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August 2010

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2010 FloridaCommonities olEocellence

Conference and~norrls Ceremnrn

Communities ofExccllence/inancia/pane/istsclefi to iiçrht,): Jeremi’ I-Jo//ic, CrlF Libbin, David ,1 In/Icr,

and ken iii, old, anti moderator lJn,:l, Shank/in.

ur.ue tlnci a . op’rtyValuesDifferent Strokes to Stay Afloat

by Kathy Danforth

F or many community associations, “these tough economic times”is not just a wearisome expression but a painful and frustratingreality. The combination of decreased income and lower property

values has left both resident owners and investors without the funds formortgage payments and maintenance fees. Consequently, associationmanagement is contending with the same obligations to properly maintain their property, but with delayed or vanishing revenues.

“Every dollar is important to a non-profit organization,” Ken Arnold,CEO of Association Financial Services, points out. “If any association haspast due account receivables, it’s affecting the association in more waysthan they may have even thought about. There’s the dollar cost for every

14 ~og2O1O REAd

good-paying owner who issubsidizing the non-payingowners. There’s the reductionof services and quality of lifefor the good-paying owners,as well as the time spent discussing the issue. There canbe a reduction in home valuebecause they are no longerqualified for FHA loans or thecommunity looks unkempt. Itmay cost the association evenmore money in late fees tovendors if they can no longerpay association bifis on time.”

Marc Berenfeld, CPA partner with Berenfeld SpritzerShechter & Sheer LLC, notesanother problem that is surfacing: “Lending institutions arenow requiring associationreserves to be in good standing before they wifi approvea mortgage to a prospectiveowner. Many associations,in an effort to reduce or keepmaintenance fees low, eithercompletely waive or only partially fund reserves. Somebanks have even requestedassociations to provide proofthat reserves are being fundedbefore approving an owner’smortgage. If an associationloses a prospective new owner,it has lost an opportunity topossibly replace an ownerwho does not pay fees withone who does.”

The economic challengesalso have a dampening effecton recruiting board memberswilling to put in the time andeffort to solve a community’sdilemma. Though FloridaStatute Section 718.112(2) (n)states that directors who are90 days delinquent in the payment of regular assessmentsshall be deemed to have abandoned the office, Marc hasobserved some associationswhere there is no one willingto step onto the board. This

Ken has seen other concerns thatalso can cause boards to run riskycuts in reserves and insurance. “Theythink, ‘If I raise assessments, I’ll bevoted out.’ And it’s a double-edgedsword, since every time you raiseassessments you may cause someone to give up trying to pay. Youcertainly have to be careful—everydollar’s important to everyone.”Back to the Basics

Collecting delinquent feesis the unwelcome arena thatmany communities haveentered on a large-scale basis.“Good, consistent policiesand procedures with regardsto collecting past due fees are

essential,” notes Ken.

leaves a resident who is delinquent in their fees making decisions thatare intended to benefit the whole community.

Matt Kuisle, Florida Director of Client Services with Reserve Advisors, observes the pressure boards face to keep fees low when costsaren’t. “Residents think that the board’s job is to keep the fees low,and no one wants to tell their neighbor that they owe more money.But, the board’s job is to maintain the property, and the fees have to bewhat they have to be. People get in trouble when they’re living somewhere they can’t afford because the fees are artificially lower thanwhat it takes to run the community.”

The first step in dealing with budget shortfalls may be an overalltightening of policies and procedures. Ken notes that for many associations, “The current economic situation really just magnifies issues thatwere there ten years ago.

“One thing that hurts assodations is poor records,” Ken has found. “Inorder to collect any past due assessments, you need to know they owethem. It’s surprising how often records are inadequate, from frequentswitching of property managers to misplacement of historical records orother reasons. There are associations all over the state that are missingout on dollars that are owed to them because of poor record keeping.”

Another issue Ken sees, which has taken on larger significance, isfailure to back up their electronic data. “For many associations, theiraccounts receivable is their largest asset. Since they don’t back the dataup, if they lose it, they could have a substantial asset that is here todayand gone tomorrow.”

Matt comments, “The associations that we see struggling the mostwere the ones that never set an appropriate budget in the good times,so when bad times hit, it created a snowball effect. Though the reservesare the easiest area to underfund, usually it’s not just the reserves thatare lacking. Often they’ve tried for the lowest price on everything andtried to self-manage or skimp on management. It’s better to pay as yougo rather than push the buck on down the road.”

In dealing with non-payment of maintenance fees, Marc explains,“Properly maintained association books and records should be maintained on the accrual basis of accounting. However, this could show amisleading result, in that the financial statements may show positiveresults (due to recording amounts due from owners when assessedrather than when paid), while in reality the association cannot pay allof its bifis when they are due. The challenge is recording an adequateallowance for doubtful accounts, or bad debts, throughout the year.By including a realistic bad debt allowance in an operating budget,maintenance fees are increased and, in effect, the good-paying ownersend up paying more to cover for those who do not pay.”

FLCAJ kig2OlO 15

A bank loan or line of creditmay be an option to covershortfalls in cash. However,Marc indicates, “These loansused to be much easier to get.”Banks are often examining thenumber of owners with delinquent accounts to determinecreditworthiness.

association has used its reservecash to pay operating expenses,the cash balance wifi be muchlower than it should be.”

