Condo, HOA assessments and fee spikes beyond the control of homeowners
By Deborah Goonan, Independent American Communities
I hear from homeowners all over the country. They tell me their assessments have doubled or tripled in the past 5 years. Others tell me their association has imposed special assessments, expecting owners to come up with thousands of dollars within a few months.
Some associations increase regular assessments in addition to collecting special assessments.
For many owners, money is tight. Steep increases in condo or HOA assessments stretches their monthly budget to the breaking point.
Most of these horror stories go unreported. That’s why media reporting of the financial crisis in association-governed housing is so important.
Today I highlight several recent reports that provide real-life examples of the financial risks and hardships for owners of homes in association-governed common interest communities.
Chatham County townhouse owners are taking on their HOA over fee, budget decisions
BY TAMMY GRUBB
February 19, 2018 06:00 AM
Updated 8:05 AM
A group of Briar Chapel residents is fighting higher homeowners association fees and demanding answers about where their money is going.
The fee increase has left residents paying their homeowners association (HOA) 128 percent more this year – from $130 to $297 a month – for landscaping and exterior maintenance for 12 Great Ridge Parkway townhouses.
The townhouse residents also pay $5 a month for alley maintenance and a communitywide fee of $125 a month for landscaping and upkeep.
Read more here (Video):
This report from North Carolina exposes how a 128% increase in monthly assessments affects young families with children and other Middle class homeowners of Great Ridge Parkway, located in the Briar Chapel planned community.
First time homebuyers often stretch to qualify for a mortgage, and since low down payment loans have returned, many young homeowners have very little equity in their homes. Most make their purchase decision based on a tight monthly budget, which includes HOA fees.
The annual rate of inflation for 2017 was 2.1%. The increase in Great Ridge Parkway HOA’s montly assessment was 60 times the rate of inflation!
It may not sound like much money to some real estate investors or more affluent homeowners, but an extra $167 per month in townhouse assessments adds up to more than $2,000 per year.
Assuming a median annual household income of $59,000, even if the wage earners receive a 3% raise ($1,770 before taxes), it will not cover the increase in HOA assessments. At $80,000 annual income, a 3% increase of $2,400 before taxes would barely cover those extra HOA costs.
This report also highlights the additional risk of buying into a small association, in this case, a 12-unit townhouse association. Since small residential associations have fewer members to share financial obligations, any added expense means that each homeowner’s share is going to be immediately noticeable.
On top of townhouse assessments, these unlucky homeowners are also obligated to pay another $125 per month to Briar Chapel HOA, to cover the cost of maintaining common areas and community pool facilities.
Why such a steep increase in townhouse assessments? The HOA says that they need $52,000 to repaint 12 units, and that there’s no money in reserve to pay for the work. That’s more than $4,300 per unit. Is that price competitive, or is it inflated? Ditto for landscaping costs of $6,800 per year. Owners wonder, why does it cost $567 per month to maintain a quarter-acre lot?
Homeowners aren’t getting answers to their questions about what happened to their assessment money. And, especially with the developer still in control of their board of directors, there’s not much hope of transparency or control over their finances.
The gem of this report is this feature at the end:
Al Ripley, director of consumer and housing projects with the N.C. Justice Center, said his best advice is to avoid neighborhoods controlled by a homeowners association.
A New Niche Loan Eases the Pain for Condos
Lisa Prevost in Legal/Financial on February 16, 2018
New York City
Feb. 16, 2018
Condos and homeowners associations (HOAs), unlike co-ops, do not have the ability to raise funds for capital projects by taking out a mortgage. But a new niche product can help condos tackle pricey capital projects by spreading the payback over several years, thus allowing condo boards to avoid dreaded assessments or bumps in monthly common charges. The niche product is called a Common Interest Realty Association, or CIRA, loan.
These loans are different from a mortgage in that they are not secured by real estate. Instead, the lender takes a security interest in the condo association’s assessments. “In the event that the association defaults on the loan, the bank is first in line to get the common charges,” explains attorney Pierre E. Debbas, a partner at Romer Debbas.
That approach is unconventional in the lending industry, but it has proven highly successful, according to Robert Plank, a senior vice president at Capital One Bank and a CIRA loan specialist. Even if one or more condo owners stop paying their share of the loan amount, the other owners will inevitably make up the difference to avoid a default situation, he says. “They’re probably one of the best-performing loans that the bank has,” Plank says. “I’ve done a hundred or so over the years, and not one has gone bad.”
