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Un-funded reserves by developer-HELP!

Started by DanB7 • 16 replies • 1447 views

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DanB7 (Florida)
Posts: 8
Posted:
So we are just now taking over the HOA from a developer who is in default. As we have dug in to things, we have discovered several areas of great concern.

1. The developer did not set aside any reserves as set forth in the original condo docs and budget. Missing 40+K
2. The developer is in default and the bank is trying to fast track the foreclosure with the cooperation of the developer.
3. The developer owes almost 20K in past due assessments on unsold units.

Do we have any leverage with the bank?

Thanks for your help,

Dan

JohnB26 (South Carolina)
Posts: 1,569
Posted:
let the bank have the common elements

their property -> THEIR responsibility to maintain 'up to code'

no more assessments
TimB4 (Tennessee)
Posts: 21,059
Posted:
Dan,

It's rare that the developer/declarant owes assessments. Typically the governing documents don't require the declarant to pay assessments on any unit owned by them and not sold. However, if they are renting the unsold units, it may be different.

If you have previous budgets showing reserves and now there are none, you should contact the attorney general about possible embezzlement.

The Association might also want to check and see if a performance bond was posted with the city/county. If it was (and it's still there) you might be able to lay claim to some of it. For this you will likely need to talk to an attorney.

Hope this helps,

Tim
DanB7 (Florida)
Posts: 8
Posted:
Sorry mate, I don't understand your response.

My guess is that they will take over the unsold units, and try to fire sale the units. In any case, we are still an HOA with un-funded reserves. There is probably 5 years left on a roof that will cost 75K to replace.

No more assessments for who?

Thanks
DanB7 (Florida)
Posts: 8
Posted:
There was an original budget that required the reserves, but none were set aside.

There was a specific time frame under which the developer did not owe assessments..specifically 4 years after the first unit sold. That clock started ticking in January.

My question is, will the bank have to fund any of this as part of the foreclosure, and what leverage if any do we have?

I can certainly make it tough on them to sell or lease any future units.
TimB4 (Tennessee)
Posts: 21,059
Posted:
For Assessments:

If the declarant must pay assessments, then once the Bank takes possession they will then be responsible for assessments from the day of possession forward. They are not responsible for any unpaid assessments of the previous owner (declarant).

For Reserves:

If the declarant controlled board never set aside money to fund the reserves, then there is no money missing. Why the membership didn't complain earlier about the Reserves not being funded is an issue with the membership. Perhaps the unfunded reserves wouldn't be an issue if the membership paid closer attention.

However, if the declarant controlled board was falsifying reports to the membership and saying that the reserves were funded, you may have a cause of action against the individual board members. You will need to check with an attorney to see what legal options would be available.

Bottom Line - The bank is going to look to cover their loan. The Association will have to see what they can do to go after the developer/builder/etc. For this, you will need to consult an attorney (and I would suggest consulting one who is was not affiliated with the Association while the declarant was in control).
DanB7 (Florida)
Posts: 8
Posted:
Tim, thanks for the info. we have contacted an attorney. Mea Culpa on the inattention of the members. We are a very small condo unit with only 9 of us, and the developer lives next door. No on e along the way caught any of this..not the attorney's, real estate agents..the FHA?? title companies etc...it's a mess and hopefully we can sort it all out.

Dan
LauraR5 (Tennessee)
Posts: 220
Posted:
I was just elected to my board in October. We have the same situation with our reserves. I had always heard that there was legally an amount that HAD to be put into reserves, but apparently that is not the case. Our first homes were occupied in 2004/2005 and when the developer left in 2010, there was $35,000 in the reserves (we have 236 units, about 30 buildings). We did a reserve analysis and found out we should probably have about 10 times that saved up.

When the builder was in charge, they wanted to keep the assessments low to attract potential buyers. Now that they are gone, we are stuck raising the assessments and looking like bad guys in order to build up our reserves. But this is how I explained it at our last HOA meeting: If you don't have an extra $10/months for your dues, what are you going to do when you get hit with a $2500 special assessment to pay for your share of the roof?

