Legal Opinion: CIS-0091

Index: 4.215

Subject: Changes to HUD\'s Process for Approval of Condominium

Planned Unit Development (PUD) Projects

September 23, 1996

MEMORANDUM FOR: Emelda P. Johnson, Deputy Assistant Secretary

for Single Family Housing, HS

FROM: Nelson A. D¡az, General Counsel, C

SUBJECT: Changes to HUD\'s Process for Approval of Condominium

and Planned Unit Development (PUD) Projects

This memorandum transmits a report on the recommendations of

an interagency working group which met over a period of several

years to consider needed revision of guidelines for the legal

documents that establish condominium and PUD projects. For many

years, these guidelines have been set forth in HUD handbooks and

in comparable publications of the Department of Veterans Affairs

(VA), the Federal National Mortgage Association (Fannie Mae) and

the Federal Home Loan Mortgage Association (Freddie Mac). The

guidelines have served as a basic expression of policies and

standards which these governmental and secondary market agencies

apply to approve condominium and PUD residential property for

their respective single family mortgage insurance, loan

guarantee, and mortgage-backed securities programs. Over time,

the guidelines have become outdated, and there has been

decreasing uniformity among the agencies.

Members of my staff participated in the working group

together with members of your Development Division. The role of

the Office of General Counsel in the deliberations was only

advisory, and HUD\'s position on individual policy recommendations

adopted by the working group was decided by the Housing

participants.

With this working group, perhaps more than with most such

collegial endeavors, the mission to coordinate policy conflicted

with the obligation of individual agency representatives to

protect their respective organization\'s authority and

responsibility. All working group members were aware that the

working group had before it a singular opportunity to simplify

policies and procedures and minimize redundancy and confusion.

Yet many times, when a remedy to a recognized problem was

proposed, it did not adequately address concerns of one or more

agencies or of the public as a whole. Ultimately, a great deal

was accomplished, but the differences in agency perspectives

explain much of the working group\'s delay in developing its

recommendations and the lack of a single final report on behalf

of the working group. The attached report, prepared at the

request of (and benefitting from review by) Housing staff, still

bears some evidence of the differences. We have included

separate OGC comments when we thought they could be helpful\--for

example, when a particular recommendation of the working group

may overlook or understate a potential concern.

During the process of drafting our report, we became aware

that one of the working group\'s basic assumptions\--the need to

continue detailed guidance for the legal documents of condominium

and PUD projects where there is an FHA presence\--should not be

taken for granted. This memorandum, therefore, discusses whether

to maintain the historical FHA approach both in terms of its

current relevance and in light of HUD\'s general reconsideration

about how to do business in the future, including an anticipated

decline in Departmental staffing.

Whereas the report reflects the working group\'s assumption

that HUD/FHA, VA, Fannie Mae and Freddie Mac would continue to

issue detailed document guidance and focuses on how to develop

common guidelines that eliminate or minimize differences between

the agencies and between the treatment of condominiums and PUDs,

this memorandum is intended to direct attention somewhat

differently. It addresses, in contrast to the substance of the

documents themselves, existing FHA procedures for condominium and

PUD approval and the extent to which they can be simplified. We

have identified certain options that can be considered in tandem

with, or in lieu of, changes to specific document

requirements.

In the expectation that HUD will continue to some extent

with the approval of condominium and PUD projects in which it has

a substantial interest, this memorandum also discusses different

procedures for implementing the group\'s recommendations and

otherwise updating HUD/FHA requirements.

HUD\'s INTERESTS

HUD\'s involvement to date in condominium and PUD approval

has been similar to the involvement of private parties such as

Fannie Mae and Freddie Mac. It also reflects public policy

concerns that no longer may be as strong as they once were.

As the report indicates, in the 1960\'s FHA was a pioneer in

fostering acceptance of both the condominium and the PUD

concepts, as exemplified by the model enabling documents that FHA

developed and that became the initial industry standard. This

original leadership role is now ended; however, HUD also performs

a continuing consumer protection role (specifically authorized by

statute in the case of condominiums) by acting as proxy for the

future purchasers of condominium and PUD units. Purchasers

cannot directly affect the content of a project\'s legal

documentation because it is prepared prior to construction. It

generally can be said that consumer protection continues as the

justification for some specific provisions of HUD\'s documents

guidelines, but that HUD\'s financial interest in project

soundness is usually a concern as well. In today\'s realities,

HUD has largely ended its direct involvement in the operation of

individual projects, except that approval of a project may still

be rescinded if operating problems come to the attention of the

local HUD Office.

Limitations placed on the developer (such as ensuring

eventual release of developer control over the governing

association) function both as consumer protection measures for

the homeowners and as financial protection for those institutions

involved in mortgage financing for the homeowners. This is also

true of some limitations placed on the associations themselves

under current HUD requirements, such as the requirement for a

majority exceeding 51% of the unit owners when voting on many

important items.

The concern of the lender and the mortgage insurer for the

protection of the condominium and the PUD homeowner stems from a

unique and basic feature of these common property interest

regimes \-- the risk presented by an individual unit is strongly

influenced by the financial viability of the entire project. For

example, if adequate funds are not set aside for the maintenance,

repair, and replacement of common elements or if those funds are

not expended in an proper manner, the value of all units in a

project will suffer. Unit values are similarly affected by the

level of assessment imposed by the association on the individual

property owner, much as value may be affected by real estate

taxes except that assessments are levied without the constraints

which operate on governmental taxing authorities. Like taxes,

assessments involve a constant balancing of opposing

considerations. Excessively high payments overburden homeowners

and affect their ability to amortize mortgages and other housing-

related debt while inadequate assessment income may lead to poor

project maintenance, repair, and replacements practices or to

sporadic large special assessments that the homeowner cannot

anticipate or often afford.

HUD/FHA and other agencies also consider the effect a

project can have on the marketability of individual condominium

or PUD properties\--both when the project is functioning as

designed and when problems develop.

These concerns lie behind HUD\'s current approval procedures.

CURRENT HUD APPROVAL PROCEDURES

1\. PUDS.

No statutory or regulatory provision directly requires the

Department\'s approval of a PUD as a condition of mortgage

insurance with respect to its units, but administrative issuances

consistently have required such approval since the 1960s.

Indirectly, the maximum statutory loan-to-value ratios imply some

ability to provide guidance about how lenders should address

matters affecting value. The statutory requirement for a quality

of title that meets HUD\'s insurance claim requirements also

implies authority to provide guidance on the acceptability of

encumbrances. Further evidence appears in Section 204 of the

National Housing Act (NHA) which expressly permits HUD to

reimburse lender-paid assessments through insurance claims only

if the assessment obligation arises out of a recorded covenant

approved by the Secretary before endorsement.

We are not aware that any legal challenge has been raised

regarding HUD\'s ability to condition mortgage insurance on a PUD

unit upon approval of the project, but the approval requirement

does appear only in handbooks and is styled as a guide rather

than a mandate. Handbook 4135.1 Rev. 2, \"Procedures for Approval

of Single Family Proposed Construction Applications in New

Subdivision,\" addresses the subject in paragraph 3-13 and

Appendix 9. Appendix 9 contains documents labeled \"Suggested

Legal Documents\"; these models (Declaration of Covenants,

Conditions and Restrictions, and the Articles of Incorporation

and By-Laws for the homeowners association) are often

collectively referred to as \"Form 1400\" because of the original

HUD form number for the instructions that accompanied the

documents. Those instructions state: \"Their use is not

mandatory but recommended because they will facilitate review by

HUD and VA. They reflect the basic requirements of both

agencies.\"

PUD approval is treated more comprehensively in

Handbook 4150.1 Rev. 1, \"Valuation Analysis for Home Mortgage

Insurance,\" paragraphs 11-12 through 11-14. With regard to legal

documentation, the starting point again is the Form 1400.

