Some of my blog posts have talked about the mistakes that real estate developers make when they turn over condominium or homeowner associations to the residents. This month, national homebuilder D.R. Horton lost a $16,300,000.00 judgment in Bankruptcy Court when it was sued by a homeowners’ association in Florida.
D.R. Horton committed some of the same mistakes as many other developers, including ones here in Central Pennsylvania:
- they did not collect assessments from all of the units;
- they used funds of the association to pay for expenses outside of the association;
- they did not provide enough funds to maintain the pool, playground and common amenities; and
- they did not keep accurate financial records of the income and expenses of the association.
In this specific matter, D.R. Horton was developing Majorca Isles Master Association in south Florida. They originally planned to create 681 units, spread out over 5 separate condominium associations. The Master Association was supposed to be responsible for amenities shared among all of the individual condominium associations. This included things like pools, playgrounds, clubhouses, etc. Like all developers, they appointed some of its employees to serve on the initial Board of Directors of the Master Association and the individual condominium associations.
The next part of the story is familiar to all developers, but especially to developers in Florida. The housing market crashed, and the sales in the development screeched to a halt. Only 355 of the units in the development were sold. Many of the unit owners stopped paying assessments, leaving the associations with a severe budget shortfall.
When faced with this budget shortfall, the Directors of the Master Association diverted the Master Association funds to pay for the individual condominium associations. In doing so, it appears that they severely shortchanged the unit owners on the services the Master Association was supposed to provide. The financial problem in Majorca Isles was so extreme that, when D.R. Horton turned over the condominium association to the owners, the condominium association was forced to file for bankruptcy.
In the bankruptcy proceeding, the Bankruptcy Trustee ended up foreclosing on 80 of the 355 units for failure to pay assessments. It also brought the suit against D.R. Horton. In addition to finding D.R. Horton guilty of all the failures mentioned above, the judge found that the developer was in violation of Florida’s Deceptive and Unfair Trade Practices Act. This meant that the developer was responsible for punitive damages owed to the Association.
In Pennsylvania, the Uniform Condominium Act and Uniform Planned Communities Act require a developer to perform many of the same obligations as the Florida laws. Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (“UTPCPL”) could allow an association to collect triple damages and attorneys’ fees.
Majorca Isles was probably a perfect storm of problems. It had lots of amenities and not enough homeowners to pay for them. While a local real estate developer may not have $16.3 million worth of liabilities, the same kinds of problems come up in lots of developments, regardless of their size. The lesson to be learned is that developers need to pay attention to these issues when they come up. Developers cannot wait until turn over to try to fix the problems that were left unattended from day one.