

Under normal conditions, construction may only commence landward of the fifty foot setback.  Surveys determine an average high water line as the basis for the setback.  The rules define “permit” as a variation from the setback line.  If the DEP establishes an erosion control line, then the more landward of the two lines determines construction boundaries.  The DEP uses historical data and measurements to determine beach topography over the next thirty years.  This data establishes the erosion control line (Hennessy & Thomas, 2002).

The Department of Environmental Protection requires all parties wishing to perform construction activities seaward of the Coastal Construction Control Line to obtain a construction permit.  The DEP may order the adjustment, alteration, or removal of any structure seaward of the Coastal Construction Control Line it deems dangerous, undesirable, or unnecessary.  The DEP uses its jurisdiction over these lands to protect the beach and dune systems, as well as upland structures and public interest in the nation’s seashores (Hennessy & Thomas, 2002).

Department of Environmental Protection

In 1971 the Florida State Legislature effected legislation requiring the Department of Environmental Protection (DEP) to establish a Coastal Construction Control Line along the Gulf and Atlantic shores of the state.  The DEP uses historical data including, but not limited to, topography surveys, erosion trends, storm tides, and vegetation data to determine the controlled construction boundaries.  In 1978 the Florida State Legislature changed the statute to allow counties and municipalities to determine the Coastal Construction Control Line.  Since 1971, all 24 Florida counties with sand beaches enforce a construction control line (Hennessy & Grow, 2001).

Design and Code Issues

General Design Issues

Architects designing beachfront projects in the state of Florida encounter many unique design issues not seen in other areas of the country.  The following facts illustrate this point (Lauer, 1999):

·         14 of the 30 most damaging hurricanes recorded between 1925 and 1995 struck the state of Florida;

·         80% of Florida’s population lives within five miles of the coast (vulnerable to storm surge, flooding, and hurricane force winds);

·         Almost 30% of the population lives within a Category 1 Storm Surge Zone (these areas represent the most frequently affected by hurricanes);

Wind Forces

Wind codes have seen recent dramatic changes, primarily in the wake of Hurricane Andrew.  The ASCE-7 code generally dictates all structural and skin design requirements of buildings along the coast over 3 stories tall.  While the code establishes a minimum 110 mph design criteria, many local codes (county, island authorities, etc.) supercede this code by increasing the wind design criteria to 120 and 140 mph.

The Bureau of Beaches and Shores, Technical Report No. 78-1 recommends using 140 miles per hour wind forces as a minimum design threshold for beachfront construction.  The 140 miles per hour force exceeds the 100 year storm threshold required by most zoning ordinances by 20 miles per hour.  A study conducted by the state of Texas indicates this design limit should only increase the cost of building construction in the range of zero to three percent (Jones & Johnson, 1982).

Appeal to Buyers, Budget Constraints

Market appeal to potential buyers is paramount in an increasingly competitive condominium sales market.  Designers must produce a product that not only satisfies code compliance issues, but must also provide a level of fit, finish, and amenities to attract buyers for preconstruction sales.  Generally, bank funded loans will require up to 75% of unit buyout before closing on the loan, so buyers must purchase from architectural drawings, renderings, and similar marketing type presentation material.  This becomes an arduous task for the designer, as this level of design is usually completed prior to contractor involvement, generating the risk of budget problems for the developer.  A concept that is marketed and sold, but that later proves too costly for the development proforma can be disastrous for all team members.

Construction Issues

Subcontractor Relations and Labor Pools

The subcontractor market in the panhandle region is generally different than that of inland construction.  Subcontractors in this area often are relatively transient, and many have no long term history.  While many are quite capable of handling a project of this type, general contractors should be deliberate in researching potential subs for condominium projects.  Labor availability, appropriate insurance and bonding, and cash flow are usual sources of subcontractor difficulties in this area.

Similarly, a general contractor will find labor supplies short in the panhandle area, as, excepting government and military projects, beachfront construction generally represents the bulk of commercial construction in this area.

Weather Issues

While the Florida coast provides year-round recreation to the residents and tourists visiting the beaches, these same conditions can prove detrimental to coastal structures.  The blazing sun of the Florida coast wreaks havoc on roof systems in this section of the country.  The sun and ocean currents generate powerful storms and hurricanes off the Florida coast.  These storms produce wind driven rains which can penetrate even the most carefully weatherproofed building skin systems.  Constructors must make themselves aware of these conditions and execute high quality construction procedures when constructing beachfront properties (Rawson, 1979).