Paragraph 11-12c.1)f requires that, before a PUD can be approved,

HUD must be furnished the documents for the project with an

attorney certification that they are in compliance with FHA

\"legal requirements\" referring to Form 1400. Also prescribed is

a \"suggested format\" for the legal certification which focuses on

selected key features of the model documents. This attorney

certification procedure was adopted in 1983 by Processing

Directive #7 issued by the Deputy Assistant Secretary for Single

Family Housing.

The certification for legal documents was intended to be

only part of the process for HUD approval of a newly-created PUD,

which also must meet the requirements of any new subdivision, PUD

or otherwise. Consequently, the developer must forward its own

certification with respect to subdivision processing, together

with the appraiser checksheet, to the Direct Endorsement lender

at the time it submits the PUD-related attorney certification and

documents to the HUD Field Office. In the case of an existing

PUD, however, the only requirement is that the developer submit

the attorney certification and documents to the Field Office.

Handbook 4150.1 Rev-1, paragraph 11-12C, lists the documents that

must be submitted when mortgage insurance is first requested for

a property in an existing PUD.

2\. Condominiums.

Mortgage insurance on condominium units is authorized by

Section 234(c) of the NHA. That section enables the Secretary to

insure units \"in his discretion and under such terms and

conditions as he may prescribe (including the minimum number of

family units in the project which shall be offered for sale and

provisions for the protection of the consumer and the public

interest).\" The section also disfavors investor-dominated

condominiums by requiring that owners must occupy 80% of units

with insured mortgages (although there is no statutory owner-

occupancy percentage for the project as a whole.) \"The Secretary

may also require that the rights and obligations of the mortgagor

and the owners of other dwelling units in the projects shall be

subject to such controls as he determines to be necessary and

feasible to promote and protect individual owners, the

multifamily project, and its occupants.\" Finally, Section 234(k)

of the NHA restricts HUD\'s ability to provide mortgage insurance

for units in projects that were converted from rental projects

within the prior year. (The Section 204 provision cited in the

discussion under PUDs also is applicable.) While there is no

explicit mandate for a project approval step when HUD is insuring

unit mortgages, clearly there is authority to do so with a strong

sense that HUD has a responsibility for the overall state of the

project and the terms and the conditions under which it is

approved to operate.

HUD has implemented this responsibility in regulatory form

through 24 CFR 234.26, \"Project requirements,\" which requires

HUD/FHA approval of a condominium project. Included are

specific requirements governing, for example, presale ratios and

the expiration or waiver of developer rights to modify the

project other than by annexation of phases or stages that HUD has

approved. Section 234.26(e)(1) further provides: \"The

Commissioner may require such conditions and provisions as the

Commissioner determines are necessary for the protection of

consumers and the public interest.\" In earlier times, FHA

executed a regulatory agreement, first with the developer then

with the condominium association as it came into independent

existence, but this requirement was deleted from the rule after

it had been abandoned in practice.

Two HUD handbooks address the requirement for condominium

approval. Handbook 4150.1 Rev. 1, paragraphs 11-1 through 11-11

contains the most comprehensive and up-to-date discussion.

Handbook 4265.1, \"Home Mortgage Insurance; Condominium Units;

Section 234(c),\" is exclusively devoted to the Section 234(c)

program, but nearly all of it is obsolete except for portions of

Chapters 12 and 13 and Appendix 24.

Handbook 4150.1 Rev. 1, paragraph 11-3E requires an

attorney\'s certification that all condominium legal documents

meet HUD guidelines (Appendix 24 is referenced) as well as state

and local condominium laws. Unlike PUD processing, no suggested

form of certification is provided by handbook, but the usual form

of certification is quite short.

To a greater extent than with PUDs, legal certification for

the documents is only part of the HUD approval of a condominium.

That process is described in Handbook 4150.1 at paragraphs 11-5

(for proposed construction), 11-6 (developments with building

under construction or existing less than one year), 11-7

(existing construction but no operating condominium association),

11-8 (existing construction with operating condominium

association), 11-9 (projects conveyed from rental housing), 11-10

(projects approved by VA), and 11-11 (projects approved by Fannie

Mae).

FHA RECIPROCITY FOR APPROVAL BY OTHER AGENCIES

1\. PUDs.

Fannie Mae and Freddie Mac have limited PUD approval

procedures, and HUD has no policy of accepting Fannie Mae/

Freddie Mac approval in lieu of its own. Paragraph 11-14 of

Handbook 4150.1 Rev-1 provides that HUD will forgo separate legal

review of documents when a VA Certificate of Reasonable Value

(CRV) is being converted for FHA use, unless HUD becomes aware

that the legal documents do not meet its requirements. This

paragraph does not specifically address the situation in which

VA has issued CRVs for some homes in the PUD but has not approved

the home being considered by HUD.

In fact, the question of PUD reciprocity with VA has been

overtaken by events. VA staff has reported to us that VA no

longer conducts any review of existing PUDs.

2\. Condominiums.

A condominium project with VA approval does not undergo

separate HUD review of legal documents. HUD does a limited

review to verify project compliance with statutes, regulations,

and policies uniquely applicable to HUD, such as restrictions on

conversion projects and pre-sale and owner-occupancy

requirements. If a CRV is converted for a unit in a project less

than one year old, the unit only qualifies for a 90% LTV unless

there is an approved 10-year warranty plan or (in the case of

proposed construction only) the CRV was issued before

construction started and VA has performed construction

inspections.

For proposed or newly constructed condominiums with

Fannie Mae approval, HUD reviews the Fannie Mae findings and

supporting documents, then determines\--sometimes with an on-site

review\--whether to accept the project.

Although in the past HUD and Freddie Mac have observed

reciprocity, they do not do so at the present time.

IMPLEMENTATION OF CHANGES

Under current HUD policy, no FHA mortgage insurance is

available for any condominium or PUD unit unless the project has

HUD Field Office approval, including approval of legal documents,

except as noted above under \"Reciprocity.\" When Housing

considers whether to revise its guidelines for the legal

documents in light of the working group\'s recommendations, it

would be timely to consider whether HUD\'s current project

approval requirement should be modified. A few words about what

other agencies are currently doing may provide some perspective.

Positions of the other agencies:

VA. VA has indicated that it is more concerned about

condominiums than about PUDs. The concern appears to be twofold:

1\) Condominiums as a class are perceived as a less stable, more

risky form of property interest, and 2) because the common area

comprises a part of each individual property and is therefore

part of the security for the homeowner\'s indebtedness, the

interest of the lender and the mortgage insurer/loan guarantor is

concrete and definite. The consequence of VA\'s concern is that

it still conducts for condominiums the review and the approval

process that it has dropped for existing PUDs and somewhat

streamlined for new ones.

Fannie Mae. Fannie Mae categorizes condominium projects as

Type A, B, or C, each requiring a different level of approval.

Type A refers to an existing project where individual properties

may be approved on a spot loan basis. Type B refers to a new or

conversion project which is unremarkable and, therefore, does not

require Fannie Mae acceptance. Type C covers a new or existing

project which merits Fannie Mae review for a specified reason

(e.g., it contains single-wide manufactured housing or is

subject to annexation or phasing). Not surprisingly, Type C

faces the most rigorous standard.

Fannie Mae classifies PUDs as Types E and F, Type E being an

established project in which control has been turned over to the

association, with Type F including any PUD still under control of

the developer. For Type E, the lender must ascertain only that

the project meets several general criteria assuring its

stability. For Type F, the analysis is more extensive, and the

requirements are much more specific.

