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.

Why are Condos stuck in the mud?

Yes, I said it, our condominium housing stock in Florida is stuck in quicksand! While the sinking feeling is lightening up, most of the market is stuck at the bottom of the bust cycle where units are difficult to sell or finance and associations are struggling to afford basic services and there's no end in sight. The main reason why condos are stuck in downward spirals is lien-holder and bank resistance to realizing losses. The micro-workout policies promoted by banks will prolong the pain indefinitely at current rates of progress, which may have been acceptable 20 years ago, but now threaten to sink any recovery's long term prospects. The lack of mortgage money is intensifying the pain by wrecking valuations across the board. Furthermore, these types of events create recognized paradoxes. Ultimately, removing some of the current condominiums - the uninsured, poorly managed, or flat out falling apart projects - must be effected to restore equilibrium to the greater market as a whole.

Banks are attempting to spread their losses over many years rather than realizing them immediately, which is only causing broader losses as the market flags and more loans in neighboring associations slide away as foreclosures slowly sap the value from entire communities. Banks want to avoid paying monthly maintenance and reserves - as well as the state's new mandate for condo contents insurance - landlord's insurance, management fees, repairs, etc. Many lenders are negotiating each loan individually based on borrower's income and solely looking to modify the terms rather than take write downs on principal balances - which is just another creative way to kick the can down the road and avoid realizing losses that are inevitable.

Without new mortgage money available, condominiums are dropping to all cash pricing throughout Florida. Condo valuations have been destroyed in the far more prevalent garden style apartments well beyond the depreciation seen in new construction high rise buildings. The current method of banks dealing with the issues is a recipe for endless distress. For many projects this could mean a decade of distress and low prices while lenders work things out in court, one unit at a time, project by project, until 100% of garden style apartments statewide have been turned over.

The condo law that "protects" banks from paying maintenance greater than 6 months condo dues or 1% of the loan amount is now providing a Perverse Incentive to delay foreclosures and losses. In essence, we are seeing play out a known phenomina - The Tragedy of the Commons - which is brought about by the management of a shared resources by a group of individuals all acting in rational self-interest. As individuals gain use from the commons, it is gradually destroyed for all until nothing remains. In many ways, it is a fractal microcosm of our current financial dilemmas.

A real recovery in the Florida market will require condominium stake holders (primarily lien-holding banks at this point) to recognize the destructive result of their self-interested actions and agree to collective solutions within individual projects. Florida's condominium law provides for methods to wind down condominium associations and satisfy stakeholders through the Condominium Termination process.

My company - The Condo Terminators - intends to evoke a culling of the herd. The market recovery will accelerate by providing benefits to all parties. For local governments there will be improvements to local tax bases and unjamming of our courthouses. For residents, better housing stock available for renters and a way out for thousands of homeowners who are paying loans that amount to debt slavery and cannot afford legal representation or have no hope of reducing balances without short payoff. For lenders, realizing savings through quicker, cheaper - most importantly - non-judicial resolutions which don't require direct investment for repairs or interim expenses or payment of ongoing assessments prior to sale of mortgaged property.