Owners Bear Risks of Condo Associations’ Shaky Finances

Condominium associations throughout the San Fernando Valley and Ventura County are finding themselves increasingly strapped for cash. The result is that condo owners are being faced with steep increases in what they have to pay to keep their residential complexes financially solvent.

One project in Westlake Village was forced recently to impose a $3,000 special assessment per unit to make a series of much-needed and long-delayed repairs.

In Sherman Oaks, owners at a 122-unit condo project were assessed between $2,000 and $3,000 each to pay for roofing and balcony repairs at their 18-year-old complex. Most of the owners had to pay up within six months or face some stiff consequences such as a possible foreclosure.

Many condo associations that have tried to keep assessments to a minimum are finding they have hefty bills for deferred maintenance such as leaky roofs, plumbing repairs, or earthquake and fire damage. Some out-of-work or financially strained condo owners are also not paying their monthly maintenance bills to the associations, resulting in serious cash shortages. One condo project in the Valley, for example, is so strapped right now that it can’t even pay its water bill, said Kathleen Daniels, executive director of the Community Associations Institute of Greater Los Angeles.

“There are lots of associations in distress,” said James P. Lingl, a Camarillo-based condo attorney who represents more than 400 homeowner associations in Southern and Central California. “Many boards of directors are not setting aside enough reserves or collecting an adequate level of dues to fund needed work.” The problem feeds on itself, he added, because deferred maintenance usually results in a need for major structural work later.

Condo and homeowner association boards are loath to raise fees, Lingl noted. And management companies hired by boards of directors often low-ball their budgets so they can get hired or avoid being fired. What happens, Lingl explained, is that corners end up getting cut--at least in the short term.

California’s Civil Code allows an associations board of directors to approve up to a 20% increase in annual regular assessments, up to a 5% special assessment and limited emergency assessments. Any other increases need to be approved by a majority of the condo owners that make up a particular association.

Condo associations are also required by California law to distribute a study of their cash reserves to association members. These studies outline the anticipated needs of an association and recommend the amount of reserves that will be needed. The study must be reanalyzed every year and updated at least every three years. Lingl advised buyers to take a close look at these studies before buying a condo or a home that’s part of a community with an association. “If the amount of the reserves is less that 50% of what should be set aside, either stay away from the condo or tell the seller you want the price reduced by the amount of underfunded reserves,” he said. “Buy property with your eyes open.”

Buying a condo without getting all the facts can be a costly mistake, said Jan Hickenbottom, owner of Condo Consulting Services in Thousand Oaks and director of condominium management at the Yousem Co. in West Los Angeles. When a board of directors or a majority of the members of an association approve a special assessment or increased regular monthly assessments, individual owners have little choice but to pay.

The failure to pay an assessment can result in late fees, penalties, the placement of a lien on the condo owner’s unit, or even foreclosure by the condo association, said Hickenbottom. Foreclosure by a condo association is pretty rare, but it can happen.

Hickenbottom advises condo owners to closely monitor what their association’s board of directors is doing. “I find that a large number of the boards don’t want to pass assessment increases for all sorts of political reasons,” she said. “They’re really not planning for the future adequately.”

Many condo boards, Hickenbottom said, “seem to feel that their role is one of keeping costs down as opposed to the ultimate fiduciary role of managing the property. The board’s role is maintaining and enhancing the investment of association members--and that involves spending money.”

Some associations are now so underfunded that lenders are refusing to extend any loans to new buyers or existing owners who want to refinance. “This creates all sorts of turmoil,” Hickenbottom said. “Some projects get into a downward spiral that’s almost impossible to reverse.”

“Most buyers don’t do enough research when they buy a condo,” said Dan Shapiro, a Northridge resident and partner in West Los Angeles-based law firm Wolf, Rifkin & Shapiro. “Review the reserve studies and check out what’s really in the coffers,” Shapiro advised. Ask if there’s been a statement by the board anticipating the need for one or more special assessments, he said. And, review minutes of board meetings for the past six months. Finally, Shapiro advised, don’t be bashful about knocking on doors and asking existing residents questions about their condo complex.