Builders are leaving un-built homes, causing hardships for condo associations. Imagine a community association of 450 lots with a community association pool and clubhouse. Now with only 225 homes closed, these condo association members are in for a shock. Condo association fees may double. In the past, builders would make up shortfalls in the HOA budget, but most builders are now cash-strapped and cannot support the condo association. Does the condo association board up the clubhouse and shut the pool?
Condo developers in trouble have been around for many years. Underfunded HOA reserves, incomplete roads, building defects and unpaid bills could end up as liens on the common property. Condo developers often create a Limited Liability Corporation for each community association and may end up judgment-proof if they run out of condo reserves.
If the condo association thinks the condo developer may be in financial distress, involve the condo association's attorney as soon as possible. Many condo associations use the condo developer's attorney, but, that could be a conflict when the two parties have competing interests. If the condo developer who still maintains a majority of seats on the condo association board disappears, the homeowners association members should band together to elect their own HOA board of directors, if authorized in the HOA documents. If not, perhaps electing an advisory, or informal, condo board, is a workable option to ensure that the owners are involved in the operations of their condo association.
Keep the local government informed regarding the financial status of the condo association. The condo 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 condo developer.
If there is a HOA loan on which the condo developer defaulted, the bank may foreclose on the remaining parcels of land. Work with the condo association's attorney to ensure that the condo association lender pays all legally-due unit/lot condo assessments, set-up fees and amounts related to newly-closed units such as the working capital, HOA reserve, long-term HOA reserve and condo association fees. The bank will normally assign a real estate company to work out any sales or leases. The condo association should alert the company to any open balances in owners' accounts. Many banks want to work with the condo associations so they may have a clear title when they make a sale.
If the condo developer files bankruptcy or is deliquent, a receiver, or trustee, will be appointed by the court. Receivers/trustees have the same rights as the condo developer did, including condo board appointments and contract approval.
If there is a major shortfall in condo reserve funds, additional HOA special assessments may be needed. Condo association budgets will need to be reworked based on the number of closed units/homes. Be prepared to negotiate condo fees for fewer services. Condo developers like to keep condo fees low in order to maximize loan qualification by prospective buyers. Does the condo association reduce services or increase special assessments?
