Thursday, February 18, 2010

Private vs. Public Ownership of Communities


Your article, Bankruptcy Won't Work ! is excellent in it's detail and content.
Another similar issue not discussed was, ...if the association is too broke to pay its bills, why not simply declare bankruptcy or consider dissolution ? (when allowed by law, not in Chandler AZ)

Dissolution I understand is not possible in most cases especially in condominiums for the same reasons as mentioned in your article. However in some Homeowners Associations that may only have a retention basin or small common area, Dissolution may be possible.

One important fact, is that most municipal ordinance's that mandate HOAs require HOAs/POAs, if there is any common area amenities no matter how small of an area it may be. In other words, one size fits all, but should it ?

As an example our development only has one small retention basin that is covered in woods and most residents don't even know that it exists and it requires no maintenance. Another example is another local development where our City placed the maintenance of the one and only retention basin in the hands of the development residents in their deeds instead of mandating a private entity to maintain it.

Does dissolution solve the problems or act as a substitute to Bankruptcy, no, most often but in some limited cases that may be possible.

Fred Fischer


Thank you for your comments. Basically, with non-productive real estate (those little scraps of land left over from a development) the developer would have to pay some entity to take them, and perhaps that's what municipalities should require as a condition to the original development, if those scraps are the only reason for creating an association of owners. In that case, and that case only, you might be able to live without a community association if all other individually owned parcels or lots could be maintained separately by their owners. But with parcels that serve more than one lot and have a necessary function--the retention basin, a clubhouse, a road, a playground--and also require annual maintenance--some community entity has to be responsible not only for the bare legal title (and payment of taxes) but also to insure that the necessary maintenance is performed so that its function is preserved. This responsibility is passed on to individual owners by virtue of covenants in their deeds, either directly or through mandatory membership in the community association. Bankruptcy of the association, or its dissolution, would not protect the individual owners from this obligation for the reasons stated in the article.

It is usually not the case, however, that the only reason for a community association is a non-functional remainder parcel--usually there is a mix of functional and non-functional pieces--and hence the necessity for a public or private entity to not only own them, but also to maintain them. You can combine these maintenance functions into an over-arching organization, like the community maintenance trusts we have discussed, but that is really to make the operation more cost-effective, it doesn't impact the necessity of the underlying legal structure at all.

Historically, most of these pieces of real estate were dedicated to cities and counties and maintained by them in perpetuity. But today, it is just as likely that the local municipality will not accept dedication and will require that the ownership, as well as the cost of maintaining the new facilities, be assigned to a small sub-set of citizens--those immediately benefited by the improvement--via a private organization. This quantum shift in public vs. private ownership of otherwise public parcels over the past 40 years has dramatically increased the number of associations created to own and maintain them.

Much of this change has occurred because of the huge expansion of housing onto formerly agricultural lands where no infrastructure existed. That and the sheer size of the developments, which include newly built commercial as well as residential areas, in many cases new towns where nothing existed before, create the opportunity and the incentive for municipalities to avoid the cost of maintaining this new infrastructure--roads, drainage facilities, parks, landscaping, etc. If the big developers wanted the zoning necessary to build new towns, they also had to find a way to create private ownership of the infrastructure, and community associations were the option they chose in increasing numbers.

If the objective is to limit the number of new community associations, one alternative is to limit suburban growth and focus instead on increasing density in existing urban areas where the infrastructure already exists and is publically owned and maintained. That doesn't change the need for a private managing entity of the buildings themselves and the discussion obviously includes issues that go way beyond the question of public vs. private ownership and the necessity of community associations. But it is useful to remind us of how we got to where we are today.