Freddie Mac. Freddie Mac recognizes three classes of

condominiums. Class I refers to a project that is still under

developer control or is subject to uncompleted add-ons or

phasing; such projects are subject to the most requirements and

necessitate the most extensive warranties on the part of the

Seller (i.e., mortgagee). In the case of Class II, project

control must have been turned over to the association for at

least a year; all common areas and amenities must have been

completed; and there must be no further add-ons or phasing

planned. If these criteria are met, Freddie Mac\'s requirements

are reduced significantly. For Class III, control must have

resided in the association for at least two years, and the other

Class II criteria apply. In that event, Freddie Mac simply

requires a 90% presale, protection of a mortgagee in possession

from more than six months\' unpaid assessments, and if a leasehold

is involved, certain lease requirements which Freddie Mac imposes

anyway on many non-condominium properties.

Freddie Mac does not categorize PUDs and imposes relatively

few requirements on their approval. Furthermore, if any of those

requirements are not met, Freddie Mac may still accept the

project on an ad hoc basis.

ALTERNATIVES TO THE CURRENT HUD/FHA APPROVAL PROCESS

There is no statutory requirement that HUD approve

condominium projects as a condition to insurance if HUD

determines that adequate consumer protection and compliance with

statutory restrictions can be assured in some other way. There

is no statutory or regulatory requirement for approval of PUDs.

Housing has legal discretion to consider policies ranging from

complete abandonment of any project approval requirement whatever

to a continuation of current requirements (presumably with up-to-

date guidelines for legal documentation). It is not known what

course, either short- or long-term, the other agencies plan to

take regarding condominium and PUD approval practices. VA,

Fannie Mae, and Freddie Mac may be influenced by any action that

HUD/FHA adopts.

The three options discussed below assume some level of

continued HUD approval on a project-by-project basis. They are

presented to assist in a Housing review of its policies and

should not be considered as covering all the possibilities.

Option 1. Exempt certain classes of projects from project

approval requirement.

a\. PUDs. This has been done to some extent by VA, Fannie Mae,

and Freddie Mac. The following classes (which are not mutually

exclusive) might be exempted:

o So-called \"de minimis\" PUDs in which there is little or

no common property owned, leased, or administered by the

homeowner association. Mandatory assessments fund other

operations of the associations.

o PUDs whose associations have passed to the control of the

unit owners with the developer no longer involved.

o PUDs whose associations have existed for a specified

minimum period of time but still remain under the control of

the developer.

o PUDs that meet a specified pre-sale level.

o PUDs in States which have been identified by HUD Field

Offices as providing adequate statutory or regulatory

protection.

o Any combination of the above.

b\. Condominiums. As previously observed, Fannie Mae and

Freddie Mac recognize different classes of condominium projects

and impose different requirements accordingly.

o The possible PUD exemptions (except de minimis projects)

could also be adopted for condominiums.

o Permit Field Offices to investigate States which may

provide adequate protection by statute or regulation.

Option 2. Increase reliance on Direct Endorsement (DE)

mortgagees. HUD could require a DE lender to certify compliance

with HUD requirements, along the same lines as the

Servicer/Seller warranties accepted by Fannie Mae for Class A and

B condominiums.

Option 3. Increased use of developer certification. HUD

could rely on a developer certification regarding other matters

of concern that are not covered in the attorney certification for

legal documents\--e.g., compliance with pre-sale requirements and

the restrictions on conversions, the adequacy of budget, and

management arrangements on the part of the association.

Options for Implementation Procedures:

1\. Handbooks. Current handbooks will need to be revised if

all or some of the changes that have been mentioned are adopted\--

changes in the types of projects that must receive prior HUD

approval as a condition of FHA mortgage insurance on units, the

basis for obtaining HUD approval, and changes in the FHA

guidelines for legal documents.

If Handbook 4265.1 were retained as a separate directive for

condominiums, it would need virtually complete rewriting. We

suggest that it is time to retire that issuance and make any

needed modifications to the more current discussion on

condominium approval in Handbook 4150.1. Guidelines for

condominium legal documents\--equivalent in function to the

current Appendix 24\--could be appended to Handbook 4150.1. Such

guidelines should be sufficient. We see no need to continue to

reproduce as handbook appendices the outdated model condominium

declarations, articles of incorporation, and by-laws that now

appear as appendices to Handbook 4265.1.

In the same vein, updated guidance on PUD approval can be

consolidated in Handbook 4150.1 without the need to continue the

largely obsolete Handbooks 4135.1, 4140.1, 4140.2. Whether or

not the specific recommendations of the working group are

followed, there is a clear need to provide instruction on

acceptable PUD legal documentation in a more general and flexible

form than the current Form 1400 documents. Under the working

group\'s approach, a single set of guidelines would contain HUD\'s

requirements covering both condominiums and PUDs.

2\. Federal Register Notice. Revised guidelines for legal

documentation, while not rising to the level of a substantive

rule that must be published in the Federal Register, still would

affect the interests of many groups (attorneys, homeowners,

planners, developers) who would not receive direct notice of

changes through regular handbook distribution. Publication of

revised guidelines in a policy notice in the Federal Register

should result in a more widespread and rapid dissemination of

revised FHA policy. A single one-time notice could be used, but

Housing should consider the advisability of using a Federal

Register notice that solicits public comment before a final

policy on condominium and PUD legal documents is adopted. As

in the present situation, whenever an agency is considering a

course of action or policy that involves divergent interests and

classes of persons or when the issues are complex, interrelated,

and represent a numbers of concessions and compromises, an

administrative record can be very useful in sorting out the

equities and buffering the agency\'s eventual decisions against

legal and political challenge.

3\. Regulations. As long as HUD relies upon regulations to

enforce the major policies that govern its single family

programs, Housing should consider selective rulemaking with

respect to condominiums and PUDs.

Condominiums. There is a need to revise at least the obsolete

portions of 24 CFR Part 234, and a good case could be made for

using that rulemaking docket to develop a comprehensive

regulatory base for the program policies that are now reflected

only in the legal documents, in lieu of the very general current

regulations. Arguably, HUD may have engaged in rulemaking that

should have involved public comments when it has developed its

condominium policies through document guidelines and review.

A basic rule on condominium project approval could set forth

requirements that are: 1) currently in Part 234 (e.g., owner-

occupancy ratios); 2) not included in any rule, but covered by

handbook (presale obligations); and 3) not a part of either rule

or handbook but significant enough to deserve attention (lender

obligation to pay delinquent assessment). One regulatory section

or component might address the condominium association, its

rights and limitations, and this would be a nexus for those

requirements that traditionally have been set out in the

Appendix 24 Policy Statement and the now defunct regulatory

agreements. Section 234 requires considerable explication. The

statute also carries a Congressional mandate to \"promote and

protect\" individual owners as well as the project and its

occupants. Both are strong arguments for reliance on rulemaking

with an opportunity for public comment.

PUDs. There is no specific regulatory base for PUDs; for

regulatory purposes they are simply a variant of the

Section 203(b) program.. The Department could take the

occasion of document revision and regulatory reform to provide a

base in the Code of Federal Regulations for this established and

growing aspect of FHA activity. We strongly support Housing\'s

effort to delete unnecessary materials from the CFR. To the

extent that regulations are retained for major aspects of single

family programs, however, it is anomalous to provide no mention

in those regulations of the special requirements applicable to

PUDs. As with a possible revised condominium rule, basic

requirements such as presale ratios could be included, and there

could be adequate provision setting forth the rights and the

responsibilities of homeowner associations.

Whatever your decision on the substance of changes and the

best means of adopting them, we are available to assist your

Office in developing pertinent regulations, notices, and

handbooks.

