Article Courtesy of The Wall
Street Journal
By Stephanie Chen
Published May 14, 2008
Here's another consequence of the troubled housing
market: Some homeowners associations are running low on cash.
The association at Monaco Place, a community of
single-family homes and condominiums in Denver, is short $250,000 of its
$9.3 million annual operating budget. It can't pay for needed roof and
siding repairs to homes. Potholes in the streets haven't been filled in
order to save money to keep electricity running in common areas, says Dee
Tyler, CEO of Colorado Association Services, which manages the
association. Monaco Place was already suffering from a high rate of
foreclosures before the credit crunch hit. In the past three years, about
a third of its 193 units have been foreclosed on.
Like Monaco Place, a growing number of homeowner and
condominium associations across the country are raising their fees or
putting the brakes on clubhouse improvements, new landscaping and other
shared neighborhood amenities. The kitty is so low for some that essential
services, such as building maintenance, electricity, trash removal and
repairs have been cut.
As community residents lose their homes to
foreclosure and new home building has slowed considerably, many of the
roughly 300,000 neighborhood associations in the U.S. are grappling with
shrunken budgets. One estimate puts the delinquency rate on dues at less
than 5 percent in many markets — higher than normal, though still not
enough to threaten basic services, says John Carona, president of Associa,
a Dallas-based company that represents 7,000 community associations in 26
states. Normally, the delinquency rate is about 2 percent, he says.
Elsewhere, the rate is much higher. At Spanos Park
East in Stockton, Calif., owners of about 25 percent of the development's
1,500 single-family homes have been delinquent in paying their quarterly
dues, according to Adrianne Bretao, a manager at M&C Associations
Management Services, which helps to manage the community association. As a
result, the association has put off expanding a patio area in the
clubhouse and swimming pool this year, says Denise Laven, the
association's president.
"It's frustrating," Mrs. Laven says.
"We're seeing the people not paying the fees, so we know it's our
money that has to pay for everything. And our dues will go up next year
because we set them annually." Often, the people behind the decisions
to cut services are the homeowners themselves, since community-association
boards are usually composed of members elected from the building or
neighborhood. (Developers usually serve as the association board until the
project is complete.) Some boards will also hire a third-party management
company or accounting service to ensure general upkeep of the area and
manage the budget.
Rules on fees and services are outlined in
association bylaws, and some states have laws that cover governance of the
associations. So individual homeowners often have little power to fight
increases in dues and cuts in services — as long as the board is
following the rules. They also have little recourse against delinquent
neighbors other than filing lawsuits, which can be costly and
time-consuming.
That's why housing experts advise homeowners to read
the bylaws thoroughly, asking what services are guaranteed and whether
annual fees are capped. Still, since bylaws were drafted when the
community was first built, few outline contingencies in the event of a
wave of foreclosures.
Eric Glazer, an attorney at Glazer & Associates
P.A., in Hallandale, Fla., says nearly all of the 200 condominium
associations his firm represents in South Florida are short of revenue due
to delinquent association fees. Five years ago, those associations
grappled with only a handful of nonpaying residents, he says.
Mr. Glazer and other housing experts say a growing
number of banks aren't paying association dues on properties on which they
have foreclosed and now own.
Colin Hendrick, president of the Carlisle on the
Ocean Condominium Units Association Inc. in Surfside, Fla., has filed six
lawsuits since December against banks that failed to pay dues on
foreclosed units.
One of those banks, Minneapolis-based U.S. Bancorp,
says it isn't responsible for the assessment fees, saying that they are
merely the trustees of the property and that the service agent is
responsible for the payments. But Florida lawyers say that since the bank
is the ultimate owner, it should have to pay.
So far, no overdue fees have been recovered as a
result of the lawsuits.
With 20 of the development's 115 luxury condominium
units in foreclosure and an additional 35 units either behind on their
fees or not paying them at all, the association says, it had no choice but
to jack up fees 10 percent to $470 a month.
"The good owners are left carrying the
baby," Mr. Hendrick says.
That's what happened to Krissy Longyear and her
husband in an affluent suburb of Atlanta, where construction of new homes
has stalled dramatically. A year after they moved into a custom-built,
two-story brick house, the couple saw their homeowners' association fee
jump 27 percent to $635 a year. Meanwhile, the developer has put a halt on
promised amenities, such as street signs and a walking trail around the
community lake.
"We aren't getting any more for the extra money
we're paying," she says.
"It's disheartening that we spent all this
money and time. Maybe we made a mistake." The tough economy is
hurting associations even in areas where the housing market has been
relatively stable. Rob Rosenberg, president of Massingham & Associates
Management Inc. in Hayward, Calif., says 90 percent of the 350 home
associations managed by his company in the Bay area of California are
seeing a rise in the number of residents who pay their dues late or not at
all. Some of the associations are toughening their payment policies by
sending out more reminder letters, and many will have to start cutting
amenities or services after another six months if they don't start
collecting more fees, Mr. Rosenberg says.
Craig Koss, president of Kramer-Triad Management
Group LLC in Ann Arbor, Mich., says he advised his 300 local homeowner
associations to cushion their budgets with additional dollars in
anticipation of the heavy foreclosures last year, but only about 25
percent of the associations did so. He says fiscally responsible
associations will keep reserve funds, but in most states, there is not a
state agency to oversee the associations to ensure that reserve funds are
set up. "A lot of people won't plan until they have to," he
says. "They won't have a rainy day fund until it's
pouring."
Governing Bodies -- A look at homeowners
associations in the U.S.: — There are currently about 300,800
communities covered by an association an estimated 59.5 million residents.
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