Friday, October 23, 2009

Condo board tries new tactic to collect delinquent fees

As published in the Miami Herald yesterday, Oct. 22nd the article Condo board tries new tactic to collect delinquent fees by Monica Hatcher points out one of the latest "bleeding edge" tactics that condominium associations are using to try and collect enough dues to survive this crisis.   
The focus of Ms. Hatcher's article, the Jade Brickell Condo has been a poster child of the boom for many years.  These strong-arm tactics are turning Condo Associations into realty investors in a last ditch effort to stave off bankruptcy, receivership of the association or wholesale degradation of property improvements.   

Ironically, the new judicial decrees are allowing condominiums to do to delinquent owners what banks are being punished for doing to delinquent owners - to enforce court remedies on real property while avoiding due process in court.  As if the legal issues weren't difficult enough, there are State Sales Tax implications to weigh when Condo Associations become landlords.   

This leads me to imagine that perhaps condominiums should reserve a certain percentage of their units solely for rental purposes to benefit the association as a regular practice.  Ultimately, some associations will be declared unfit and terminated as a result of the success or failure of today's Hail Mary legal tactics.

Condominium associations are a not for profit entity created to maintain, operate and own common areas in shared living communities like apartment and town house developments.   They are not truly intended to be landlords, nor are they investors, nor are they designed to evaluate the market transactions that they facilitate.   If associations are unable to pay the bills, they may wind up taken over by their creditors in receivership - or forced to file bankruptcy to forestall the complete loss of control over the property by its owners.   Perhaps its time to re-evaluate this not-for-profit as standard practice in the hopes of making condominium associations more intelligent creatures.  

The real irony is that courts are allowing condominiums to do what banks may not - gain benefit from legal action through unorthodox tactics.  The goal of these blanket receiverships are to give income to the HOA while saving the costs associated with filing individual foreclosures on all units.  Meanwhile, banks are filing foreclosure, and in many instances, instructing their legal council to refrain from pursuing repossession actions further in hopes of avoiding monthly assessment payments.  Banks are avoiding full repossession, where they have to pay for contents insurance (known as the HO-6 contents policy), property management fees, bookkeeping fees and - in many cases - costs to rehabilitate foreclosed property.   Banks are attempting to raise the cost basis of their bad loans by racking up large default interest bills which will never be paid, so when they eventually satisfy their mortgages with short sales, they can reap  

Some condominium law firms have argued - successfully at times - that these delay tactics are not equitable in the eyes of the law and obtained court orders for banks to begin paying pre-foreclosure monthly assessments on property which they do not own in fact.    In this circumstance, the bank gets stuck with the continuing assessments while the association then attempts to place the rental income into receivership to satisfy as close to 100% of dues outstanding as possible.  

Condominium associations may not be prepared for the tax implications of becoming a landlord. "Remember that leases with less than 6 months duration are subject to Florida sales tax, which associations may not be presently collecting," said Steven Price, a CPA with the local firm Goldstein, Schecter & Koch.  Associations should carefully review their leasing policies to ensure that they are registered with the Florida Department of Revenue if they are conducting short term leasing or face a tax levy in the future. 

Perhaps condo associations should be directed to spawn their own subsidiary, for-profit investment companies to buy up and lease out a reasonable percentage of their units as a matter of normal business.  An association owned, for-profit venture could provide an income for maintaining the property through good and bad times, Strict limits on leverage would have to be maintained for these controlled entities. However, in good times, this type of arrangement could be suitable to lower the monthly maintenance assessments and build replacement reserves for condo buildings. This practice could provide a safer, lower cost source of leverage in lieu of Special Assessments - by allowing banks to mortgage a small percentage of the property directly, rather than encumbering the entire association, which could then be reserved for emergency settings only.

The radical legal tactics and creative decisions issued by local judges can act as a band-aid for many struggling associations in Florida.  However, it only takes 1 successful challenge by a unit owner to unwind the judge's order.  The stakes in the event of a successful challenge could be high, a struggling association having to repay rents collected as well as the possibility that they may have to pay attorney's fees to the challenger.  If an association is challenged before something like this worst case scenario, it will be wiped out afterwards.  Unless there's an obvious benefit to these radical tactics, or the property's distress is largely past, we suggest evaluating Condominium Termination as an alternative to dubious practices.

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