Published in the ECHO Journal, June 2009

In today’s economy, many builders are leaving unbuilt or partially-built homes, consequently causing hardships for associations. Imagine a community of 450 lots with a community pool and clubhouse. Now with only 225 homes closed, these association members are in for a shock. Association fees may double. In the past, builders would often make up shortfalls in the budget to keep the community well maintained, but most builders are now cash-strapped and cannot support the association. Does the association board up the clubhouse and shut the pool?

Developers in trouble have been around for many years, but we have seen more and more in the past three years. Underfunded reserves, incomplete roads, building defects and unpaid bills could end up as liens on the common property. Developers often create a Limited Liability Corporation for each community and may end up judgment-proof if they run out of funds.

If an association has an inkling that its developer may be in financial distress, involve the association’s attorney as soon as possible. Many associations use the developer’s attorney, but that could be a conflict when the two parties have competing interests. If the developer who still maintains a majority of seats on the association board disappears or ignores communications, the homeowners should band together to elect their own board of directors, if authorized in the governing documents. If not, perhaps electing an advisory, or informal, board, is a workable option to ensure that the owners are involved in the operations of, and decision-making for, their association.

Keep the local governmental entities informed regarding the financial status of the association. The owners will be looking to them for help. The municipality may hold bond money or guarantee bonds; ask that these not be allowed to lapse without the homeowner board signing off on them. The municipality may also provide insight on the developer.

If there is an outstanding loan on which the developer defaulted, the bank may foreclose on the remaining parcels of land. Work with the association’s attorney to ensure that the bank pays all legally due unit or lot assessments, set up fees and amounts related to newly-closed units such as the working capital, reserve, long-term reserve or mailbox fees. The bank will normally assign a real estate company to work out any sales or leases. The association should alert the company to any open balances in owners’ accounts. Many banks want to work with the associations so they may have a clear title when they make a sale.

If the developer files bankruptcy, a receiver, or trustee, will be appointed by the court. Receivers/trustees have the same rights as the developer did, including board appointments and contract approval. Building relationships with these professionals will help ensure smooth operation and management of the association.

Association members will need to make some hard decisions. If there is a major shortfall in funds, additional assessments may be needed. Association budgets will need to be reworked based on the number of closed units/homes. Services may need to be reduced. Contracts should be reviewed to determine if any savings may be available. Be prepared to negotiate fees for fewer services. Developers like to keep fees low in order to maximize loan qualification by prospective buyers but, with the developers out of the picture and no longer subsidizing operating account shortfalls, owners need to be realistic in their expectations for the association. Will the association reduce services or increase assessments? The homeowner-controlled board must help the owners understand all options and make recommendations based on the advice of their professional consultants.

With the new Fannie Mae eligibility requirements effective March 1, 2009, for condominium loans, 70 percent of the units must be sold or under contract before the remaining units can get approvals for Fannie Mae-backed loans. Fannie Mae also is requiring that no more than 15 percent of a project’s units be 30 days or more past due on condominium association fees. These new requirements will exacerbate the already distressed condominium sales and resale market. Existing owners will be hurt the most by these new mandates because they will be expected to pay additional maintenance fees and/or special assessments to cover those owners and the developer who are not paying their fair share, and because they will have an even more challenging time trying to sell their units. Communities will need to come together now more than ever to work through these hard economic times. This economic morass will eventually end—they all do. Until then, owners should support their homeowner-controlled board and understand that better times are ahead.

Dean Williams is the Vice President of Developing Communities at the Kramer-Triad Management Group in Ann Arbor MI. The firm provides management services for homeowner associations and is an Associa Company.This article was originally published in Association Times.