The length of the loan terms can vary, but 10 years is the norm. Capital One can structure its loans as a non-revolving line of credit for the first two years, during which time the borrower pays only interest. Once the borrower has finished drawing on the line, the loan is converted to a 10-year fixed-rate loan. Interest rates are currently in the 4-percent range.
Condos do have to meet a lengthy list of qualifying standards.
For the reader who thinks that their homeowners or condo association is saving enough money in reserve for future repairs, think again.
The financial industry identified an enormous niche market — community association lending — several years ago. I’m hearing from lots of owners, and reading about more and more associations taking on substantial debt, often in the form of 10-year loans.
The terms of the CIRA loan, as explained in the example above, seem relatively good at a current interest rate of 4%. But those terms only apply for condo associations with 70% or higher owner-occupancy ratio. The truth is, the majority of condo associations fail to meet this requirement alone. If assessment delinquencies are on the high side, condo associations can expect the interest rate to double or triple.
Note that the CIRA concept is based upon the inconvenient reality that the owners who pay their assessments in full and on time will end up picking the slack for the owners that cannot or do not pay their share of expenses.
In other words, the collective revenue from all owners in the association spreads out the lender’s risk. That ultimately makes a great deal of money for shareholders of Capital One Bank.
Unfortunately, in most cases, homeowners cannot stop their HOA board from borrowing money to pay for capital improvement projects, some of which may be unpopular.
Novato condo complex owners trapped in legal battle
By Richard Halstead, Marin Independent Journal
POSTED: 02/17/18, 5:44 PM PST Updated 02/19/2018
A legal battle between a construction management firm and a general contractor that involves an accusation of extortion has left 121 members of a condominium complex in Novato unable to sell or refinance their homes for the past three years.
CIDology Inc., a construction management firm based in Pleasanton, has been accused of extortion by the general contractor it selected to complete $4.59 million of repairs at Western Oaks Village, a 322-unit condominium complex along Redwood Boulevard in Novato.
In a cross-complaint filed in 2015 in Marin Superior Court, Del Mar Pacific General Contractors of Solana Beach alleges CIDology sought “to extort a kickback from Del Mar Pacific to ensure CIDology’s cooperation in allowing Del Mar Pacific to perform its work.” The matter is scheduled to go to trial in June.
In February 2015, after CIDology stopped paying Del Mar Pacific, Del Mar filed mechanics’ liens totaling $1.9 million against 121 members of the Western Oaks Village Owners Association. The liens have made the sale or refinance of the condos owned by these 121 members impossible.
According to a legal filing by the association in April 2015 seeking removal of the liens, at least 28 pending sales had been placed in limbo and at least two refinances were canceled outright.
CIDology — the CID stands for common interest development — handles every aspect of special assessments for homeowners associations, including estimating the extent of repairs needed, negotiating contracts with contractors, helping homeowner association boards to get their members to approve the assessment and arranging financing for HOA members who need it.
CIDology is also overseeing a $5.22 million exterior repair project for the 36-unit Pinnacle Condominium Association in San Rafael, where each condo owner is paying a special assessment of $145,000.
This is the second report of lawsuit involving CIDology. Allegations in this complex litigation include defective workmanship on the part of general contractor Del Mar Pacific, and extortion to participate in kickback schemes from CIDology.
Given the business model of CIDology, it’s hard to believe any self-respecting and ethical board member would agree to work with Brian Smith’s company.
It should be rather obvious that the company that inspects the property for needed repairs has a direct incentive to expand the scope of work and inflate the price of its contract, especially if that company also “helps” the condo HOA board to convince owners to vote in favor of a special assessment needed to fund the project.
And, according to claims in the report, CIDology convinced the “association board” to amend its governing documents to allow a simple majority to approve a special assessment, rather than a supermajority of 67%.
How did that happen? Amending governing documents usually requires at least 67% of total voting interests. It’s not a decision of the board alone, unless board members just so happen to own a 67% interest in the association. But, if the board holds a controlling interest of votes, then amending the documents to approve the special assessment would be unnecessary.
Although no conflicts of interest or foul play have been proven, anyone with a smidgen of common sense can see this twisted process gives an appearance of wrongdoing.
Unfortunately, while the general contractor and construction management company continue to fight in court, 121 owners of Western Oaks Village are stuck with condos they cannot sell, and paying $33,000 special assessments for improvements they may never see.
Kind of destroys the industry-touted myth of affordable HOA and condo living.