Friday, March 14, 2008

Caring for Community Associations with a Maintenance Trust

By Tyler P. Berding

It isn't often that a complex problem can be solved with a relatively simple solution, and the criticism of skeptics is excused until the problem is truly solved-but a simple solution to the problem of providing new affordable housing, and saving existing projects, may be at hand.

First, let's briefly explore the problems faced by developers of new, for sale, affordable housing, and also those encountered by the owners of existing projects. Most true "affordable" housing available for purchase in California exists in attached developments--mostly condominium projects. Would-be builders of new affordable housing have been unable or unwilling to develop new projects for a number of reasons. The high cost of land and the costs of construction, of course, especially in the urban areas of the state, are always a disincentive, and one problem that we can't address here.

But even if the necessary financing is available to purchase land and construct the project, builders are still reluctant to build attached housing because they perceive that such projects will end up in litigation between the new owners and the builder. Their insurance carriers have echoed that concern. The lack of a workable warranty to cover the project against defects in construction-the overwhelmingly dominant reason for litigation in such projects-is a further impediment. If builders could find a way to reduce the incidence of litigation, we could remove a major road block to the construction of affordable housing.

The problem is different with existing projects. The cost of maintenance and the inability to raise necessary funds to meet these costs is leading to gradual obsolescence. Many of these issues have been documented on these pages over the last five years (The Uncertain Future 0/ Community Associations; Back to the Uncertain Future; Associations Lack Cash.) Briefly, the lack of funds stems from boards of directors who sometimes do not understand the nuances of the extensive repair and maintenance work that is required, coupled with the resistance of owners to regular contributions of the additional capital necessary to fund these projects. Further, the projects are small in the scheme of things, and lack substantial negotiating strength or knowledge of new and better methods and materials.

These circumstances could be greatly improved if we were able to combine many of these community association projects into a single, well-funded, professionally operated, community to which the responsibility for maintenance and repair, including warranty repairs, could be delegated. This type of organization is not without precedent. On the government side, we provide for special districts to administer and maintain all kinds of real estate. Landscape and lighting districts; reclamation districts; water districts; and redevelopment districts are examples of single-purpose government entities formed to maintain or service privately-owned property. These districts are governed by directors elected by the owners of the various properties within the district. A further advantage to a Special District is its ability to raise funds through the sale of public bonds.

In the private sector we have mutual insurance companies which are basically a community of property owners who have joined together to provide financial assurance against certain identified catastrophes. Large community associations, which may include a dozen or more "neighborhoods" are probably some of the best known examples of combining several smaller projects under the umbrella of a "community" in order to provide more efficient and· comprehensive maintenance. Such well-known California communities as Rossmor in Walnut Creek, Sun-City in Roseville, The Villages in San Jose, and Leisure World in Laguna Hills are examples of a group of smaller individual projects which share the benefits inherent in a large mutually owned entity. Of course, large community or property owner associations are usually formed from contiguous parcels, but there is no legal reason why non-contiguous properties could not be aggregated for certain specific purposes without interfering with basic ownership interests.

If the combination of, say, 20 or 30 non-contiguous community associations into a mutually­owned and operated "maintenance community" could be achieved, it could bring substantial benefits to each of the member projects. Not only would negotiating power be greatly enhanced when contracting for services, there could be pooling of funds to provide greater liquidity, and form, essentially, a maintenance "insurance" pool to deal the. ongoing repair needs of the member communities. A large group of associations could afford more sophisticated engineering and architectural expertise to insure that maintenance and repair projects were designed and executed
There are several types of organizations that would suit this purpose. In the public sector, the obvious choice would be a "special district." In the private sector, trusts or non-profit corporations could be used. Whatever it's legal nature, its purpose would be the same-to provide an organization that would accept the d~legation of maintenance and repair obligations fora community of non-contiguous common interest developments. We've coined the term "Community Maintenance Trust (CMT)" as one example of such an entity.

Builders and owners alike could' derive substantial benefits from this arrangement. New construction would have to be inspected by the Trust before the project would be accepted for membership. The reserve requirements for future maintenance would be determined, and the builder would be required to deposit several year's of reserve contributions. Existing projects would have to be appraised and their future maintenance and repair needs estimated, before they would be allowed to join the community. They would then have to "buy in" with a sum of money determined by the maintenance and repair appraisal. But once in, future maintenance and repair expenses would be born by the Trust.

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