Private vs. Public Ownership of Communities

Tyler,

Your article, Bankruptcy Won't Work ! is excellent in it's detail and content.
Another similar issue not discussed was, ...if the association is too broke to pay its bills, why not simply declare bankruptcy or consider dissolution ? (when allowed by law, not in Chandler AZ)

Dissolution I understand is not possible in most cases especially in condominiums for the same reasons as mentioned in your article. However in some Homeowners Associations that may only have a retention basin or small common area, Dissolution may be possible.

One important fact, is that most municipal ordinance's that mandate HOAs require HOAs/POAs, if there is any common area amenities no matter how small of an area it may be. In other words, one size fits all, but should it ?

As an example our development only has one small retention basin that is covered in woods and most residents don't even know that it exists and it requires no maintenance. Another example is another local development where our City placed the maintenance of the one and only retention basin in the hands of the development residents in their deeds instead of mandating a private entity to maintain it.

Does dissolution solve the problems or act as a substitute to Bankruptcy, no, most often but in some limited cases that may be possible.
Thanks,

Fred Fischer

Fred,

Thank you for your comments. Basically, with non-productive real estate (those little scraps of land left over from a development) the developer would have to pay some entity to take them, and perhaps that's what municipalities should require as a condition to the original development, if those scraps are the only reason for creating an association of owners. In that case, and that case only, you might be able to live without a community association if all other individually owned parcels or lots could be maintained separately by their owners. But with parcels that serve more than one lot and have a necessary function--the retention basin, a clubhouse, a road, a playground--and also require annual maintenance--some community entity has to be responsible not only for the bare legal title (and payment of taxes) but also to insure that the necessary maintenance is performed so that its function is preserved. This responsibility is passed on to individual owners by virtue of covenants in their deeds, either directly or through mandatory membership in the community association. Bankruptcy of the association, or its dissolution, would not protect the individual owners from this obligation for the reasons stated in the article.

It is usually not the case, however, that the only reason for a community association is a non-functional remainder parcel--usually there is a mix of functional and non-functional pieces--and hence the necessity for a public or private entity to not only own them, but also to maintain them. You can combine these maintenance functions into an over-arching organization, like the community maintenance trusts we have discussed, but that is really to make the operation more cost-effective, it doesn't impact the necessity of the underlying legal structure at all.

Historically, most of these pieces of real estate were dedicated to cities and counties and maintained by them in perpetuity. But today, it is just as likely that the local municipality will not accept dedication and will require that the ownership, as well as the cost of maintaining the new facilities, be assigned to a small sub-set of citizens--those immediately benefited by the improvement--via a private organization. This quantum shift in public vs. private ownership of otherwise public parcels over the past 40 years has dramatically increased the number of associations created to own and maintain them.

Much of this change has occurred because of the huge expansion of housing onto formerly agricultural lands where no infrastructure existed. That and the sheer size of the developments, which include newly built commercial as well as residential areas, in many cases new towns where nothing existed before, create the opportunity and the incentive for municipalities to avoid the cost of maintaining this new infrastructure--roads, drainage facilities, parks, landscaping, etc. If the big developers wanted the zoning necessary to build new towns, they also had to find a way to create private ownership of the infrastructure, and community associations were the option they chose in increasing numbers.

If the objective is to limit the number of new community associations, one alternative is to limit suburban growth and focus instead on increasing density in existing urban areas where the infrastructure already exists and is publically owned and maintained. That doesn't change the need for a private managing entity of the buildings themselves and the discussion obviously includes issues that go way beyond the question of public vs. private ownership and the necessity of community associations. But it is useful to remind us of how we got to where we are today.

Bankruptcy Won't Work!

Why There’s No Protection for Members When 
Community Associations "Go Broke"

By
Tyler P. Berding, Esq. and Sandra M. Bonato, Esq.

            You’re at a board of directors meeting of your homeowners association.  Things have been happening around the community--not good things--and you want to find out why.  Why have they closed the pool?  Why is the landscaping looking so bad?  What’s with the rumor that the property manager might be let go.  You know that money has been tight for the association.  You’re aware that assessments haven’t gone up for years, and now word has it that a large number of owners have stopped paying altogether.  At the meeting the president of the association announces further cutbacks--the association’s insurance may have to be dropped.  There have been no deposits to the reserve account for several years and, worse, the account has been drained over time to meet monthly obligations. The board proposes a 5% special assessment and approves it, but it’s not likely to go far with all there is to do and pay.  A report from the manager confirms your worst fears: re-roofing of the project (including for your unit) will have to wait, and even temporary repairs to the leaking portions of the roof may not be done for months.  There’s no money to pay for it.

            A member raises his hand and asks the inevitable question--if the association is too broke to pay its bills, why not simply declare bankruptcy?  Hold the creditors at bay until the economy picks up?  No one on the board has a good answer.  Why?  Because it almost never happens.  Here are the practical and legal reasons why...

Click on the title link above to read the rest of this article

The Great Foreclosure Debate: Part II--Readers Respond

Here are two of the letters we received in response to “The Great Foreclosure Debate: Should Community Associations use Alternatives to Foreclosure to Protect Their Cash Flow?” posted below. They represent two sides of this very controversial issue. The first is a spirited response from Mr. George Staropoli, a community association activist in Arizona who writes a blog and newsletter devoted to the question of the constitutionality of community associations. The second is from Ms. Nancy Sterling, a real estate professional, about a 34 unit condominium complex where nearly half of the units have been through bank foreclosure in the past two years. They help to understand why the foreclosure debate has generated so much energy and provide contrast between the theoretical and the practical...

