Posted on: Friday, April 16, 2004

Private neighborhoods threatened by lack of maintenance money

By Jim Wasserman
Associated Press

SACRAMENTO, Calif. — "Welcome to our neighborhood," says the sign in the development once known as Franklin Villa. "No gangs. No drugs. No guns."

What started 35 years ago as a pleasant community run by a private homeowners' association has become an object lesson in what can happen when such a neighborhood starts to unravel.

Its original owners moved out, new owners failed to maintain the property, neglect accelerated into falling property values, then crime and eventual collapse. Now taxpayers are paying $80 million to turn it into a nonprofit housing complex called Phoenix Park.

While extreme, it could be the fate of thousands of privately run communities throughout the nation, which are flirting with declines by failing to spend adequately on upkeep, even as owning a home in private communities has become the nation's fastest-growing lifestyle.

Of more than 260,000 private communities nationally and 36,000 in California, at least one-third have steadily deferred raising necessary assessments for fear of political conflict and now need repairs and facelifts for which they significantly lack money, say those who monitor homeowner association finances.

"If you give me a list of 30 names, 10 are on the list," says Robert Nordlund, owner of California's Association Reserves Inc., which analyzes private communities in 41 states, Canada and Mexico.

In Tampa, Fla., Len Colodny, president of the Lake Place Condominium Association, faces the challenge of asking the residents of his neighborhood to pay a one-time special assessment of up to $4,000 per home to pave streets and make other repairs neglected for years.

Colodny says he expects significant opposition from fellow residents of his 18-year-old, 90-home complex, but adds, "If you can't afford to take care of the place, you can't afford to live here."

Half to three-fourths of the state's older private communities have reserve funds too small to meet needs, Colodny estimates, saying that newer developments "can get away with lower maintenance. But if they haven't been saving up they're going to run into that cycle, too."

The trend, especially in older privately run neighborhoods represents a striking parallel to the financial deficits plaguing local and state governments.

As the public sector has delayed maintenance, many private association boards are also watching streets, pools, balconies, siding and clubhouses slowly deteriorate while their reserve funds have half or less of the money needed to eventually fix them. And just as politicians fear raising taxes, voluntary, often-inexperienced association boards fear the wrath of homeowners.

As a result "they tend not to do that, or raise them in very small increments," said Tyler Berding, a California attorney who specializes in private communities.

Many states have no reserve fund requirements for such communities, while those with laws typically set few requirements.

Nordlund says older residents of such neighborhoods tend to think, "Why do I care about the roof in five years?"

But underfinanced reserves could threaten the 40-year-old culture of living in a privately run neighborhood, which is where 80 percent of all new homes are built nationally, according to the Community Associations Institute of Alexandria, Va. The group, which advises association-governed communities, estimates that 50 million Americans live inside such communities, with half paying between $100 to $200 a month to maintain them.

Many of California's 477 cities encourage privately run communities because these enclaves build and maintain their own streets and parks, even as residents also pay property taxes to support the city.

Though newer communities need fewer repairs and typically have more money, they can also run into trouble if assessments are set too low to maintain them.

That happened to Ken Nelson, a small-business owner and the first president of the 256-home Wolf Creek Estates Homeowners Association in Plano, Texas, where he says the association "ran out of cash 60 days after I was elected."

The developer had set annual dues at $420. "From the day I got elected that was my No. 1 issue," Nelson says. "The crowning achievement of my life is an 83 percent vote to double our dues."

Low interest rates have kept reserve funds from building in recent years. Associations can also foreclose on homeowners who don't pay their dues, so resident are often wary of raising them.