The Beginning Of A New Era: Developer Foreclosures And Builder Foreclosures

When most of us bought property in condominium or homeowners associations, we did so because of the ease of living—community pools, pretty landscaping, uniformity of housing, and other favorable amenities. Most of us trusted that the developer and builders of our association had more than sufficient profits to maintain our associations. However, with the advent of a recession and high unemployment rates, those companies in the construction trade feel the same strains as everyone else.

Typically, a developer will obtain a large loan to develop a neighborhood; then subdivide the lots, sell them to builders or retain the lots to build on, and form a neighborhood association. These loans will usually be paid off gradually as the developer sells the properties to owners. As financial constraints envelop the developer, these loans, at times, are not being paid. Unfortunately, if the developer fails to pay the loans within a specified period, the bank that holds the loan may “call-in” the loan; and choose to initiate a foreclosure if the loan still has not been paid.

An initial developer loan encompasses all areas of an Association—from the individual lots to the common areas, including pools, recreation areas, common walkways, clubhouses, etc. If the bank chooses to foreclose on a developer loan, it is foreclosing on all parcels not satisfied by a partial release as sublots are sold. Essentially, the bank will foreclose on a common area if the common area parcels have not been satisfied by a partial release from the mortgage. But didn’t you “pay” for an undivided portion of a common area when you bought your property, with the intent that you would get use and enjoyment out of the common areas? Yes, you did. This is precisely why when a bank chooses to foreclose on a common area, the bank will often name every owner in the association as a defendant in the suit, alleging that all lot/ unit owners have an interest in the foreclosed property. Also, several individual sublots/units owned by a builder/developer may go into foreclosure as well, putting additional financial strain on the Association.

But didn’t the developer “dedicate” common areas through the filing of a declaration and plat maps? Yes, the developer usually did do that, which becomes a problem when the loan continues to encompass common areas. The dedication of the common area, the intent of the developer, and whether or not a common area can be foreclosed on, are still issues in many foreclosures today. Also, if a winning bidder at sheriff’s sale takes title to the common areas, will the winning bidder be able to take our pool, landscaping, etc.? (Again, that is a question that is being fought within several lawsuits concerning the obligations of a successor declarant after a successful bid for a common area at sheriff’s sales.) The true extent of this problem has not yet been realized, as many developer foreclosures are in beginning stages at this point.

Even if a bank has not foreclosed on developer-owned properties, many financially strained developers may avoid payment of property taxes on the common areas, and therefore, may incur penalties for delinquency and have tax liens placed on the parcels. In some cases, the county board of revision or fiscal office may foreclose on delinquent tax parcels.

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