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Gone with the Wind

Condemned f​​or serious defects, a North Carolina beachfront community finds salvation in declaring bankruptcy, dissolving the association and selling the land.​

By Pamela Babcock

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SAGGING, BOARDED-UP BUILDINGS, makeshift orange fencing, black and yellow tape warning visitors to “keep out” and shuttered facilities used to greet vacationers pulling into Peppertree-Atlantic Beach Resort in North Carolina’s Bogue Banks. They won’t find much left of the timeshare complex’s first phase now.

More than a dozen buildings were razed earlier this year after the Town of Atlantic Beach condemned nine of them in 2014. A bankruptcy court approved the association’s dissolution and reorganization plan in February, and a broker is being hired to sell the land and split the proceeds among current owners.

“The story is about an orderly way to deal with the termination of a 30-year-old beachfront condominium that has just outlived its useful life,” says Hope Derby Carmichael, the association’s attorney and a partner with Jordan Price Wall Gray Jones & Carlton in Raleigh, N.C.

Latent design and construction defects in the buildings—not neglected maintenance or a lack of funds—likely led to the community’s demise, says Carmichael, a fellow in CAI’s College of Community Association Lawyers and a board member of CAI’s North Carolina chapter. Decades of salt water and sea air at the beachfront location didn’t help either.

Atlantic Beach Town Manager David Walker says he feels sorry for the owners but added that from a public safety standpoint, the buildings were beyond repair.

“It was one of the oldest condominiums on the Bogue Banks, and being oceanfront, it weathered many a storm with the salt air corroding the building materials. The fact that we condemned it as far as its public safety, that was never challenged,” he says.

DEFECTS DISCOVERED

At one time, Peppertree-Atlantic Beach Resort included 33 buildings in three phases. Each phase had its own condominium association, though the three sections share some amenities, such as pools, beach access, putting greens and tennis courts.

Phase one, Peppertree-Atlantic Beach Association, opened in 1984 and included buildings one through 14. Phase two, Peppertree-Atlantic Beach II Association, opened in 1986 and includes buildings 15 through 25. Phase three, Peppertree-Atlantic Beach Villas Association, opened in 1996 and includes buildings 26 through 33. Each phase is a separate legal entity; owners can only be assessed for problems within their phase.

The first phase featured octagonal buildings with two residential stories built on top of a ground-level storage area. They were constructed largely with trucked-in, prefabricated materials.

Problems were discovered in 2012, when the first phase hired a contractor to repair exterior decks. When the contractor pulled back the subfloor, he noticed extensive rot in the support beams. Instead of continuing the work, Carmichael says the board decided to do its due diligence and investigate the full extent of damages to the buildings.

“They didn’t want to simply put a new floor down on top of a substructure that wasn’t sound,” explains Carmichael, who has represented community associations for nearly 25 years.

Meanwhile, because of issues affecting phase one, the phase two and three boards also undertook extensive engineering studies to make sure their buildings weren’t facing the same kind of latent defects.

Phase three was fine, but phase two discovered it needed about $1.2 million in repairs on decks, walkways and stairwells to its 11 buildings. Atlantic Beach originally tried to condemn several phase two buildings, but the association held off the town.

In addition to using reserves, the phase two board has crafted a plan for a loan, spread out over three years, to cover the repairs. The community hopes to have the repairs done in time for Memorial Day vacationers.

IN LIMBO

Phase one owners weren’t so lucky. Atlantic Beach wasn’t going to budge on its stance that buildings one through nine were beyond repair and needed to be torn down.

That left five more buildings in the first phase in limbo. Unlike the others, they were constructed by a different builder and weren’t prefabricated, Carmichael notes. They only needed some repairs, but the only way to raise funds to repair or rebuild would have been to assess the owners of all 14 buildings. Ultimately, that meant all phase one buildings, including those that could’ve been repaired, had to come down.

“As a practical matter, nobody in building 14 is going to want to pay to completely rebuild their neighbor’s unit in building seven. By the same token, nobody in building seven, who won’t have their unit anymore because it’s going to be torn down, is going to pay to have their neighbor’s unit in building 14 repaired,” says Carmichael.

To further complicate matters, the condominium was subdivided into timeshare interval ownership, meaning every unit was subdivided into 52 ownership weeks. Within the 14 buildings in phase one, 63 units were subdivided into more than 3,000 separate timeshare ownership interests.