Attachment

cc:

C D¡az 10214

CA Weidenfeller 10240

CIS Albright 9240 CIS Alexander 9240

CIS Chron 9240 CI Daly 9236

CIS Dec. File 34.0, 159.0

CIS Martin 9240

HUD CLIPS Index File No. 4.215

CIS:MARTIN/ALEXANDER:les 9/5/96 H:\\GIS\\TSFOR

ACORN Control No. 155132

Concurrences and Dates:

CIS CIS CIS CI

Martin Alexander Albright Daly

CA

Weidenfeller

REPORT ON RECOMMENDATIONS FROM THE INTERAGENCY

WORKING GROUP ON REFORM OF CONDOMINIUM AND

PLANNED UNIT DEVELOPMENT DOCUMENTS

SUMMARY

A working group of government and industry representatives

(working group) has reviewed the current requirements of federal

agencies and secondary market institutions (collectively referred

to as agencies) for single family mortgage lending with respect

to units in condominium and planned unit developments (PUDs).

This review focused specifically on legal documents that

prescribe the organization, responsibilities and operation of

associations \-- the private, non-profit, specialized

organizations created by project developers for the purpose of

governing a condominium or PUD regime with eventual resident

control.

The working group started with three assumptions:

\<\<\>\>

Condominiums and PUDs should continue to be subject to

certain requirements as a condition to single family

mortgage lending. The legal documents contain most of these

requirements, although the documents, standing alone, may

not be a suitable means of implementing agency policy in all

respects. Policy can also be expressed in regulations,

handbooks, mortgagee letters, memoranda, guides, etc.

\<\<\>\>

As much as possible, the agencies should try for

standardization in imposing document requirements and

guidelines. Uniformity will increase a borrower\'s sources

of financing without requiring duplication of effort and

frustrating, pointless procedures on the part of lenders,

developers, associations and sometimes the borrowers

themselves.

\<\<\>\>

In a number of respects, the requirements are

outdated.

As work progressed, the group adopted another working assumption:

\<\<\>\>

The corresponding requirements for PUDs and condominiums

should differ as little as possible.

An effort to modernize and standardize the requirements for

single family mortgage lending in condominiums and PUDs

necessarily entails a thorough revision of the documents. This

report covers working group recommendations that involve change

to the more important policy matters. It highlights key points

but does not try to exhaust the subject matter. The purpose of

this report is to 1) explain the general background and

conclusions of the working group\'s deliberations, and 2) serve as

a vehicle for facilitating decisions by the FHA leadership

concerning adoption for the FHA single family programs of the

major recommendations outlined.

BACKGROUND

Whenever homeownership interests involve common areas, there

are special considerations which impact on lenders and the

agencies that insure, guarantee, purchase or securitize their

mortgages. This is true whether the common area is owned jointly

and severally by the unit owners and administered by a

condominium association or owned by a PUD homeowners association

comprised of all the unit owners. In either case, the owners

support the association with mandatory periodic payments and

control it with their voting power. In effect, these communities

comprise quasi-governments that exhibit typical strengths and

weaknesses of the democratic process.

The legal documents for condominiums and PUDs must reflect

any applicable state or local law, and for condominiums there is

invariably some law that applies since they owe their existence

to enabling legislation. Still, there is always latitude for the

attorneys who draft enabling documents on behalf of developers to

introduce substantial differences in the rights and obligations

conferred on residents, and the drafting decisions of these

attorneys are influenced by standards of agencies such as FHA.

FHA, in fact, was an pioneer in developing the substantive

content of many condominium and PUD documents; in the mid-to-late

1960s, it set the pace by prescribing model documents for

condominium developers to use whenever they anticipated use of

FHA-insured financing. In that same time frame, 24 CFR part 234

was adopted to implement section 234(c) of the National Housing

Act (Act), and Form 1400 was issued providing models for PUD

documents paralleling those that had been developed for

condominiums. By 1973, the Department of Veterans Affairs (VA)

coordinated with HUD/FHA in developing standardized PUD forms and

generally uniform policies for condominiums.

These pioneer standards served well for years while PUDs and

condominiums emerged as successful approaches to land subdivision

and planning, but the last twenty years have seen major

evolutionary changes in the concepts of common property

interests. For example, in the mid-1970s, phased projects were a

rarity and mixed-used projects combining condominiums, PUDs,

cooperative housing, rental units and commercial property had yet

to be devised. An appendix to this report includes a brief

discussion of the way in which condominiums and PUDs have evolved

from their original concepts, and how these sometimes subtle

changes have (or should have) impacted on the agencies\' treatment

of both types of regimes.

The Form 1400 documents for PUDs have not been formally

updated since 1973. The last joint effort by the agencies to

update guidance for condominium documents began in 1975 when HUD

organized a Condominium Task Force with VA, FNMA and FHLMC. This

resulted in revised legal guidelines that appear as Appendix 24

of HUD Handbook 4265.1. These rules and guidelines developed for

an earlier period are less and less relevant today. The agencies

have differed in their response to this fact, or else have

largely ignored it. As a consequence, builders, lenders,

borrowers, homeowners associations and attorneys now find

themselves caught up in conflicting and outdated requirements

that greatly complicate the task of creating a legal structure

for the projects. The result may be a legal structure that fails

to provide flexibility or match current approaches to planning,

development and management of projects with associations. From

time to time, agency staff have acknowledged a need for document

reform and agreed to cooperate more closely, but there has only

been accord in principle and not on specifics. A number of

issues simply had to be hammered out to return to a general

uniformity of requirements while adapting to current conditions,

and this was the task of the working group as it began to meet at

the end of 1991.

CONCLUSIONS AND RECOMMENDATIONS

Beginning in late 1991, the working group undertook analysis

of the agencies\' policies for condominium and PUD documents.

The objective was to update these policies and procedures, make

them more effective and minimize differences among the agencies.

Scrutiny of each provision led to the recommendations that follow

at the end of this report.

Although there has been wide-spread recognition for some

time that the various agency requirements are in need of

revision, the impetus necessary to get this effort underway was

missing until the CAI Research Foundation, the research arm of

the Community Associations Institute (a trade organization

representing homeowner and condominium associations around the

country), invited agency representatives together to form the

working group and offered to furnish technical support and

partial staffing for the enterprise.

The group began with the premises mentioned at the start of

this report, namely, that:

1\) Common property interest regimes should be subject

to certain requirements as a condition to approval by

the agencies;

2\) Those requirements should be as uniform as possible and

3\) As much as possible, the requirements for PUDs and

condominiums should match one another.

This report does not purport to present a full analysis of these

premises for reconsideration; however, it is important to

recognize that an endorsement of many of the working group\'s

recommendations will necessitate an implicit acceptance of the

premises.

Since it was assumed that agency standards are necessary for

addressing various issues that bear on underwriting risk and

consumer protection, and since there was little serious question

about the general benefit of minimizing differences and conflicts

among the agencies\' positions, the first real question for the

working group was whether condominium and PUD issues should be

dealt with separately or as different facets of a single inquiry.

It was decided that treating them individually would not be

necessary. The current approach to designing communities and

subcommunities with associations lies in integrating different

forms of common property interest, not in drawing distinctions

that tend to separate and isolate them by configuration and use.

Furthermore, many of the most pressing issues pose problems for

both condominiums and PUDs: allocating financial resources and

apportioning assessments; collecting delinquent assessments;

resolving lien priorities; control of project expansion and

phasing; guarding against discriminatory rules and practices;

establishing and maintaining equitable voting rights; overcoming

voter apathy; allocating use of amenities; providing liability

insurance for good management and misfeasance protection against

bad; and the orderly termination of regimes and disposition of

assets.

Once it had been decided to treat condominium and PUDs

together, the next steps fell into place. First, analyze

existing agency policies as recorded in regulations, directives,

memoranda and other agency documents in order to compare

corresponding provisions from the different agencies and focus on

the policy objective that gave rise to each provision (unearthing

the reason for a number of requirements proved remarkably

difficult). After that, evaluate the policies. When the working

group members agreed on a policy in principle, specific language

describing the policy could follow.