The transition period from builder to homeowner control sucks sometimes. You will just have to either charge a special assessment or raise dues to cover the shortfall. Or you can wait until the roof goes and do the special assessment then. Builders are only looking out for themselves.
DanB7 (Florida)
Posts: 8
Posted:
Yep...The reserves are SUPPOSED to be there. They are included in the original budget. 7K a year for the last 5+ years. I expect we will have to do a cost benefit analysis to see whether we should go after the developer, OR the 9 different title companies that should have caught it.

LauraR5 (Tennessee)
Posts: 220
Posted:
Dan,
Do you mind if I ask what you pay for your monthly assessment? $7,000 a year among nine people is approximately $65/month. I would guess that'd be a large chunk of your assessment?
GlenL (Ohio)
Posts: 5,491
Posted:
Dan not sure of where you expect someone who is facing foreclosure to come up with the funds, nor am I sure it is the title companies fault, their job is to make sure the title is clear with no encumbrances not enforce CC&R's.

You say that there is only five years left on the roof but with the amount you say he owes, the building can't be that old and most roofs are rated for at least 20 years so you have time to raise assessments and start gathering reserves.
Studies show that 5 out of 4 people have problems with fractions
DanB7 (Florida)
Posts: 8
Posted:
There are 15 units total. Over the last 6 years, 9 units have sold. The developer was supposed to make up any difference between the budgeted amounts and the actual collected, including reserves.

We pay 269.33 a month. I was the 2nd buyer.

Thanks.
DanB7 (Florida)
Posts: 8
Posted:
The building was a rental that was converted. At the time of conversion, in 2006 there was 13 years of life left. It's an old school building built in 1924.

I don't expect he will be able to pay it, but we will try to make him..he may well have assets and is just crying broke for all we know. I can also make it tough on the bank or any successor developer, since the FHA won't approve any loans with unfunded reserves I don't think. We'll see.
JohnC46 (South Carolina)
Posts: 14,265
Posted:
Quote:
Posted By DanB7 on 11/27/2012 1:42 PM
Yep...The reserves are SUPPOSED to be there. They are included in the original budget. 7K a year for the last 5+ years. I expect we will have to do a cost benefit analysis to see whether we should go after the developer, OR the 9 different title companies that should have caught it.


Dan

Budgeted or actual?

If budgeted but budget line item not met, then not owed nor stolen. I say no legal action can be taken or in other words, won

If shown as actual (as in was there) in a financial statement, then the money is missing. I say legal action could be taken but see below about blood out of a stone.

One cannot get blood out of a stone (broke developer) no matter how much they pay the seller of the machine (lawyer) that says they can.

Hope this helps.

DanB7 (Florida)
Posts: 8
Posted:
In Florida, reserves that are budgeted are required by law. Very strict here. Still may not get blood out of the turnip, but there are definitely civil issues here. Not suggesting anything criminal.
GlenL (Ohio)
Posts: 5,491
Posted:
Dan, we're not saying (at least I'm not) that you and your neighbors didn't get the short end of the stick. But realistically unless there are some performance bonds you can attach don't spend a fortune trying to collect this. Instead I would think you would want the bank to take title to the empty properties to increase your assessment base. It also looks like you need to raise assessments $84 a month per unit to make your $75.000 goal.
Studies show that 5 out of 4 people have problems with fractions
KellyM3 (North Carolina)
Posts: 2,239
Posted:
Dan,

The developer is bankrupt. Your HOA, like many others, has not funded Reserves Funds and now wishes to do so. Establish a new dues rate to build reserves or cut your budget (but not maintenance) to free up cash and start saving. Anything else, given the developer bankruptcy, is costing you time and money.

But, thank goodness you and your colleagues have caught the matter w/ a few years until your roof "dies" of old age. The developer was never your partner in this arrangement and knew what it was doing in holding down reserves - it holds down your dues rate.

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