Tuesday, Dec. 9, 2008 | These days, at a downtown condo project, window-washers come biannually instead of every three months. Painters touch up the halls once a year, half as frequently as they once did. Security guards work fewer hours. Renovation plans for the sparsely furnished lobby are on indefinite hold.
Homeowners fund those services and save for future expenses by paying monthly dues. But one of five homeowners at Gaslamp CitySquare, a 200-plus unit project in downtown, is in some stage of delinquency in paying homeowners association dues. Some are at least 30 days late paying their monthly dues, which average around $350. Others have yet to pay a $500 one-time special assessment. The association levied that assessment recently to deal with a $154,000 budget shortfall, said homeowners association board president, Gregg Neuman.
The lion’s share of those delinquencies comes from units in foreclosures or short sales. When banks foreclose on properties in default, they are required to pay back fees to the homeowners association. But a gap exists between when homeowners stop making payments and when the bank repossesses the house, enough time for several months’ fees to be lost. One owner in the building owns six units and recently went into bankruptcy on his business, leaving the dues on his units in limbo.
While money is tight, owners in buildings like Gaslamp CitySquare hope for the day when their HOA has the money to pay for some of the extras that make the building marketable.
“The lobby in our building is like a mausoleum — no furniture and no art on the walls,” said Mark Mills, real estate agent who owns a unit in the building. “If you want to meet people there you pretty much have to sit on the floor.”
But fixing up the building’s lobby is a luxury at this point. The HOA needs to cover day-to-day expenses like insurance, utilities and common maintenance. And the association is not draining its reserves — savings for roofs and large-scale repairs — to pay for its operating expenses like some buildings, Neuman said.
In addition to dragging down values as banks slash prices to unload distressed properties, foreclosures in communities with homeowners associations whack neighbors again, leaving them to make up the difference in monthly dues. In downtown San Diego, nearly 6,000 condos and converted apartments hit the market between 2001 and 2006, significantly increasing the number of residences in the revitalizing city core, and attracting investors, vacation homebuyers and owner-occupants.
The resale market in downtown San Diego has seen a marked increase in sales as foreclosures have hit the market in force. Foreclosures increased 238 percent, from 32 to 108, in downtown from third quarter 2007 and 2008, according to MDA DataQuick.
For units in buildings like Gaslamp CitySquare, with its 22 percent delinquency rate, buyers find major difficulties obtaining mortgages. Banks can’t sell loans to Fannie Mae or Freddie Mac if the HOA has a delinquency rate higher than 15 percent, Neuman said, eliminating the option of a conventional loan for buyers. If they really want a unit in a building like that, buyers have to find alternative, more expensive, financing.
Hence the special assessment of $500 charged to homeowners in the building — Neuman said if the HOA can pull its finances back on track, buyers might be easier able to purchase the units for sale in the building.
Jim King owns a human resources company in Seattle and two condos in San Diego — one in Harbor Club downtown and one he recently purchased at Capri by the Sea in Pacific Beach.
When he was researching his Harbor Club purchase a couple of years ago, King saw a few price tags in nearby buildings that caught his eye.
“They might have a very affordable price tag on them, but there are a ton of vacancies
and (HOA) dues are set at a point where they may not make sense,” he said. “Some of these new construction seem too risky for my blood.”
Buyers seeking deals on distressed properties could get more than they bargained for if they don’t research the homeowners association finances before they move in. Prudent buyers make offers only after examining the building’s financial history and records of past board meetings to see if the board has contemplated a special assessment.
“I would think that more people would be interested in (the HOA finances),” said Jeff French, an attorney with Green Bryant and French, a firm that represents more than 100 homeowners associations in San Diego. “They’re essentially buying into a situation that could be good or bad. They should actually read the stuff that the association provides as part of escrow — various disclosures about the solvency, special assessments anticipated.”
Real estate broker Joseph Galascione of ERA Metro Realty said he’s steered clients away from certain buildings because of looming special assessments — the one-time fees levied to make up for shortfalls — or underfunded reserves.
“It’s more common that we find HOAs that are OK — most of the HOAs are financially stable,” he said. “But there are enough out there that it warrants us spending more time researching the health of a building.”
When he became board president a few years ago, Neuman immediately increased homeowners association dues to avoid draining the building’s reserves, which are calculated so that homeowners aren’t hit with a surprise bill 15 years in the future to fix something with an anticipated lifespan.
Neuman sells real estate in downtown San Diego and said he sees some buildings spending their long-term reserves on one-time expenses.
“That puts the building itself in a downward spiral,” he said. “But at the same time you don’t want to be an association making the dues so high that nobody wants to buy there. You have to have a balancing act.”
Matthew Swain studies the reserves of homeowners associations for a company called Association Reserves. He said state civil code doesn’t specify exactly to what extent an association must fund its reserves, just that a board must act in the best interests of the association. But among the 12,000 associations served by his company, the average HOA is between about 30 and 40 percent funded, leaving the homeowners susceptible to special assessments in the future.
Painting for stucco and wood can be timed, and elevators and roofs and asphalt have predictable life spans. When the developers build a project, they take all of those life spans and divide up replacement costs.
If a roof lasts 15 years, the association takes the total cost of the roof, divides it up over 15 years, and tries to deposit that much into an interest-earning account every year. An association with reserves that are 100 percent funded means that it has saved up enough to cover the deterioration to that point of all of those anticipated replacements.
When the association is 30 percent funded, it faces a one-in-three chance of a special assessment, just for the expenses that they could’ve prepared for, Swain said. But once the association increases its reserves to at least 70 percent funded, the risk for having to come to the homeowners and ask for the lump sum payment drops to one-in-100, he said.
Victoria Cohen takes the official notes in board meetings for 12 homeowners associations in San Diego, as a contracted meeting recorder for HOAs. She said she’s been privy to several tense conversations lately in some buildings.
“They’re scrambling just enough to get enough money in the kitty to pay operating expenses,” she said.
But Cohen said even though most of the associations she serves are in adequate financial shape, there are clouds on the horizon.
“When I sit at board meetings where they’re actually in OK shape, and they’re raising dues, the things that are rolling off their tongues is they hope that this increase isn’t going to push more people into foreclosure,” she said.
Special assessments are a last resort for HOAs. California law limits the amount of special assessments to 5 percent of the unit’s value. Some real estate experts are starting to wonder if some distressed buildings will get to a point when all of the owners would be unable to afford a special assessment, especially in current economic conditions.
Homeowners associations can declare bankruptcy, said Vicki Vandruff, vice president of the California Association of Community Managers. Vandruff has seen special assessments range up to $100,000.
But Vandruff and other HOA experts haven’t yet heard of associations declaring bankruptcy.
Neuman at Gaslamp CitySquare said he’s filing personal judgments against the former homeowners who left the building’s association high and dry when they defaulted on their units. If they buy anything in San Diego County or sell another property, the HOA has a right to be repaid.
Such a judgment costs $500 to file, a cost many boards don’t want to undertake, Neuman said.
“But if a guy owes $5,000 you may as well throw $500 after it,” he said.
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