The working group met sporadically and the project was not a

high-priority or high-visibility effort for any of the agencies,

so it took several years to reach maximum feasible accord. By

mid-1994, the working group felt that the next step should be

pursued, which is to submit their joint conclusions and

recommendations to the respective agency policymakers for

approval and guidance. This report presents the results of the

group\'s deliberations in a form keyed to FHA policy issues.

THE MORE SIGNIFICANT ISSUES ADDRESSED

Many of the proposed changes of FHA policy reflected in the

full revised \"Suggested Guidelines of the working group\" are

minor and technical; only a small proportion merit the attention

of senior policy makers. The common theme of these

recommendations is the modification or termination of

restrictions that impede flexibility in the design or operation

of associations. Based on the working group\'s consensus of

important matters that should be considered for change by

decision makers within the respective agencies, there follows a

summary of the more significant recommendations and the reasons

for them. It should be emphasized that in no way are these

recommendations intended as a commitment on the part of any

agency. Also, if the change would position FHA differently from

one or more of the other agencies, that difference is

noted.

The full discussion of each recommendation as contained in

the revised \"Suggested Guidelines\" can also be provided for more

detailed review.

1\. Maximum assessment.

CURRENT REQUIREMENTS

Condominiums: In practice, Field Offices, with Headquarters

acquiescence, have limited annual increases to about 10% of the

fee in effect.

PUDs: Annual increases should not exceed 5% according to the

Form 1400; however, Field Offices have typically set a limit of

10%, again with Headquarters\' consent, probably in response to

inflationary periods.

AUTHORITY

Condominiums: Neither the condominium rule or handbook

discusses assessment limits.

PUDs: Form 1400, Declaration, Art. IV, § 3, provides for 5%

annual increases without a membership vote. In 1975, a Housing

memorandum to Field Offices authorized the approval of

association documents linking assessment increases to CPI

levels.

ISSUES

The initial assessment charge is sometimes a problem, but

probably less so than in the past. It was not uncommon in the

early days of condominium and PUD expansion for developers to

\"low-ball\" initial assessments with the intent of attracting

naive buyers who would not recognize that the affordable monthly

charge contained in the prospectus could not continue to meet

increasing expenses or build up adequate reserves. Sometimes,

too, developers would defer elements of maintenance and insurance

cost or would omit expense items attributable to planned

amenities. Later, when the developer was no longer a part of the

picture, the assessments mushroomed to a level some homeowners

could not afford. Rarely did one encounter excessively high

initial charges. However, initial assessments tend today to be

fairly realistic. Homebuyers are becoming more sophisticated, as

association budgets are scrutinized more thoughtfully in terms of

assessment income and return on investment.

In addition, the developers\' representatives on the working

group urged more flexibility in setting assessment throughout the

period of developer control. FHA, and we believe the other

agencies as well, have observed an informal 10% limit, on the

premise that controlling increases forces developers to match

initial assessments with operating expenses. The 10% standard,

however, is rather crude and it, too, can put a considerable

burden on the homeowner. A 10% increase each year, together with

the effect of compounding, can result in a doubling of the

assessment in the 7-8 years that the average FHA homebuyer

continues as mortgagor.

RECOMMENDATIONS

Eliminate the requirement for a limit on the assessment

amount that an association board may approve without a membership

vote, provided that a membership vote is required to approve any

capital expenditure (other than as needed for maintenance and

repair) exceeding twenty percent of the common expense budget

during any twelve month period. Although this recommendation

may be viewed as favoring developer interests by permitting

larger increases to be imposed by the developer, the working

group expects that increased buyer awareness should militate

against excessive increases. Developer and CAI representatives

argued that the main problem, once control passes to the

association, is unwillingness on the part of the membership to

approve even those assessment increases reasonably needed to meet

rising operating costs. Nevertheless, some control over capital

expenditures is necessary.

If, instead, an annual assessment cap is provided, reduce

the vote needed for a change from 67% to a simple majority with a

quorum procedure as discussed in Recommendation 12 below. During

the developer\'s control period, the class A (developer) vote

would not be counted for this purpose.

As an alternative to the somewhat arbitrary figure of 20%,

some members of the working group favor tying annual increases to

an appropriate cost index, or allowing associations to pass on to

the membership any increases in their operating costs that they

cannot control, such as taxes, plus a limited additional

adjustment for inflation in other budget items, such as salaries

and employee benefits.

2\. Personal liability for assessments.

CURRENT REQUIREMENTS

Condominiums and PUDs: Liability for unpaid assessments does

not pass to a purchaser.

AUTHORITY

Condominiums: Handbook 4265.1, Appendix 24, µ 7(d)(1).

PUDs: Form 1400, Declaration, Art. IV, § 1.

ISSUES

It is often difficult to collect from sellers since they may

leave the jurisdiction. The seller who has defaulted should not

be relieved of responsibility; however, if the seller is not

available there should be recourse against the buyer, provided

the latter bought knowing of the outstanding indebtedness against

the property.

RECOMMENDATIONS

Allow the association to hold successors in title personally

liable for unpaid assessments, provided that it notifies the

successor of the arrearage amount prior to settlement. This

liability should not extend to those who take title by reason of

foreclosure or an assignment by deed in lieu of foreclosure.

COMMENT OF OGC STAFF

The recommendation may be perceived as unfair to the

purchaser who is likely to be unaware of unpaid assessments prior

to executing the purchase contract. An alternative approach to

alleviate the burden on associations would be a provision in the

declaration that authorizes the association to receive payment

for unpaid assessments from the seller\'s funds at closing whether

or not a lien has been filed.

3\. Developers\' assessment obligations.

CURRENT REQUIREMENTS

Condominiums and PUDs: Like any other association member, the

developer is responsible for assessments on any units it owns.

However, HUD has approved projects where the developer may be

exempted from that portion of the assessment attributable to

costs that do not apply to unsold or unoccupied properties. For

example, if the developer assumes responsibility for exterior

maintenance otherwise performed by the association, the

assessment might be reduced proportionately. A similar reduction

would be appropriate if the association is obligated for a

project-wide utility charge, such as water and sewer, and unsold

properties have not been connected to the service.

AUTHORITY

Condominiums: Appendix 24, µ 8(a) requires each owner,

including the developer, to pay. There is no formal statement

exempting unsold units although any equitable and reasonable

method is permitted for allocating common expenses among the unit

owners.

PUDs: Form 1400, Declaration, Art. IV, § 1 requires each

owner, including the developer, to pay. There is no formal

statement exempting unsold lots or units. Art, IV, § 6 requires

both annual and special assessments to be fixed at a uniform rate

for all lots.

ISSUES

The working group members representing developers\' interests

urged that developers be relieved from the obligation to pay

assessments on units, in particular undeveloped lots, that do not

benefit from the common space and facilities, provided that the

developer has taken steps to protect the financial integrity of

the project.

RECOMMENDATION

The declarant should set forth in a five year budget a

reasonable income from the initial assessment schedule. (Since

increases must be voted on and cannot be known at the regime\'s

outset, they may not be taken into account.) Compare the

discussion of imposing limits on assessments in item 1 above.

Recognizing that there may be instances when the project does not

include at first a sufficient number of homeowner occupied units

to be financially viable, the developer would obligate itself to

fund deficits, including shortfalls to reserve accounts and the

association\'s needs for meeting insurance premiums, that occur

within the five year budget term (or until such time as all units

have been sold, whichever occurs first).

Apropos the separate but related issue of unimproved lots

held by the developer, it is recommended that the developer be

responsible in these instances for not less than 25% of the

regular assessment. A proviso would be that this reduction not

result in a need to compensate by imposing an unduly burdensome

assessment on the homeowner occupants and that the assessments

collected, giving account to the reduction, be adequate to meet

the financial needs of the project and support the common

elements.