Roof Systems and Skin Issues

Condominiums with so-called “flat roofs” receive ample abuse from sun and rain.  The constructor should purchase a roofing system that will remain flexible for long periods of time.  Liquid plasticizers in roof membranes tend to migrate out of the roof material within five to ten years.  This situation results in a brittle roof material.  The roof material may crack under the weight of a single person causing leakage or other undesirable results (Rawson, 1979).

Pooling water can also allow prolific algae reproduction.   The algae can bite into an asphalt roofing system causing severe water damage to the structures interior.  Rubberized roof membranes tend to fair better against algae damage (Rawson, 1979).

Construction defects in condominium skins systems can allow water to penetrate to the habitable space of the structure.  This situation can lead to a multitude of problems.  The constructor may find himself in a courtroom defending against claims made by condominium residents.  Some of the problems include water damage to structural and finish systems in the condominium.  Courts may require constructors to pay for or repair damage caused by water penetration resulting from shoddy workmanship.  Water penetration may lead to mold or fungal growth within the structure.   These growths may lead to or aggravate asthmatic conditions of the condominium residents (Morey, 1996).

The Condominium Association

One of the unique challenges facing the beachfront condominium constructor involves a lasting relationship with the condominium association.  Condominium associations involve multiple owners.  This means the constructor must deal with multiple personalities.  The problems most often arise when a warranty situation develops (Morse, 2002).

The contractor must balance the desire to do repeat business with the need to protect thin profit margins.  With so many owners involved in the condominium association, the constructor often returns to perform maintenance items rather than warranty items.  An example of a warranty would include a heating and cooling system malfunction within the warranty period.  A constructor must repair or replace this item under the obligations of the warranty.  A member of the condominium association might ask the constructor to return to replace a door off its hinges.  The latter situation clearly falls in a maintenance category (Morse, 2002).

The Authors’ Conclusions and Recommendations

Contractors wishing to capitalize in the Florida panhandle condominium construction market should develop and maintain a defined approach to avoid pitfalls that have produced many casualties in the past.  The relationship with the developer is first and foremost, and should include an analysis of his presence & financial sustainability.  It should also include a review of his local track record, as well as a review of the overall performance and bank loan information.

Equally critical is a review and understanding of the contract documents before entering into any contract of commitment.  Items that must be addressed / determined include completeness of the drawings, a review of code sensitive issues [structural integrity, life safety, etc.], products and materials specified, and an understanding of accountability of the design and construction parties as understood by the developer.

Finally, the constructor must have a firm grasp on an appropriate contractual relationship to minimize changes, define dates and associated finance issues, and provide a complete source of remedy in the event some discrepancy arises.  The contractual arrangement and any other implied or understood structure should insulate the builder from unnecessary communication with condominium buyers, and should explicitly address the relationship with the condominium association during and after construction is complete.

References

Hennessy, K. S. Esq. & Grow, J. M. (2001).  Florida Coastal Construction Permitting. [WWW document]  URL www.llw-law.com/article6.cfm

Hennessy, K. S. Esq. & Thomas, G. (2002)  Florida Coastal Construction Permitting.

Presented at the 2002 Florida Chamber's Permitting Summer School at Marco Island.  [WWW document]  URL www.llw-law.com/article18.cfm

Jones, C. P. & Johnson, L. T. (1982)  Coastal Construction Practices.  Marine

Advisory Bulletin MAP-23 Florida Sea Grant College Program.

Lauer, N. C. (1999). Paying for Paradise.  Research in Review.  Spring and Summer 1999.

Morey P.  (1996).  Mold Growth in Buildings: Removal and Prevention.  Proceedings of Indoor Air '96, Nagoya, Japan.  Vol. 2:27-36

Rawson, Jr., M. V. (1979, October 25).  Guidelines for Hurricane Resistant Construction Community Resource Development.  Conducted by: The Alabama Cooperative Extension Service.

United States Census Bureau. (1996).  Population in Coastal Counties: April 1, 1990 and July 1, 1994.  Washington, DC.  [WWW document]  URL http://www.census.gov/population/estimates/county/9094cstl.txt

Interviews:

Lewis, Jimmy (2002, October 18) Lewis Investment Company, 2140 11th Avenue South, Birmingham, AL 35205

Giattina, Chris (2002, October 18) Giattina, Fisher & Aycock,  2031 11th Avenue South, Birmingham, AL 35205

Morse, Roger (2002, October 18) Bill Harbert Construction, 820 Shades Creek Parkway, Birmingham, AL 35209