To see the future of many developments of common interest, take a look at the current reality of those recent condo conversions that were born with serious maintenance problems and a significant cash deficit. The financial situation of these projects shows us what other associations will find when their need for maintenance and repair exceeds their budgets.

If a partnership is unable to pay for essential maintenance, the value of the units will fall, similar to the loss in value caused by today’s recession. But they won’t be able to sell despite the lower sales prices, and the owners, many now underwater, will stop paying their fees. When the association reaches the point where it cannot pay for essential services or perform critical maintenance, the local municipality will have to decide whether the units remain habitable. If the answer is “no”, conviction may be the next step.

But owners may not have to wait for the local municipality to act. The O’Toole case that was discussed in a previous post (November 17, 2008) decided that a board of directors of a community association not only has an obligation to pay the debts of the association, but also has a duty to specially assess the members sufficiently to pay those debts, and not only that, a trustee can be ordered to ensure compliance with these obligations. The question then arises: what if an owner decides to sue the association for not properly maintaining the project and the owners are unable to pay the special assessment imposed to pay the resulting judgment? If a court orders an appraisal that homeowners cannot afford, the next logical step would be for the court-appointed trustee to foreclose on the properties to collect the unaffected appraisal.

Whether or not this is a likely scenario is irrelevant – it is one of the few legal options available if a court-ordered appraisal exceeds what homeowners have the ability or willingness to pay. With no way for homeowners to comply with the court ruling, foreclosures would undoubtedly occur. If the owners were unable to afford the appraisal or if the appraisal exceeded their equity (again, not surprising, especially in today’s seriously depressed market), an appointed receiver may have no choice but to empty the development, replacing the banks. or other lenders rather than homeowners and most likely converting the property into a rental apartment that would be owned and held by the mortgage lenders, who would likely also suffer a loss on the deal. O’Toole’s court obviously ignored an essential truth: that while ultimately the owners may pay for maintenance and repairs, if they don’t have the cash to do so, the project is likely not owned by multiple lenders and no one. will win.

But there may be yet another alternative. In California, and other states, there is a legal remedy for an outdated development of common interest, it is called “Partition.” Now “partition” may look like a partition, but it actually allows an entire project to be ordered and sold as a single parcel. California law allows a community association partition in one of three cases: (1) Property damage or destruction occurred more than three years prior to the partition request and no repairs have been made; (2) At least three-quarters of the project has been damaged or destroyed, and 50% or more of the separate interest owners oppose reconstruction; and (3) The project is 50 years or older, obsolete and uneconomic, and more than 50% of the owners oppose restoration. Many associations are approaching the 50-year mark. But even before that, could seriously deteriorated infrastructure qualify as “pecuniary damage” to the extent that it would qualify under the old statute? Would a court, seeing a project that has deteriorated to the point of becoming uninhabitable amid claims of inadequate maintenance, order the partition rather than ordering the owners to pay an unaffordable appraisal? Could most owners force them to sell the project in its entirety to avoid individual liability for such a lawsuit, and if they did, would they get more value than trying to sell their individual unit in a badly run down project?

The answer is that in the right circumstances with the right facts: yes. What are those facts? If the special appraisal needed to achieve basic habitability exceeds the current owners’ ability to pay, you may not need anything more. Most landlords, or a court, could force a partition of the property and sell it as a single parcel. We have discussed many times the possible greater value that an older project may have sold or rebuilt as a single parcel than as a collection of individual condos.

This situation, developed over time, can expect today many developments of common interest. They do not have sufficient funds for critical maintenance, values ​​have fallen, and owners have no incentive to contribute additional capital. But instead of waiting for a creditor or lenders to judge the foreclosure, the association must critically consider the possibility of selling the entire project and therefore potentially getting a higher value from a sale or remodel as a single parcel than as multiple individual interests that cannot continue. survive on your own.

This may seem like a draconian reaction to the inability to raise enough funds to sustain a common interest development, but if homeowners wait long enough without taking any alternative action, their individual interests may lose value. So instead of watching the project deteriorate to the point where it is no longer habitable or vulnerable to takeover by lenders, severely impacted common interest development owners might consider selling it altogether. of the entire project.

Clearly, we are talking about a project in a great deal of financial distress, but our experience with hundreds of old and aging projects tells us that some are already there. If you think this situation may exist in your association, talk to your legal advisor about your options. Using the partition to maximize the value of the project by selling it as a single parcel could be an alternative to turning it over to the banks and leaving.

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