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.

When Condos Go Bankrupt and Beyond

What happens when condominium towers go bankrupt? It's a looming question being asked by homeowners, investors and even many property management professionals. The primary forms of resolution for failing condominiums are bankruptcy and receivership which can be used separately or in combination. Thanks to recent court decisions, there is even a Blanket Receivership which is sweeping through condominium associations statewide to mitigate losses. There are different ramifications for developer controlled homeowner associations as opposed to associations in control of the individual members. Ultimately, the goal of the workout process is to return the association to its members, while ensuring that all of the creditors are paid, vital services are available and regular maintenance is performed or brought current.

Bankruptcy is a federal court filing in which a person requests protection from creditors and can be used to restructure agreements such as leases, loans and settle accrued payment obligations. Recently, the Maison Grande condominium's bankruptcy placed 500 beachfront apartments in Miami Beach, under the court's protection from their creditors legal actions. The association's 30% delinquency rate caused a downward spiral into bankruptcy. Unit owners were suffering from a long term obligation initiated by the developer over 30 years prior, which over the course of time damaged the association's finances until there was little other recourse to avoid a their creditor's receivership action.

Thus far, condo bankruptcy has mostly come in the form of Chapter 11 reorganization, however it remains to be seen if a Chapter 7 filing for liquidation will result from these court actions from established condos. The Maison Grande's Chapter 11 bankruptcy filing, and it is likely that the association will rid itself of their crushing liabilities. The Debtor-in-Possession (DIP) financing provisions of Chapter 11, will allow the condominium borrow new money for the purposes of continuing to function normally while in bankruptcy. They will use the filing to obtain a court order to service providers such as utilities and managers to honor agreements and collect payments on a deferred basis.

Receivership is a court mandated appointment of a 3rd party management company to pursue collections, rent condominium property and pay the bills. There are many circumstances when a receiver can be appointed to collect rents from tenants payable to parties who are not the owner of record on title. In the above example, a creditor was threatening an entire condominium with a receivership action to collect an outstanding debt from a struggling association. In mortgage loans where the condo property is purchased as investment, Fannie Mae's standard mortgage documents have a Rider or add-on which gives mortgage holders the right to place these investment properties into receivership and begin collecting rents prior to the completion of a foreclosure activity.

Condominiums can use Florida Statute 718 to open receivership to collect rents for units in foreclosure, which in itself is nothing new. When it comes to the condo receivership the real news is the Blanket Receivership. In the past, associations had to open a separate receivership for each property in distress. The legal fees and expenses of individual receivership were simply too burdensome to make it a worthwhile action. Enterprising condo litigants obtained judicial permission to establish a Single receivership action for all delinquent units in any given association. The recent 3rd District Court of appeals decision, where a developer who fell into HOA foreclosure challenged the blanked receivership and lost has had the effect of affirming the Blanket Receivership as the preeminent new tool in the arsenal of condo lawyers statewide.

There's a high rise, waterfront condo on South Beach, which shall remain nameless, whose developers went bankrupt twice. After much trepidation, the bankruptcy trustee only completed the sales process last month with the project having been since turned over to the unit owners several years ago. The risks of buying bankrupt condominium units are starkly illustrated by the difficulties this condo had in continuing operations, as well as the emptiness of the building since the building now had an expected cost; the bankruptcy attorneys and trustee. In addition to the weight of court costs, the developer's budget was underfunded, just as the developer, which led to a rapid spike in condo assessments. Many developers attempt to have a reduced initial budget because of the way that condo law gives developers incentive to have the lowest budgets possible.

This South Beach condo was one of the first condominiums to file a blanket receivership action. However, the building, through shrewd management by its Board and its management company, has managed to continue as a going concern, lower the monthly budget, improve and remodel the building and take a leading role in foreclosing against non-paying unit owners. According to a recent search of the MLX by Condo Vultures Realty and public records, the last sales closed in August of 2009 for $240 per square foot; this closeout is happening more than 8 years after construction began and 4 years after end sales started. This closure has come at an exacting price, as it took more than eight years after the Notice of Commencement and four years after the bankruptcy to get the building sold out and stabilized. It's important to note that the bankruptcy sales for this South Beach high rise came at the very robust top of the market, when there was no excess condo inventory.

When condominium towers go bankrupt, there are negative consequences for nearly all interest holders, but the balance of the law is actually in favor of preservation of the improvements for use of the occupants over the interests of equity holders, debt holders and creditors. Florida's condominium laws are easily amongst the most advanced of shared ownership in our country today and are showing that with strong remedies and flexible application, that it is possible to work out many situations where a condominium is unable to pay its bills.

Alternatively, there do exist, written into each condominium, provisions for termination of the subdivision agreement and these workout processes can be adapted to facilitate a Condominium Termination process as well. When looking to invest into a distressed condominium, knowing the potential pitfalls can help investors mitigate risk factors. Best practices include insuring the income streams through the use of landlord's insurance policies with rent loss coverage and maintaining capital reserves against potential rises in operating costs associated with owning distressed condominium property.