Community conflicts
Adult communities are confronting defects and underfunded reserves

Article Reprinted with Permission of the Associated Press

Posted October 31, 2004

ROSEVILLE, Calif. Jim Viele moved to Sun City Roseville in 1997 expecting to think more about golf than landscaping, drip irrigation systems and lawsuits.

But as head of his homeowners association, Viele is mired in a lawsuit with Del Webb, the nation's premier builder of privately run adult communities. The association claims the developer saddled the 5,400 residents with defective water systems that caused trees and turf to die and the golf course to become soggy.

So, Viele and other residents in this decade-old community east of Sacramento, fearing huge hikes in their $120 monthly dues or a big drain on cash reserves, sued Del Webb to fix it or pay the bill.

As developers build more planned communities, they are also turning them and their multimillion-dollar annual budgets over to residents and volunteers to run once the developers sell out. Often, development experts said, residents from California to Arizona to Florida learn they've inherited financial time bombs.

Cracks develop in clubhouses, tennis courts and roads. On the championship golf course that once lured buyers, grass either dies or turns soggy because of defective irrigation systems. Often, residents find the problems are due to construction defects and that the developer didn't leave enough money in the reserve funds to pay to fix them. Either the associations have to raise dues or collect one-time special assessments, often hiking living costs beyond buyers' original expectations.

With so many of these communities being built each year, often to house the pool of aging baby boomers entering retirement, situations like the one in Roseville could become commonplace across the country, experts said. As they do, some of the nation's largest builders are finding themselves the targets of lawsuits from unhappy buyers.

One of those is Stuart Diamond in Delray Beach. He leads the homeowners association at Villa Borghese, which is suing the community's developer, Ansca Homes, after they inherited a $280,000 deficit and a defective irrigation system.

"I didn't expect to be involved in a quagmire," Diamond said of the association's $1.2 million lawsuit against the developer, which has also been sued by the Ponte Vecchio West Homeowners Association in nearby Boynton Beach for the same reason.

Industry watchers said problems stem from competitive pressures and the lack of government oversight. Some builders, they say, set monthly or yearly assessments as low as possible to attract buyers while they sell the community. After the developers sell out, the low assessments that enticed buyers aren't high enough to run the place or repair swimming pools or streets when they crack.

Such "lowballing" of fees does occur, acknowledged Donna Reichle, a spokeswoman for the Washington-based National Association of Home Builders. But she said costs can rise after a builder sets the assessments and reserve funds.

"When the assessments are initially set, they reflect the price of labor and materials at that time," she said. However, the cost of building materials could "increase at a rate higher than at the time of the reserve study."

There are no statistics on how often these problems occur. But experts in association finances say they're one element in a larger phenomenon in which one-third of the nation's 260,000 associations don't have enough money for their long-range upkeep.

At Sun City Roseville, where golf cart lanes line wide boulevards and retirees from Minnesota and South Dakota host golf tournaments and card games, Viele said Del Webb left the association with enough money when it departed the community in 2004. But the community's lawsuit alleges a flip side of the lowballing issue leaving behind defective infrastructure that could overwhelm even adequate funds with repair bills.

"The budget may have been all right, maybe, if this thing had been built the way it was supposed to be built," said Tyler Berding, the association's attorney.

Del Webb's attorneys have denied allegations of defects, and talks are aimed at resolving the issue.

Del Webb, which began creating communities for adults 55 and older in 1960 and became the signature name in communal Sunbelt retirement living also has attracted lawsuits alleging construction defects or inadequate reserves at Sun City MacDonald Ranch and Sun City Anthem near Las Vegas and Sun City Grand near Phoenix.

Las Vegas attorney Edward Song has sued Del Webb's parent company, Michigan-based Pulte Homes, alleging it underfunded a homeowners association that took over its 372-unit Stone Ridge condominium project in Las Vegas. Pulte's 2001 merger with Del Webb made it the nation's largest homebuilder.

Pulte strives to ensure smooth transitions, said spokeswoman Mark Marymee.

"When we transition out of communities we leave reserves fully funded," he said. "We want to leave a community with a positive feeling for both sides. That goodwill is something we definitely feel is important to us."

But Song said lawsuits may become increasingly common as more adults flock to privately governed communities that share facilities such as pools and golf courses, and as competition spurs builders to "do it quicker, faster and then get it to the market as soon as possible."

Virginia attorney David Mercer said cities that approve development projects and property management companies that run them should be more outspoken about the financial foundations developers leave for private communities, many thousands of homes.

"They've created a little city in many respects," he said.

California is one of the few states that makes developers prove adequate startup association budgets and reserve funds. But it requires only the minimum, and formulas used to set it haven't been updated since 1999 because of a state budget crisis and staff cuts. Most other states have no rules.

At Sun City Roseville, Viele said his advice to other associations soon to take over their communities is "make sure you do your due diligence."

In Delray Beach, Diamond said a new community with pools, golf courses and clubhouse may look like a bargain to buyers with dues of $155 a month, "but the bargain is you end up picking up the difference once the developer leaves."