4\. Responsibility for property which neither the association

nor its members own.

CURRENT REQUIREMENTS

Condominiums: This problem does not arise in condominium

projects.

PUDs: Local governments sometimes require a homeowners

association to bear the maintenance burden for streets, water

mains and other infrastructure which is not titled in (or leased

by) the association. Current policy prohibits the collection of

assessments for any purpose \-- maintenance, insurance, etc. \--

with respect to property which it does not either lease or own,

even though the property may benefit the project exclusively.

AUTHORITY

PUDs: Form 1400, Declaration, Art. IV, § 2.

ISSUE

Feeling pressed financially, local governments are sometimes

requiring PUD associations to maintain property which the

associations do not own or lease and which is therefore not

common area. The property involved usually benefits the unit

owners exclusively. Nevertheless, the associations cannot

effectively control expenditures related to property in which

they have no property interest; such expenditures are simply

gratuitous acts.

RECOMMENDATIONS

Allow associations to collect assessments and accept

responsibility as needed for property which is not a part of the

common area. These recommendations, especially the transfer of

responsibility for the property, may require local government

approval.

5\. Flexibility in plan changes that result from phasing.

CURRENT REQUIREMENTS

Condominiums and PUDs: In a phased or staged project, in

order to annex land without the unit owners permission, the

developer must submit to HUD or VA a plan that describes the

type, size and location of all anticipated changes enlarging the

initial development. Modification of a proposed enlargement must

also be coordinated and cleared with HUD or VA.

AUTHORITY

PUDs: Form 1400, Instructions, instruction \# 7 \"Staged

Developments\".

Condominiums: Appendix 24, µµ 4(b) and 12.

ISSUES

Developers are reluctant to construct a project larger than

the anticipated market will bear, yet they may have obtained

land on favorable terms which they intend to use for additional

phases when the market is available. The resulting uncertainty

works to the disadvantage of first-phase owners who are unsure of

the final project outcome and whose rights, especially the

enjoyment of amenities, may be diluted by the advent of more

owners as subsequent phases are built. Phasing always involves a

balancing of interests between the developer and existing

homeowners. The condominium plan and the PUD general plan are

reasonably explicit projections designed to alert buyers to

proposed enlargement of a project. The related requirement that

HUD/VA approve any modification of a plan militates against

developers undermining this consumer protection by revision of

what was originally offered.

RECOMMENDATIONS

Allow the developer to modify the location, type (i.e.,

detached, walk-up, etc.), design and price of improvements from

one phase to another. Permit lot sizes to vary as well. The

developer should be required, however, to notify each purchaser

that the type and value of later-phased properties may be greater

or less than what he or she is purchasing. It would also be

necessary in the case of condominiums for the developer to

specify a limit on expansion of the project so that purchasers

can know the potential ultimate dimensions of their jointly-owned

common area.

COMMENT OF OGC STAFF

The working group recommendation succeeds in drawing the

developer\'s initial homebuyers into the phasing plan and blunting

any objection they may raise about on-going development of the

project, assuming the plan is followed. The problem remains,

however, that subsequent purchasers from those initial owners

will not be aware of the concern that phasing can raise, unless

they happen to research the recorded developer plan, a highly

unlikely event. The working group did not resolve this aspect of

the problem and we frankly do not see a practical solution.

6\. Flexibility in enlargement of projects.

CURRENT REQUIREMENTS

Condominiums: Unless described in the condominium plan and

disclosed in timely fashion to prospective unit owners, an

annexation of land requires a heavy majority vote (67%) of the

unit owners.

PUDs: Approval by 67% of the unit owners entitled to vote is

necessary. There is no consistent means of effectively notifying

a prospective buyer of anticipated project enlargement.

AUTHORITY

Condominiums: Appendix 24, §§ 10(b)(7), 12.

PUDs: Form 1400, Declaration, Art, VI, § 4 and Articles of

Incorporation, Art. IV, µ (f).

ISSUES

The problems here are analogous to those identified in topic

number 5, just discussed. There we are concerned with the manner

in which the developer carries out an announced plan to expand

the project by adversely affecting the value of the existing

properties. The classic example reflects the case where a

developer decides that the market has softened in the price range

of existing properties and builds out the next phase with cheaper

townhouses. In this topic number 6, we are focusing on a

situation where, typically, the developer holds an option on

adjoining land which was not described in the project plan or

shown on the plat surveys and is subsequently added as the market

demand increases. Annexation of this nature burdens the

infrastructure (and any amenities) serving the existing

properties and clearly dilutes the rights of prior purchasers

whose property values may suffer much as they would from phasing-

in of the lower-market townhouses. Existing homeowners must be

afforded an opportunity to vote on such a change, if they did not

know at the time they acquired their properties that expansion

was planned. The expansion of projects appears to have become

more prevalent as they average more units with developers are

more cautious about overbuilding during periods of slow economic

growth. The constant concern is to protect the rights of prior

owners as the development expands. This was the subject of

considerable discussion within the working group.

RECOMMENDATIONS

Requirements for both condominiums and PUDs with respect to

enlarging the regime and adding land and improvements should be

substantially changed. More guidance is needed so as to provide,

in addition to the current requirement for notice to existing

condominium members of intended changes and the limitation on

time for phasing completion (five to seven years), various other

protections for unit owners. There must be specified a minimum

and maximum number of units that will inform the individual

initial purchaser about the range of his or her ultimate interest

in the property. There must be assurance that the project as

designed will not be overly burdened by additions, and the

declaration must establish the basis for reallocating ownership

interests, common expense liabilities and voting rights if the

project is expanded in any way. This is particularly important

in the case of condominiums, where the common area that will very

likely be affected is already a joint part of each unit owner\'s

property and therefore a part of the security for the insured

mortgage, as well.

With respect to PUDs, there is a different problem.

Although the enlargement of a PUD is governed by the same

considerations and need for homebuyer protection, there is no

requirement for a plan comparable to that which must be submitted

by a condominium developer. PUD developers would have the burden

of establishing that they had adequately notified all unit owners

in a timely manner.

If adequate protections are in place (including recordation,

as needed), it would be appropriate to reduce the necessary vote

and otherwise simplify the process for permitting expansion,

whether or not it has been detailed in a general plan.

7\. Mixed-use communities.

CURRENT REQUIREMENTS

Condominiums and PUDs: There has been a need for

clarification of the extent to which commercial and multifamily

residential space may be combined with residential condominium

and PUD property. HUD\'s position on this point has varied,

although such mixes have usually been accepted by Field Offices

if an overall benefit to the residential use can be shown, e.g.,

convenience food stores, bank branches, laundries. Mixed-use has

been disallowed, when the size or value of the commercial

property was out of proportion to the residential use, and it

could be inferred that the intended market area was not local to

the project and its immediate environs.

AUTHORITY

Condominiums and PUDs: There is no written policy, although

there have been oral communications by Headquarters Housing and

OGC staff with Field Offices and the public which address the

matter on an ad hoc basis.

ISSUES

Rigid compartmentalization of the different types of common

property interests, together with tight restrictions on

commercial space have kept the agencies from fully participating

in a trend towards mixed-use projects, with the FHA/VA homebuyer

feeling the principal loss. Moreover, mortgage insurance

guidelines are not the proper vehicle for promoting or

discouraging the development of sizable, complex communities or

for resolving land use questions. More flexibility is needed to

accommodate modern concepts of community planning, but some

adherence to traditional FHA principles is needed as well.

Thus, it is essential to maintain proper allocation of costs and

voting power among the different classes of persons enjoying the

project, and there must be protection from security problems and

nuisances caused by traffic congestion and sanitation, especially

where food service is involved.

