HOA/Condo Associations working with Financially-Distressed Developers

Community Associations Condominium Associations Developers HOA HOA Board of Directors Uncategorized

Every 7-10 years, there is typically a downfall in the market. The current decline has had a great impact on financial institutions and the auto industry, but the hardest hit has been the housing industry. The difference this time is the role played by the financial institutions that are not lending at previous levels. Through the trickle-down theory, the financial stresses of developers have hit developing community associations hard. Builders have had to downsize. And, many of their employees had been serving on boards.

The biggest impact has been the financial impact on the community. Developers have not been able to fund all or any of the association deficits. To meet these deficits, boards have had to decrease services in order to decrease costs. For the costs that they cannot reduce, such as insurance premiums and mandated services, an increase in assessments is necessary to make up the difference. Homeowners have found themselves paying more for less, and the association managers are left to explain it. How do you, as a homeowner board member, please the homeowners you represent?

Developer Hat
Chances are if the developer is still in the picture, they’re still controlling the board. If this is the case, then they’re also controlling the budget including deficit funding and assessment payment (or nonpayment).

Prior to approving a budget, the developer is first going to want an updated multi-year budget so that they can see the impact of turnover. They also may ask their accountant or the association manager for a number of scenarios. For example, “What happens if we turnover the association in 2011 instead of 2012?” or “What happens if we raise the assessments $30 instead of $25?“

Secondly, if the multi-year is showing peaks and valleys with assessments over the next few years, the developer is going to do what he can to make it a steady increase to get to a budget that requires no subsidies by turnover. This may mean cutting services, reducing or eliminating transfers to the reserve account, and/or the operating contingency.

Lately, more and more associations have been faced with the reality of developers leaving earlier than anticipated. It may be their choice to leave because it’s costing them too much to complete the project. Or, they may be forced to leave due to bankruptcy. Regardless of the reason, it is happening all over the nation. And when it does, the homeowner-controlled board finds itself in the difficult position of immediately raising assessments and reducing services to prevent operating with a deficit.

Association Hat
When a developer abandons a community that has not been built-out, the two biggest concerns from the homeowner perspective are the potential for increased assessments and diminished services. For the homeowners who moved in prior to 2005, things were looking great! Assessments were reasonably low, services were performed and often exceeded expectations – rainbows came out of the developers’ shoes when they walked. Within the next three years, the market started to tank and these happy homeowners soon found themselves receiving letters from their associations using words such as “delinquency rate”, “deficit” and “assessment increase”.

Delinquency rates sky-rocketed, resulting in increased attorney fees as assessment income decreased. When income does not meet budgeted expectations, replacement reserves may be used to cover operating expenses. With the rapid increase in delinquencies, expenses became too much to handle and the year end net profit or loss had parentheses around it. Developers received invoices, sometimes exceeding $100,000 per community, to cover deficits. Experiencing a halt in sales and being expected to cover very large deficits from a number of communities, developers quickly started to feel the impact. To preclude the need to subsidize the association’s operating fund deficits, developers increased assessments and decreased services. So now, not only does the once-happy homeowner have to pay exponentially more than he or she paid before, but the pool still isclosed and the grass cut only twice a month in the summer.

Happy Medium
Community association managers must remember that their primary responsibility is to the association. They should work with the developer to try to make a bad situation better. If the developer has to leave a project earlier than anticipated, suggest he put money towards the reserves as a good faith effort. If he can afford to retain one developer-appointed member on the board, recommend they he do that so it doesn’t look like he is abandoning the association.

To sustain the trust of the homeowners, community managers must constantly communicate with them. Sympathize with all parties and do what you can to help alleviate their stresses. Keep the owners up-to-date with the monthly delinquency rate and the progress (or lack thereof) of home sales within the community. It also helps to explain the hardships of other communities so the owners realize that they are not the only ones going through this difficult time. The crucial point is to remind the owners that this is a temporary situation and that experts are projecting a turnaround in the housing market by late 2010.

While there’s really nothing anyone can do about an upside-down market and the effects it has on the developer and owners in a community in which all, or even most, of the units/homes are unsold, the manager, board and the owners should hunker down to weather the storm until the economy improves. We are already seeing signs of a recovery. Defy gravity…what goes down must also go back up!

For more information about Homeowners Associations or Condominium Associations please visit this helpful website.

Source: Association Times