To read the letters and our comments, please click on the title link above...

Condominium Conversions: Old Apartment or New Product?

Does Caveat Emptor apply to Conversions?

The spate of conversion of old apartments to condominiums has finally abated largely due to the failed economy. For many reasons which we have previously noted, buyers prefer new construction and only buy conversions when the housing market is in a selling frenzy. Nevertheless, thousands were sold and owner claims have arisen which range from minor issues with the unit itself to major waterproofing and structural failures in the buildings which will require very expensive reconstruction for which no funding was provided by the converter.

These claims are often defended by developers with the argument that since what was purchased was not new, the owners cannot expect that the converter should pay the cost of rehabilitation. That the conversions are not new construction is not usually hidden from buyers. Everyone buying into a converted apartment project did or should know that the buildings were more than just a few years old and that deterioration can be expected.

But what most buyers do not know and should not have to expect is that the maintenance and repair funding plan which was coupled with the sale of the unit was inadequate for the eventual repair of the buildings. And why is this important? Because a condominium conversion is not just a used apartment alone. It is a new product assembled from several important pieces.

Click the title link above to read the rest of this essay...

The Great Foreclosure Debate

Should Community Associations Use Alternatives To Foreclosure To Protect Their Cash Flow?

There is currently raging a great debate. This one has nothing to do with national health care, war in the Middle East, or the future of the Washington Redskins. No, this debate is whether community associations should have the right to use foreclosure as the ultimate delinquent assessment collection tool. Foreclosure is the enforcement device that allows a creditor, in this case a homeowners association, to force the sale of an owner’s condominium or single family house to collect a delinquent association assessment. The practical arguments among the various participants in this debate go back and forth something like this: Assessments are a community association’s cash flow lifeline—if owners fail to pay, the association cannot keep its commitments. Foreclosure is a radical remedy—it costs associations more than they can possibly recover, so why do it? Foreclosure for failure to pay delinquent assessments is the only enforcement mechanism that works.

The legal arguments include: There is really no contract between owners and their association that gives the board of directors the right to foreclose because the owners weren’t parties when the association was created. The CC&Rs are recorded against the title of the owner’s interest and provide for lien rights and hence the right to foreclose. State legislatures have not clearly provided for an association’s right to foreclose.

And finally, the moral arguments: A home is a sanctuary—how can we allow it to be taken away just to satisfy a small arrearage in assessments?  We should not allow owners who do not pay their assessments to live on the backs of those owners who do. Everyone should pay his or her own way. Foreclosing on someone’s home is immoral and community associations should have no right to do it. It just supports a large number of attorneys, property managers, and collection companies.

Anyone who has paid any attention to the articles, blogs, websites, and water cooler conversation about community associations and the recession has heard these arguments, or others like them. Can’t be missed. And the underlying problem is real—thousands of community associations have real cash flow problems because owners are falling behind in their assessments. Enforcement activity is up, and that often means an increase in the number of properties entering the foreclosure process. People are losing their homes for a variety of reasons, but there has been an outcry over whether community associations should be able to enforce delinquent assessments through foreclosure. But we’re getting ahead of ourselves. Let’s back up and look at how we got here.

Click on the title link above to read the rest of this article...

Who Do You Trust?

      The Essential Ingredient in Effective 
Management of Community Associations 

     When there is war inside a community association there are usually several sides—the owners, the board of directors, management, and sometimes, lawyers. Each brings their unique perspective to the dispute, and each may distrust the views, or worse, the motives of the other. That they should all be working together to manage a project that is inherently unmanageable is beside the point—when there is a lack of trust cooperation goes by the boards and issues that should be open to easy solutions instead become a battleground. Why are we wasting good ink to discuss disputes that are often inconsequential in the scheme of things? Because lack of trust can paralyze a community association just when economics require unprecedented cooperation.

Click on the title link above to read the rest of the story...

A Reader Responds...

What About Absentee Owners Who Won't Serve?

Dear Tyler,

I am the president of our HOA board and I pointed our homeowners to your recent 'blog posting while pleading once again this year for candidates.

One of our resident owners responded with a point about another problem to add to your list and I thought I would pass it along to you.

Thanks for your efforts to educate.

Regards,

Ken Meeuwse

Pleasant Hill

It occurs to me that Tyler Berding has missed one essential problem with condominiums and their Boards in his article and that is absentee homeowners who rent their units and expect resident homeowners to do all the managing of the association.

I am aware of at least two owners in my building who have owned and rented their units since the association was first organized and have never served on the Board. They are the owners of Unit [] and Unit []. There may be others in the complex and there are other owner/renters in this building who have owned for a number of years and never served as well. I suggest that the current Board make them aware of THEIR responsibility. Since they have relied for 28 years on people like me who have served multiple times on the Board to manage the complex in which theirr investment property is located, I suggest that the Board specifically contact the absentee owner/landlords and tell them that it is their turn to serve.

If they are unwilling to do so, then I think it is time for the Association to explore what legal options we have to take into account the additional cost absentee owners represent to the Association and to resident owners such as the difficulty in getting fixed rate financing on one's unit due to the number of rental units, increased clean up costs from more frequent move in/move out in those units, lack of absentee owner participation on Board, etc. and assess absentee owners accordingly.

Those of us who have served multiple times on the Board have a right to ask those who have not and who have a unit owned here for more than a decade (whether they live here or not) to step up to the plate!


Ken, thanks for your note and for forwarding the comments above. He is correct--absentee owners are less likely to serve on the board of directors than residents. 


Tyler