RECOMMENDATIONS

The agencies\' current restrictive approach to developments

that combine the different uses described should to be relaxed

somewhat and there should be guidance on managing the problems

introduced by large and complex projects. Mixing different uses

will usually entail a need for different classes of membership.

It is essential that the association\'s (and sub-association\'s, if

present) powers be drawn so as to enable it to address the more

varied and complex problems common to mixed-use projects.

8\. Member accountability for damage to common property.

CURRENT REQUIREMENTS

Condominiums: No provision.

PUDs: Absolute liability for damage to the common area or

lots may not be imposed on the unit members, except as provided

by law.

AUTHORITY

PUDs: Form 1400, Declaration, Instructions, Art. IV.

ISSUES

There has been a greater need to protect associations from

the expense of repairing damage to common property caused by

departing sellers and tenants who escape responsibility for their

actions. The unit owner, as landlord or host, is usually in the

best position to assure proper care of the premises and secure

redress for any loss.

RECOMMENDATIONS

Association members may be held accountable to the

association for damage to the common area caused by guests,

invitees and others in the household, even when state or local

law does not make them liable. This accountability would extend

to expense incurred by an association when a member violates its

covenants and rules. In order for such responsibility to attach,

however, prospective purchasers must be advised of this liability

when the disclosure packet is provided. If no disclosure is

provided, as is often the case with PUDs, or if the disclosure is

not timely (i.e., before the sales contract is executed), then no

accountability beyond that prescribed by law can be imposed on

unit owners or former unit owners.

9\. Flexibility in permitting use of common areas.

CURRENT REQUIREMENT

Condominiums and PUDs: The membership must vote on

significant issues, which include most important matters

involving common areas (e.g., expanding, liquidating,

mortgaging). Matters not reserved to the membership are the

responsibility of the board of directors.

AUTHORITY

Condominiums: Handbook 4265.1, Appendix 11; Bylaws, Art. IV,

§ 2. See also Appendix 24, § 7 (b), 10(b)(5) and 10(b)(9); 13

PUDs: Form 1400, Bylaws, Art. VII, § 1(c).

ISSUES

As some projects become more extensive physically and the

regimes more complex in organization, associations are compelled

to seek membership votes on more and more matters that cannot be

foreseen but are essential to daily operation and management. It

is usually very difficult to assemble a quorum and obtain

membership approval for most of these management-type decisions.

RECOMMENDATIONS

The association\'s board and officers should have greater

power in the administration of, and control over, common areas.

these powers include extending rights of enjoyment (regarding

amenities) to non-members when financially advisable and

conveying partial or full property interest in the common areas

when necessary, as in the case of boundary-line disputes,

condemnation actions, etc.

10\. Reducing the scope and detail of the association documents.

CURRENT REQUIREMENTS

Condominiums and PUDs: Significant rights and restrictions of

the developer, the association, and the membership are set

forth in three documents: the enabling declaration establishing a

plan for condominium ownership (for condominiums) or the

declaration of covenants, conditions and restrictions (for PUDs);

the bylaws; and the articles of incorporation. Material

amendment of condominium documents during the period of developer

control requires approval by the first lienholders (including

HUD) on a majority of units and material amendment of PUD

documents requires HUD approval. During the life of the

association, amendment also requires support by a substantial

majority of the membership.

AUTHORITY

Condominiums: Appendix 24, § 10(b) governs the unit owners

rights to decide on amendment; § 10(c) governs lienholders\'

rights.

PUDs: Form 1400, Art, VI, § 3 governs the voting rights of

unit owners and § 5 provides for HUD/FHA approval; Articles of

Incorporation, Art. X governs the voting rights of unit owner

approval and Art. XI provides for HUD/FHA approval; Bylaws, Art.

VIII, § 1 governs the rights of both unit owners and HUD/FHA.

ISSUES

Developers and associations find that it is difficult to change

provisions of the documents whenever a membership vote is

required. On the one hand, efficiency favors a flexible approach

to making necessary changes in the associations\' rights and

restrictions, as long as the membership retains ultimate control

through its selection of directors. It is difficult to assemble

a quorum and when the turnout is sufficient, it is not easy to

get voter agreement on key issues. On the other hand, the right

to decide important issues must rest with the unit owners,

notwithstanding efficiency problems this may cause management.

The challenge is to decide which matters need to be brought

before the voters and which can be handled administratively. It

is also reasonable to reconsider whether a 75% or 67% majority is

needed for all but the most vital decisions, such as termination

of the regime.

RECOMMENDATIONS

In instances where a public offering statement or other

disclosure is provided to prospective purchasers, this statement

could be used to specify certain powers of the developer and

subsequently of the association which do not require consent by a

majority of the unit owners. It would similarly be possible for

HUD/VA to agree that certain matters now set forth in the

documents may be covered less formally and do not require

approval by mortgagees and mortgage insurers/guarantors. The

working group composed an sample list of such matters (which

include some that have been previously discussed): 1) assumption

of personal liability for a prior owner\'s unpaid assessments; 2)

member liability for common area damages caused by tenants,

guests, etc.; 3) right of the developer to phase or annex land

without committing to or describing the nature of future

improvements; 4) right to use common area and grant easements

across units (including those already sold) for sales purposes,

such easements and use to be compensated by the developer as

appropriate; 5) right of the developer to unilaterally amend

documents or veto association amendments, subject to certain

limitations; 6) right of the developer to appoint directors of

the association; 7) right of the developer to grant easements to

adjoining land owners, subject to expense sharing, and 8)

exemption of the developer from architectural review

restrictions.

COMMENT OF OGC STAFF

As in the case of phasing changes discussed in topic number 5,

the problem arises that only the initial purchaser from the

developer will likely receive the prospectus and subsequent

owners will not be aware of the developer\'s or association\'s

scope of authority.

11\. Insurance requirements.

CURRENT REQUIREMENTS

Condominiums: The association must obtain a blanket policy

that covers the common area, together with any non-common area

property securing the insured/guaranteed mortgage, and protects

against flood damage and the customary other hazards. Fidelity

bonds are required to protect against errors and omissions of the

officers, directors and staff. There is no prohibition against

an association\'s obtaining insurance protection from liability

for its officers and directors, but none is required.

PUDs: Only flood insurance is required in accordance with

that necessary for a 203(b) property. The association may obtain

coverage for the common area against the usual perils. The

association may also elect to obtain coverage of the units on

behalf of the individual owners.

AUTHORITY

Condominiums: 24 CFR 203.16a (flood insurance); Appendix 24,

µ 14.

PUDs: 24 CFR 203.16a (flood insurance); Form 1400,

Instructions, Appendix of Forms, Form #8.

ISSUE

There was no disagreement over the current need for flood

insurance covering condominiums and PUDs; Congress has adequately

addressed the matter. Some members of the working group,

however, favored mandatory coverage against other hazards for

PUDs, and developer representatives urged mandatory liability

protection for officers and directors of both condominiums and

PUDs. The problem is that additional coverage requirements can

be quite expensive, especially for small projects.

In the case of condominiums, an argument can be made for

comprehensive hazard coverage of the common areas since they are

in effect a part of the security for a mortgage on any unit.

With PUDs, this reasoning does not apply; the only supporting

argument in the case of a typical PUD is that its association may

possibly obtain a beneficial premium rate by including all the

units as well as the common areas in a single policy. Of course,

whenever a homeowner association owns a significant part of the

project\'s infrastructure as common area, e.g., streets, water

systems, etc., the need for insurance against hazards, and

probably for liability as well, is clear.

RECOMMENDATIONS

There should be reasonable amounts of insurance to cover

repair and restoration of common elements (PUDs included); there

should be \$1,000,000 protection against liability. Fidelity

insurance should equal generally two months\' assessments, more if

the agency deems appropriate. An association may require unit

owners to maintain adequate hazard and/or liability coverage on

individual units.

