Sunday, April 5, 2009

What Happens When a Community Association Fails?

Does the experience in Florida presage the future for California?

We have written many times about the difficult future of the housing industry and that of common interest developments in particular.[1] Underfunded reserves have given way to underfunded operating budgets as the economic crisis deepens and community associations are finding layoffs and foreclosures beginning to impact their ability to pay for even daily operations as assessment payments dry up. What we once predicted as a future problem has been escalated to the present by the economic downturn.

This problem is not confined to California. Other states are experiencing the effects of the economy on community associations. In Florida, the problem is epidemic. In a recent article Jim Loney, writing for, tells the story like this:

“Florida's condominium and homeowners' associations are facing what experts call a trickle-down disaster from the property crisis. Dozens and perhaps hundreds of condo buildings have budget shortfalls as thousands of owners, under water on their mortgages or in foreclosure, stop paying monthly fees.

"I call it a death spiral," Miami Beach city commissioner Jerry Libbin said. "It's a catastrophe in the making." [2]

Community associations rely on the monthly cash flow from assessments to pay virtually all of their expenses. In most cases, they have no other source of income. When that income is seriously curtailed, the ability of the board of directors to protect and maintain the project is in jeopardy. Borrowing from reserves works for a while, assuming there are reserves in the first place. But that lasts only so long as does the available cash, and then what? We’ve written about this situation recently, and it leaves boards in the position of making some very tough decisions.[3] Landscape or pool maintenance? Painting or insurance premiums? Management or the water bill? When we get down to life-safety issues, like paying for electricity, security guards or the sewer bill, its time to re-evaluate the very survival of the association. Loney shows us that the problems in Florida are similar: “Rust pokes through the peeling paint on the railings, pest control has been curtailed and the palm trees are no longer being fertilized at the 1940s-era Miami Modern condominium building in Miami Beach.”

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