Why would we want to promote more HOAs with a tax break?

A new proposal in Congress would allow members of a HOA to deduct their association fees from their federal taxes:

Upward of 67 million people live in these communities — ranging from sprawling master-planned subdivisions down to individual condominium or cooperative developments. As of 2014, they contained nearly 27 million housing units. Their homeowners associations often provide the functional equivalents of municipal and county services, and residents nationwide pay roughly $70 billion a year in regular assessments to fund road paving and maintenance, snow removal, trash collection, storm water management, maintenance of recreational and park facilities, and much more.

The same residents also pay local property taxes to municipal, county or state governments. But unlike other homeowners, only their local property tax levies are deductible on federal tax filings. Their community association assessments that pay for government-type services are not.

Now a bipartisan group of congressional representatives thinks that’s inequitable and needs to be corrected. Under a new bill known as the HOME Act (H.R. 4696), millions of people who live in communities run by associations would get the right to deduct up to $5,000 a year of assessments on federal tax filings, with some important limitations…

The bill’s primary author is Rep. Anna G. Eshoo, D-Calif. Co-sponsors include Reps. Mike Thompson, D-Calif., and Barbara Comstock, R-Va.. Though the bill has little chance of moving through the House or Senate during this election year, it sends a message to the legislative committees now working on possible tax code changes for next year: Congress needs to acknowledge the role the country’s community associations play in providing municipal-type services. The way to do it is to allow deductions on a capped amount of the money residents are required to pay to support community services.

It will be fascinating to see what sort of formula is used to calculate these deductions as the fees paid to associations do not cover all sorts of municipal services used outside of the association.

At the same time, won’t this promote more HOAs, or at least make them more attractive? And do we really want more? They certainly are popular but they continue a trend that is not necessarily good for society: privatizing municipal goods and helping neighbors guarantee their property values. For the first, instead of paying a municipal government, a new layer of private government is enabled to take care of certain services. Americans tend not to like more and more layers of fees and government. However, this might be outweighed by the second factor: the HOAs help keep the neighbors in line without owners directly having to interact with other neighbors. Instead of possibly having to live next to the neighbor who paints their house purple and starts a garden in the front yard, the HOA polices this. In other words, this tax break might help more and more Americans work out civic life through private associations that they see as a necessary evil.

Given all of the HOAs, is there any analysis that shows they pay off financially in the long run either for the property owners or the municipalities?

Time of year for HOAs to crack down on holiday decorations

As Halloween decorations emerge, homeowner’s associations are back to patrolling displays. See this example in Naperville:

After neighbors complained to the Ashbury Homeowners Association board about the traffic and noise created by the celebrated house decorations, the group installed rules that thwarted Thomas’ plans.

“I am disappointed,” said Thomas, who has lived in the 1100 block of Conan Doyle Road in south Naperville for 21 years and has decorated his house for the past 18 years. “For a lot of people, the house has become a tradition and it is something people look forward to.”

Thomas’ display has grown over the years, and now includes over 2,000 pieces with lights and synchronized music. Visitors to the cul-de-sac have also grown — he estimates about 8,000 people visited last year alone — which is why neighbors raised concerns about traffic and safety with the Ashbury Homeowners Association board.

The board notified neighbors via its October newsletter that a “Holiday Decorations Rule” was voted on and passed at its Sept. 21 board meeting. The rule limits a person’s decorations to 50 percent of the yard, excluding lights, and restricts the display to 30 days before and after the holiday.

I can see both sides to this story. The homeowner may be asking why the association is now instituting these rules. He has had displays for years; why now? The HOA might say that the displays keep growing and attracting thousands of people disrupts the neighborhood. On the other side, suburban residents tend to prefer quiet streets and neighbors that don’t draw negative attention to themselves (even if they are raising some money for charity). The owner could respond that these are just temporary decorations. The final guidelines may be reasonable: a homeowner could still do a lot with 50 percent of their yard and thirty days before and after provides around 60 days for the displays.

To avoid issues such as these, wouldn’t homeowners associations be better off having such guidelines on their books from the beginning or before such situations arise where single owners feel like they are being singled out? Associations are often pilloried for having silly rules on their books but they can help cut off situations such as these.

Statistics from the first “Community Association Fact Book”

Many Americans live in community associations and a new book discusses the broad patterns:

A new body of research, the “Community Association Fact Book,” tallies the numbers of associations, housing units, residents and property values for the country and each state. It was published by the Community Association Research Foundation, the research arm of the trade group Community Associations Institute in Falls Church, Va…

According to the study, 24 percent of American homes are in an association. Nationally, the number of associations increased to 328,500 in 2013 from 10,000 in 1970, the first year the foundation began keeping track. During that time, the number of housing units grew to 26.3 million from 701,000, as did the number of unit inhabitants to 65.7 million from 2.1 million. They pay about $65 billion annually assessments.

As for state data, Illinois has 17,900 associations, the fourth-highest after Florida, California and Texas.

The states with the fewest associations, less than 1,000 each, are Alaska, Arkansas, Mississippi, North and South Dakota, West Virginia and Wyoming.

That’s roughly 20% of Americans living within an association that provides oversight. Of course, these associations are often intended to protect homeowners from their neighbors within the community and outside of it. At the same time, it can lead to new sorts of issues in how to govern these associations, such as collecting and spending money in an association and operating as a board. The Chicago Tribune carries a weekly column featuring questions about associations and it often seems fairly complicated with neighbors disagreeing in a formalized setting.