OGC STAFF COMMENT

Current policy on whether or not to require various types of

insurance coverage is probably somewhat unrealistic, i.e., the

mandatory requirements do not represent adequate coverage.

Especially when an association owns infrastructure and provides

public services, or when it operates risk-intensive amenities,

there is a strong argument to be made for liability coverage.

The heavy cost of most insurance, however, cannot be ignored.

Perhaps more than in any other matter covered by these

recommendations there is a need for flexibility, based on project

size and complexity. OGC staff believes that HUD should urge

associations to consider the adequacy of their insurance

protection and should underscore the considerable risks attendant

upon the operation of common property interest regimes. We are

not persuaded, however, that HUD should mandate a broad expansion

of insurance requirements for homeowner and condominium

associations at the present time.

12\. Quorums.

CURRENT REQUIREMENTS

Condominiums: A simple majority of 51% of owners present or

voting by proxy constitutes a quorum.

PUDs: 10% of those members entitled to vote from each class

of voters present or voting by proxy constitutes a quorum, except

that for a vote on assessments, 60% of the franchised members

present or voting by proxy is needed.

AUTHORITY

Condominiums: Handbook 4265.1, Appendix 11 (Plan of Apartment

Ownership), Article II, § 3.

PUDs: Form 1400, Bylaws, Art. III, § 4; for assessment votes,

Declaration, Art, IV, § 5.

ISSUES

There was considerable discussion within the working group

about the difficulty of realizing quorums, especially in larger

associations. Even for critical decisions, it is a major effort

to turn out a sufficient number of voters, using absentee

ballots, proxies and every manner of device for simplifying the

voting process.

RECOMMENDATIONS

Where the members number 250 or less, a quorum should be

comprised of at least 20%; over 250 members, 10% should suffice

to assure that a small number of members does not gain control of

the vote on a given issue. Where there are different voting

classes, the quorum requirement ought not extend to each class

unless the vote uniquely affects one or more classes.

13\. HUD/FHA and VA approval of document changes.

CURRENT REQUIREMENTS

Condominiums: HUD, VA and lienholders are entitled to be

advised of any document changes, provided they request the

information in writing.

PUDs: HUD and VA have a veto power over changes to documents

during the period of developer control.

AUTHORITY

Condominiums: Appendix 24, µ 9(a).

PUDs: Form 1400, Declaration, Art. VI, § 5.

ISSUES

Developer and association representatives urged that there was no

longer a need for continued monitoring and regulation by HUD/FHA

and VA, especially since neither Department is able to oversee

the operations of all regimes within their respective

jurisdictions.

RECOMMENDATIONS

The veto power for PUD document changes should be curtailed and

the range of subject matter over which the power may be exercised

should be reduced. A similar veto should be provided for

condominium document changes. A list of those types of changes

that would still require HUD and VA involvement is set forth in

the working group\'s draft materials.

Appendix

APPENDIX

What are the differences between condominiums and PUDs of

the 1970s compared with those of today and why is it important to

reconsider the policies of HUD/FHA and the other agencies? Part

of the answer lies in changes in land law, lending practices and

residential lifestyles in recent decades, and changes in the

roles that condominiums and PUDs have come to play in meeting

community housing needs.

Condominiums. Condominiums have become a popular form of

property ownership in many parts of the country and condominium

regimes are now regulated by statute in all jurisdictions,

although the level and effectiveness of regulation differs widely

from state to state. Condominiums also represent a growing part

of FHA business that sparked when Congress lifted its original

limitation of section 234(c) to units only in projects financed

by an FHA-insured blanket mortgage\--in 1978 for existing

condominiums and in 1983 for new condominiums. The concept that

a blanket mortgage with its accompanying requirements for project

structure and governance is an assurance of project quality has

become outdated. As condominium development has spread outward

from more urbanized, higher land cost centers, highrise

configurations have become less dominant. More and more, we are

seeing condominium projects comprised of townhouse units,

detached structures and manufactured housing units. None of

these have relevance to multifamily construction standards.

The operation and management of condominium projects also

seem to be undergoing a change. Residents are often cavalier

about voting on association issues and many times seem

indifferent to the operation of their projects. It is quite

difficult to assemble quorums for annual meetings, especially in

larger condominiums. Yet members seem to be increasingly

strident about those few issues which provoke their interest

(disputes over some associations\' refusal to disclose salaries

are a current example). It no longer appears appropriate for HUD

to maintain the previous level of protective overview on behalf

of residents who choose not to exercise the rights provided them,

except to the limited extent necessary for protecting its

financial interests. The Department need not abandon completely

an oversight role for homeowner concerns\--section 234(c) of the

NHA provides for it\--but as the concept of condominiums has

matured, that role has become less important.

This issue over monitoring condominiums where FHA has

already insured unit mortgages is related to the question of how

much review HUD should undertake for an existing successful

project when faced with a first-time application for insurance.

There is no party such as the developer who has a financial

interest in a large number of units and is therefore motivated to

press for membership approval of changes in the event the

association documents do not conform to FHA requirements. In

this situation, Section 234 insurance is an option only if HUD

waives its requirements\--a less than ideal solution.

Over time there have been an increasing number of

condominium projects that for one reason or another might not

have been intended originally for FHA financing but which could

now benefit from eligibility for such financing. The working

committee considered the matter of applying agency requirements

to existing operating projects and decided that the agencies must

resolve it individually. For example, FNMA considers that

virtually no review is needed for existing projects. HUD, on the

other hand, has not adopted a lesser degree of review, and

continues to rely on the project approval process as the means to

scrutinize an existing project in certain key respects such as

the priority of the purchase money lien over assessment liens and

the association\'s ability to adopt and enforce rules that are

potentially discriminatory.

PUDs. Planned unit developments have also evolved and

expanded in the past several decades. Typically more up-scale

than condominiums, PUDs are less often a means of reducing costs

and providing entry level housing than of affording amenities

while relieving the homeowner of responsibility for most of the

property\'s maintenance. They tend, also, to \"stabilize\" a

neighborhood by controlling growth and property maintenance, the

latter through architectural controls and managed upkeep.

PUDs were not always so up-scale (nor are they in all cases

today, of course). Developed in the 1960s, largely under the

auspices of FHA and the Urban Land Institute, as an alternative

to traditional zoning and land use restrictions, PUDs were

designed to reduce building costs by simplifying construction and

increasing density (with the consent of local authorities).

However, over time, these developments have acquired another

attribute taking them in a new direction. Because the common

area that often contains the project infrastructure is owned and

operated by a homeowners association, these self-administering

residential subcommunities have become a popular surrogate for

more traditional forms of local government. Some city and county

leaders, pressed by fiscal and social problems, willingly

abdicate to PUD associations the responsibility for operating and

controlling their projects.

A PUD, then, can be either quite minimal or quite complex \--

in the latter case resembling towns more than subdivisions.

Large regimes may include within their common property roads,

water and sewer systems, cable television operations, fire

departments, power companies, health care facilities and

supplementary private law enforcement installations. Some or all

of the responsibility for staffing and operating this diverse

property may fall upon the association. When recreational

amenities are provided, the tennis courts, swimming pools , golf

courses and walking and riding trails cause added problems of

liability and maintenance costs for associations. With

increasing frequency, we see PUDs combined with other uses \-- a

single PUD may include a condominium regime, a cooperative

association, rental housing and office and retail commercial use.

Often there is an umbrella association to administer the various

sub-associations, especially if the project is phased. All these

considerations raise problems of cost allocation and the

equitable distribution of voting power among different classes of

owners and tenants \-- matters not envisioned when HUD\'s Form 1400

documents were last revised.