Unfinished subdivisions stuck with underfunded HOAs

Article Courtesy of The Arizona Republic

By J. Craig Anderson

Published December 21, 2008


When the San Tan Heights Homeowners Association switched from developer control to homeowner-elected leaders in August, its new board members and management company learned that the HOA was practically DOA.

Its problems included nearly $1.6 million in unpaid dues that the previous HOA board in the Queen Creek-area community had made no effort to collect.

The biggest individual delinquencies belong to bankrupt home builders.

Developer abandonment is likely to become a serious issue in the coming year for as many as 200 of the more than 10,000 Arizona communities under HOA control, both opponents and supporters of Arizona's HOA policies say.

Partially completed subdivisions and newer communities more prone to home foreclosures are the ones most likely to suffer, experts say, while well-established HOAs in older neighborhoods may not have any trouble at all.

Homeowners in neighborhoods with underfunded HOAs have seen their association fees increase at the same time amenities and services are being reduced or eliminated.

They fear the worsening conditions will further hurt their property values and quality of life.

San Tan Heights is one of several boom-era subdivisions Valley developers have abandoned before completion during the past year.

Homeowners in some other communities have been unable to wrest control of their association from developers, who usually are among the HOA's principal debtors.

Ricky Doxie, owner of a condominium at Village at Rio Paseo, said that developers Engle Homes and Sunbelt Holdings still control the Goodyear community's destitute HOA despite the demise of their joint development venture, which produced 27 of 144 planned units.

Meanwhile, homeowners in the community have been forced to fend off worsening blight, angry creditors and interruption of essential services, he said.

San Tan Heights HOA board members say the association will go bankrupt in 2009 unless homeowners each agree to pay an extra one-time $750 assessment, which many residents say they can't afford.

The board also accused developer Miller Holdings of tapping the association's reserve fund to pay operating expenses.

However, owner Larry Miller said he simply did whatever he could to pay the HOA's bills while member delinquencies mounted, adding that it would have been a waste of money to go after bankrupt HOA debtors who had no money to give.

Miller said the HOA is suffering because San Tan Heights, like scores of other communities in the Valley, provided homes to entry-level buyers, many working in the construction industry, at or near the housing-market peak.

"Every one of those subdivisions is having the same problems," he said.

Advocates for HOA reform say lawmakers could have prevented problems caused by the housing-market downturn by passing tougher restrictions on what critics describe as a developer-friendly system that often treats homeowner rights like an afterthought.

"Unfortunately, I think we've dug ourselves into a big hole here," said Clint Goodman, Mesa attorney and homeowner advocate.

The HOA age

Homeowners associations have become ubiquitous in recent decades, as local governments have sought to limit the impact of population growth on the demand for municipal services.

Development standards have evolved to the point where developers are required to include large parks and open spaces in each new community - recreational amenities once provided almost exclusively by the public sector.

"Cities like it because they don't have to maintain certain areas," said Goodman, president of the Homeowners Institute.

Fast-growing Arizona cities and towns such as Gilbert require all new residential development to be under HOA control.

Another requirement, which Reed Porter, president of T2 Homes, said has become a challenge, is that the developer must finance and construct those amenities in each new community before selling a single home.

Porter knows firsthand how amenities can become cash-sucking monsters in a half-empty community where the developer has gone out of business.

"Now, there's 500 residents living in a community with amenities for 1,000 residents, and then they see the community start to deteriorate," he said.

Porter, also the former president of bankrupt builder Trend Homes, abandoned one Gilbert subdivision fitting that general description early this year.

Cooley Station North in east Gilbert is one of seven communities Trend Homes was building before filing for Chapter 11 bankruptcy protection in January.

Porter later joined Najafi Cos., a private-equity firm, to start a new company, incorporated as T2 Homes but operating under the Trend Homes name.

Still, T2 is not planning to build or sell any more homes in Cooley Station North and is not liable for the original Trend's unpaid HOA subsidies, Porter said.

Trend built about 280 homes inside the community, which contains 865 subdivided lots.

Nor is the community's principal landowner, Trend Homes' former - also bankrupt - land bank Taro Properties Arizona, responsible for cleaning up the acres of weed-infested vacant land inside Cooley Station, he said.

"The problem is, bankruptcy protects you from all that," Porter said.

His choice of the word "problem" seems less ironic when one learns that Porter served as the board president of the Cooley Station HOA until earlier this month.

That's when Taro agreed to release its nearly 500 mortgaged lots to Bank of America, the jilted lender. BofA will become the community's sole institutional landowner.

It has been an ordeal that required board members to make tough decisions such as closing two of the community's three swimming pools, he said.

Like it or not, Porter said, municipalities will have to change their standards to allow incremental development in the wake of so many failed subdivision projects.

"The developer gets these huge loans to build all these parks and amenities," he said. "I'm sure that the next go-round, banks won't lend on all that stuff up front."

Defeated purpose

Garin Groff, spokesman for the town of Gilbert, said that the reason town officials require developers to complete parks and other amenities in advance is to protect home buyers from the unfulfilled promises of developers.

However, he said Gilbert has been working to accommodate recent requests for more incremental development.

"The town is flexible and will work with developers to phase certain elements," Groff said.

He added that residents of Cooley Station can file complaints with the code-enforcement department in Gilbert about the weeds, which some residents believe are a fire hazard in addition to being unsightly.

The town's enforcement staff will contact the landowner, in most cases a bank, to pressure for a cleanup of the area, Groff said.

Porter said bank repossession of developer land is usually beneficial to struggling HOAs, because banks generally resume payment of fees and clean up vacant land to prepare it for resale.

In the meantime, some communities have formed homeowner cleanup crews to tackle vegetation, trash and construction debris on developer- or bank-owned vacant lots. Groff said, though, residents should obtain permission from landowners so they don't risk being accused of trespassing.

Doxie said he and his neighbors confronted a similar problem earlier this year, when tumbleweeds took over the vacant lots in Rio Paseo.

They had a lawyer send letters to the HOA demanding removal of the weeds, which were cleared out soon afterward.

In general, Rio Paseo residents have learned by experience to take an active approach to dealing with problems in the mostly empty community.

At one point, a landscaping contractor who claimed he was owed money by the developer-controlled HOA had his attorney get liens placed on every homeowner's property.

On another occasion, residents received notice that the community's water service, paid through their $165-a-month association fee, was scheduled to be shut off the next day for non-payment.

By getting involved, the homeowners were able to get the liens removed and keep the water running, Doxie said.

Still, he said that some HOA services have been eliminated without input from homeowners and that the association has not provided any update about its financial situation since a year ago.

"Nobody has contacted us to this day with any information about what is happening here," Doxie said.

Richard LaPorta is board treasurer of the San Tan Heights HOA. He said the community's previous HOA board had a policy of limiting homeowner access to financial information, forbidding residents to copy any documents or remove them from the management office.

Goodman said such policies are commonplace but illegal.

"I sue homeowners associations all the time because they don't disclose financial records," he said.

Lack of accountability and a widespread lack of interest in tougher HOA laws have turned associations that could benefit both home builder and homeowner into "a setup that's ripe for fraud" and financial shenanigans, Goodman said.

"It seems like the main purpose of HOAs has backfired," he said.