“You’re dealing with a tremendous number of people who have a relatively low-value ownership interest,” says Carmichael, adding that someone may have paid $2,500 in 1982 for a week in a timeshare that’s worth nothing today. “The reality of the market in 2014 was that most people couldn’t give them away. The market for a 30-year-old timeshare simply isn’t there.”

Carmichael says it would have cost an estimated $12 million to demolish and rebuild phase one—a cost of about up to $6,500 per unit week. Under the condominium’s documents and North Carolina statute, the association would have needed unanimous approval for the assessment—an impossible task given the number of owners spread across the country.

“If someone owns something that’s worth zero dollars, why are they going to pay $6,500 to rebuild it?” asks Carmichael. “Nobody was ever going to pay an assessment, so the board asked, ‘How do we end this condominium association?’ ”

HELP WANTED

Initially, before Carmichael was hired, the board gave owners three options regarding the association’s future.

They could hold their stake in the association, deed their interests to the association and walk away, or deed their interests to the association and opt for a comparable unit and week in the other two phases of the community.

“I believe the board’s original intent to make those three options available was an effort to secure unanimous approval for termination of the condominium. That, unfortunately, proved to be an unattainable goal,” she says.

About a year ago, the board contacted Carmichael for help. The association finally realized declaring bankruptcy was the most viable option.

Carmichael and her legal team crafted a plan that would allow the bankruptcy court to issue an order to demolish the buildings and sell the land free and clear of owners’ interests; the remaining owners would receive proceeds from the sale.

The three options the association initially offered to owners are being honored by the bankruptcy court. Owners who chose to walk away aren’t being penalized, and those who opted for a unit in the other two phases are being given owner status in the bankruptcy plan and will share in any potential sale proceeds.

“We believe—and the court has agreed—that this is the most equitable treatment, given the bankruptcy option wasn’t even a consideration or a known option to the board when it offered those options to owners,” says Carmichael.

SEALED FATE

Phase one likely was doomed from the start of development.

“The buildings just weren’t constructed to withstand the beachfront conditions,” Carmichael says.

Among other things, there were no roofs over the decks and stairwells, which left them exposed to the elements. Over time, water intruded or began pooling and running down channels into the walls of the buildings. That ultimately led to the floors rotting and sagging.

Some owners believe the association could have done more to save the community. A group has threatened litigation against the board and management, which is why Carmichael declined to allow them to be interviewed.

“They’re trying to find some basis for alleging liability,” says Carmichael, explaining that some owners believe the board should have investigated the issue in 2005 when windows were replaced.

If the damage had been discovered earlier, Carmichael thinks the community could have covered repair costs through its reserves. The association had a significant fund to cover broken windows, the full window replacement in 2005, repaving and reroofing.

“When the association encountered this construction defect issue that had been hiding there for 30 years, the buildings had to be torn down. There certainly wasn’t an adequate reserve to demolish and reconstruct all the buildings,” she explains.

The demolition cost $350,000—paid for with funds the association still had on hand and with contributions from a vacation club that had a significant interest in the first phase. The vacation club continues to hold interests in the other two Peppertree phases.

“It was in the club’s best interests to get rid of the eyesore that sits in the middle of the entire community,” says Carmichael.

END OF DAYS

Knowing the development boom that occurred around the U.S. in the late 1970s and early 1980s, Carmichael says she wouldn’t be surprised if other aging beach resort communities find their buildings at the end of their useful lives and face similar challenges.

Although it’s rare for associations to file for bankruptcy, Carmichael believes Peppertree’s experience shows it can be a solution to an immense problem.

“Sometimes, you’re going to find yourself in a situation that seems like there’s no way out, but there is. There are options,” she says. “And even when you find that the only thing that can happen is you have to tear your buildings down, it’s not hopeless.”

Walker, the Atlantic Beach town manager, says that the Peppertree land, which is zoned resort services and sits on about 19 acres, is “very marketable,” particularly because of its access to amenities and the fact that new construction there now can extend up to nine stories high.

“Whoever comes out with ownership will have immediate access to a wastewater treatment plant, the beach and pools,” he says.

Carmichael says brokers she’s spoken with hope to find a developer to purchase the land and build condominiums on the site.

​​​Pamela Babcock is a freelance writer in the New York City area.​