The foundation of any properly run condo association or co-op building rests on residents paying their monthly maintenance fees on time and in full, with no delays or delinquencies. However, thanks to the lingering effects of the recession causing job losses and financial uncertainty—especially here in the Chicagoland area—many buildings and associations are feeling the pinch of late and/or missing maintenance payments. Many owners are also unable to cover the cost of special assessments to fund much-needed capital repair and improvement projects.
Hard Times vs. Hardball
Most real estate industry pros have seen the effect that non-payment and arrears have on buildings and HOAs, and say that it’s a problem that has surged in some buildings in recent years, for an array of reasons.
According to Tom Skweres, regional vice president of ACM Community Management in Downers Grove, the reasons for non-payment vary. “It can be because of financial hardship. They've lost their job, or have other expenses that have come up—but it’s mostly employment.”
Residents going into arrears deliberately is another issue that can make for serious administrative and budgeting headaches for boards, says Jeffrey Cagan, president and CEO of Chicago-based Cagan Management. In these cases, “It doesn’t have anything to do with financial hardship—it’s because they're angry with a board member about something.” Fortunately, says Cagan, “It doesn’t happen a lot. We manage what I consider established condominiums and co-ops, so we don’t find that as a big problem. Conversions with a lot of renters in the building can be different, but when it’s owner-occupied, we don’t find a big issue with it.”
When to Act
Regardless of the reason for an owner's arrears, says Skweres, “The budget still has to be met—and the unit owners in good standing have to bear the expense of the unit owners who are not paying. Hopefully they would collect the money back, but in the short term everybody bears that burden.” Multiple and ongoing arrearages can have a trickle-down effect across an entire association, limiting the funds the community has available for both regular maintenance work and important capital projects.
Acting quickly, and putting that action in writing is key, says real estate attorney James A. Erwin, founding partner of the law firm of Erwin & Associates LLC in Chicago. “Too often, boards wait too long before taking action. Board members have a fiduciary obligation to manage the fiscal health of the association. We typically counsel boards to send a first notice promptly after the first month of delinquency and to then initiate formal action (via a 30 day notice) after a second month of delinquency. Waiting any longer does not generally benefit the association.”
Cagan agrees. “The quicker you move, the quicker you get a result. As far as grace periods go, it’s up to the board.” The typical grace period written into most governing documents is 30 days, says Skweres. The typical grace period before incurring late charges is 15 days.
The time a board or association will wait before initiating collection procedures will vary, depending on what is written into the community's bylaws. There are also restrictions as to what can be charged with respect to state and federal laws.
According to the pros, initiating a lien on the unit, then either trying to go to small claims court for judgment, or forcing a lender to start a foreclosure action is normally the typical course of action. If the unit is rented to a third party, the association can try appointing a receiver to get rent paid directly to the association. If not, forcing the bank to start a foreclosure may be their only option. Doing so is extremely expensive, running into the tens of thousands of dollars—but if a resident is paying his or her mortgage and not the monthly condo charges, then commencing legal proceedings is the board’s strongest way to bring the matter to a head, once all other efforts have been exhausted.
The Role to Play
While the management of co-ops and condos is their niche, in recent years management companies have also had to become experts in the field of debt collections. Many boards and residents don’t recognize that debt collection is a whole separate business and expertise, and one that is secondary to most property management companies. Similarly, a community's accountant or financial advisor is also largely uninvolved in collecting arrears. It's the association's legal counsel who is crucial in pursuing proper collection and/or foreclosure.
Experts say that an accountant doesn’t become a key player in any collections action and most often it will be the property manager, who the board will be relying on for advice, and guidance, with respect to collection matters. Once the legal team gets involved, they will report to the property manager on the status of the legal proceedings.
A Helping Hand
If a resident is open and proactive in communicating with their board about a temporary financial hardship from the beginning, a board may agree to make a move that is both a business decision and shows that they are good neighbors, giving the resident a payment plan that keeps the association solvent and eases the pressure on the individual as well. “I would think a payment plan that lasts six months is the most prudent for a board to take,” says Skweres. “Obviously, the board realizes that these are neighbors they're dealing with, so in most cases they are willing to work out a six month payment plan.”
Whatever terms the board and owner agree to, “It just needs to be documented properly,” says one attorney. “It’s in the board's interest business-wise because taking the next steps for collection requires a lot of time, money and effort, which you may not get back. Also, it’s in your best interest as a neighbor, because you are buying goodwill.”
Others feel that payment plans or other easements are just bad business, plain and simple, and discourage boards from adopting such measures. “While granting a grace period to owners who have encountered financial hardships may seem like the moral or empathetic way to respond to assessment delinquencies,” says Erwin, “the board represents the interests of the association and, as such, must enforce assessment collection against all owners alike. Owners who do not have the financial resources to maintain their accounts current need to consider other alternatives, whether those be selling the unit, renting it out, borrowing funds or other means of resolving the debt.”
“In other instances,” Erwin continues, “particularly with smaller associations, as an offset against an owner's delinquency, a board will allow a delinquent owner the opportunity to perform maintenance work or other tasks for the association that would otherwise cost the association money. This can work but—again—it's not typically a recommended solution because of the formalities and cost that must be undertaken (a contract must be drawn up and approved by the board, etc.) and the risky precedent that could be established and challenged by future owners who want to enjoy this same benefit.”
On the administrative side, in order to staunch the outflow of cash and lack of inflow, Skweres says, “Boards can put a lien on the property, and then evict the owner and take possession of the unit, renting it out until the delinquency is satisfied. At that point, they would turn it back over to the unit owner.”
Keeping it Fair
The Fair Debt Collection Practices Act applies at the beginning of a proceeding and requires advanced noticed of 30 days. Collecting a past-due assessment requires sensitivity, and it’s important that the association does not violate the owner’s rights. The FDCPA requires that when the association writes to an owner to collect late assessments, it must state that the letter is an attempt to collect a debt, any information the debtor gives will be used to collect the debt, the amount of the debt that has accrued and the name of the association, and that the owner has 30 days to dispute the debt’s validity in writing. If a debt collector violates the act, the FDCPA says he or she may be liable for damages to the debtor, such as emotional distress or slander.
According to Erwin, “In Illinois, associations operating under either the Illinois Condominium Property Act or the Illinois Common Interest Community Act have a statutory lien for delinquent assessments. To enforce recovery, condominium associations should start by sending the owner a 30 day notice of the arrearage and intent to institute legal action pursuant to the Forcible Detainer Act. That action allows the association to sue to evict the owner and to take possession (not ownership) of the unit and then rent it out to recover delinquent assessments. A common interest community association may also initiate an action under the Forcible Detainer Act, but only if its governing documents expressly permit such action. Otherwise, those associations are limited to foreclosing their lien, which is costly and time consuming, or initiating a breach of contract claim, which may not be efficient if the owner is uncollectible.”
Fortunately, the days of rampant arrears may be on the wane. “It’s obviously a problem if someone can’t pay their costs,” says Cagan, “and that was an issue four or five years ago, when a lot of buildings were being converted and a lot of buildings were struggling—but we don’t see that too much today.”
If your building is among those still struggling to collect delinquent common charges however, you are faced with essentially three choices: Enter into a payment plan with the defaulting owner, sue for money damages, or foreclose. Whichever method is chosen, it’s important to do it in a timely, formal manner to maximize the recovered funds and minimize the impact on residents in good standing.
Keith Loria is a freelance writer and a frequent contributor to The Chicagoland Cooperator. Associate Editor Hannah Fons and staff writer Christy Smith-Sloman contributed to this article.