There has to be an interesting story behind the disparities in the number of associations between states. It may have to do with laws in particular states that make it easier or harder to form an association. But, it all may be influenced by other factors like an urban/rural split (the states with the least number of associations are more rural) and cultural patterns (what do people think about neighborhoods, how important is protecting property values, etc.).

Revisiting “Privatopia”

One of the key texts in the last 20 or so years regarding gated communities and homeowners associations was Privatopia, published in 1994. With a recent book, Beyond Privatopia: Rethinking Residential Private Government, the same author updates his thoughts and talks about the financial viability of homeowner’s associations:

A: The (housing) boom is clearly over, and right now few of these associations are being created. The problem shifts to sustaining the ones we have. What was sustaining them was an endless rise in housing prices. People could always sell at a profit, and the association would get its money. Now we have foreclosures and people not paying their assessments for six months or a year, and associations aren’t getting their assessments. The banks in foreclosures don’t want to pay overdue assessments…

It’s presumed that monthly assessments will cover operating expenses, which can include things like trash collection, pool maintenance, even resurfacing the streets. But studies that have been done show they probably don’t have enough money in reserve. At least a third of them … don’t have half of what they should have. After the housing collapse and the foreclosures, it’s probably more like half don’t have enough. Many of them are having to go to the bank and get a loan, but if you have a high delinquency rate, you can’t get a loan…

Q: Do you have any numbers on how many such associations are in dire financial straits?

A: No, and that’s a problem. I’m starting a six-month sabbatical now to work on exactly that. Everything I get is anecdotal, and I want to get a quantitative handle on how bad the problem is.

If many local governments are having budget problems, it is a surprise that many homeowners associations are facing similar troubles? I would imagine that the locations with more associations in financial trouble would mirror locations with more foreclosures and the most depressed housing prices. I wonder how many people within these associations are aware of these troubles. Actually, I wonder how many residents pay much attention at all to what their associations are doing.

Ultimately, perhaps this will all end up in the courts as associations and lenders who own foreclosures battle over assessments.

Suburban treehouse illustrates typical NIMBY debates

A man in Arlington Heights, Illinois built a fairly large treehouse in his backyard: “It has a wraparound deck, two levels, small windows, siding and roofing that mimics the family home’s.” It drew the attention of several neighbors who then complained to the village who subsequently passed new regulations for treehouses. However, since this treehouse was built before the new regulations, it can stay put.

This could just be a local issue except that the pattern of events fits many NIMBY discussions in suburban communities. Here are some of the comments made by people involved in the story:

Village Manager Bill Dixon said treehouses have not been a major issue in town and urged the village board not to overreact to one particular case, no matter how bad.

“There are 18,000 single-family homes in town, but this is the only one we’re hearing about,” he said.

But Trustee Thomas Glasgow, who lives in the neighborhood, said the treehouse is overwhelming. He believes property values in the area have diminished as a result.

At Glasgow’s recommendation, the board agreed to limit the structures to the height of the home on the property.

Mayor Arlene Mulder expressed concern, however, that the code could effectively ban treehouses for some properties.

But Trustee Joseph Farwell said: “Sometimes, you can’t build exactly what you want where you want it because you live in a community.”…

But Piotrowski [one of the neighbors], who spoke at a recent village board meeting, said the new rules don’t go far enough. He wants to see the houses banned all together because he believes they are not safe.

For his part, Belmonte said the whole conflict could have been avoided if Piotrowski had raised his concerns right from the start.

In one story, you have many of the elements of a typical NIMBY issue: a person does something with their property that some neighbors do not like. These neighbors argue the action reduces property values and raises safety concerns. The community ends up creating new regulations to avoid such issues in the future while knowing that they may be limiting people from doing similar things. The property owner says that if the neighbors had simply come to him first, none of the rest of this had to happen.

The key quote to me comes from one of the village trustees: “Sometimes, you can’t build exactly what you want where you want it because you live in a community.” This is true – communities have all sorts of regulations and zoning in place to help limit some of these issues. And much of this has been codified even further in homeowners associations that really limit some of the possible actions by individual owners. Homeowners submit to these regulations because they don’t want to have to worry about what their neighbors might do and to protect their all important housing values. But the enduring question from this story and other similar cases is this: where does a community draw the line between the rights of individual property owners and the interests of neighbors and the rest of the community? At least in Arlington Heights, future treehouse builders will be more limited in what they construct in order to balance these two competing interests.

Homeowners’ associations and flying flags

An Arizona man is fighting his homeowners’ association over flying a “Don’t Tread On Me Flag.” While this may appear to be a political situation, it is a broader issue: there have been numerous battles over the years between residents and homeowners’ associations over things like flying flags.

On one hand, homeowners’ associations are trying to maintain a certain image in the neighborhood. On the other hand, their rules are extensive and can often appear heavy-handed. However, this Arizona man and many others have a few options that would limit situations like these: don’t move into neighborhoods with such associations (and they are quite common) and know what the restrictions are before purchasing or become involved with the local association and change the rules. As in this situation, two American desires are in conflict: the desire to maintain some local control (and perhaps boost property values) and the desire to be individuals who can express themselves.

Overall, homeowners’ associations are common today in America. According to the Community Associations Institute, there are over 305,000 “association-governed communities” with over 60 million residents.