Another option to cover expenses,when maintenance fees have notbeen adjusted in advance, is aspecial assessment. Once again,the reality of non-paying ownersshould be factored in on the frontend, rather than setting up theneed for yet another special assessment or addition to the future

Matt sees varying approaches to capital projectsto optimize savings for eachassociation. For those withcash available, Matt observes,“Accelerating capital projectscan take advantage of lowerlabor and material costs.People are finding that theunit costs aren’t as high asthey thought they were so theycan do more paving than theyoriginally planned. Labor costsare lower so painting costshave been lower as well. If youpaint earlier than you wereplanning, then the communitylooks in better shape. Peopleare also taking advantage oftechnology to save money—for example, replacing a poolheater with a geothermal system can save on energy costs.”

Other communities may bedeferring planned non-essential capital projects due to thelack of funds. “Interior renovations, carpet replacement, interior painting, and furniturereplacement are some projectsthat are often postponed. A lotof communities are deferringlandscaping projects, but it canhave a detrimental effect onproperty values, so that canbe touchy. It’s a fine line youhave to walk,” Matt says.

The reserve schedule canbe a guide in determining thebest use for the money available. “The reserve schedulehas replacement costs andremaining useful life for everything essential so you knowwhat’s coming up next,” Mattadvises. This can keep associations balanced betweenincreasing curb appeal andhaving the funds for the background fundamentals, like airconditioning, when needed.Going for the Gold (or Green)

Collecting delinquent feesis the unwelcome arena that

Marc has seen, “An association with an operating cash shortagewill sometimes turn to its reserves and begin to plunder them in orderto pay operating expenses. While this is in direct violation of Floridastatutes, associations with little options and cash needs wifi more oftenthan not use reserve cash. Financial statements don’t always tell thestory, but the information is always there. Add up all reserve cashbalances under the assets section of the balance sheet; then add upreserve fund balances on the liabifities and fund balance section of thebalance sheet. Cash balance should always equal fund balance. If an

operating budget. Marc gives the example, “If the association believesthat ten percent of its owners wifi not pay, and the association needs$100,000, it should be increased to $111,000. Each owner is chargedwith a slightly higher amount, but when ten percent of bad debts arerealized, the association wifi stifi have collected the needed $100,000.”Lightening the Load

Cutting expenses can be the simplest way to stretch the remainingdollars, but associations do need to keep in mind any mid- to long-term results beyond just today’s bifis. Renegotiating contracts or putting them out to bid may result in lower prices for the same service.Other services may be eliminated or reduced. Marc relates, “We haveseen 24-hour security reduced from three shifts per day to two, eliminating the overnight shift. Another association chose not to heat itspool, and another stretched out lawn service and reduced cuttingsfrom 29 per year to 24.”

Eric Glazer, principal attorney with Glazer and Associates, P.A.,observes, “For the first time I’m seeing, unfortunately, that clientsare looking at cutting down on management. That obviously can’tbe too good for the association.”

Ken notes two sources of expenses to tackle: late fees and penalties formunicipal code violations. “Paying bills on time cuts costs dramatically,”he notes, and code violations can run as much as $500 per day on topof what is probably an unavoidable expenditure getting up to code.

Associations can, in one small way, take advantage of the depressedeconomy to lower insurance costs. Matt reports, “According to ourappraiser, replacement costs have decreased five to eleven percent,depending on the location, in the last 15 months. This can translateinto significant premium savings while still having adequate coveragefor replacing your structures.” An appraisal should be performedbefore taking bids for insurance, and Matt says, “In many recentcases, the savings in insurance premiums is significantly higher thanthe cost of the appraisal service.”

16 Aug2010 FICAJ

many communities haveentered on a large-scalebasis. “Good, consistentpolicies and procedureswith regards to collectingpast due fees are essential,”notes Ken. “A lot of communities make stuff up asthey go along, and theydon’t understand the ramifications. We heard aboutone association that brokea water pipe to prevent theunit from getting water, sincethey didn’t have the abffityto shut it off. Something likethat might work in the short-term, but ultimately it’s goingto expose the association togreater liability. You alwayshave to look at the big picture and stay within the law.Unfortunately, inconsistencyallows certain owners a littleleverage in reducing theirliabffity to the association,”Ken comments. “If you waivethe late fee for Mr. Smith,Mr. Jones may claim unfairness if you don’t waive it forhim. Now we’re in a positionwhere no one feels that theyought to pay.

“If you don’t deal withcollecting past due assessments, it will compound theproblem,” Ken says. “In mostcases, a property manageris a generalist doing a lotof things; he can’t be thebest at collecting past-dueassessments and the best atanalyzing concrete restoration proposals and the bestat managing the landscaperbecause there are a lot ofdifferent skills involved.”

Many associations hirecollection agencies andlawyers to deal with collections, liens, and foreclosures. “Associationsneed to understand thatprofessionals differ in

their practices and procedures and it has a dramatic effect on how muchmoney they collect,” Ken points out.

Eric observes, “Some law firms are now taking these cases on a contingency basis rather than charging the association by the hour. We’regetting fees from the delinquent owner or the bank when they finally getthe title back. We only make the association pay if and when the bank orassociation gets title.

“It’s very important that associations keep up, through their legalcounsel, with new cases that come out through the appellate courtsaround the state,” Eric points out, “as there have been attempts at innovative measures that have failed. There have been efforts to force banksto start paying association dues before the bank has finished foreclosure.The courts have held that to be illegal. You can’t force a bank to do that,

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court order. You have toappear before a judge andhave a good reason why itshould be canceled.”

Another area of compromise that has profited associations is settling in “shortsales.” Ralph explains, “Whena unit owner is about to gointo foreclosure, if they find abuyer, the bank is frequentlywilling to take a lesser amountthan is owed on the originalmortgage. In order to completethe sale process, the association has to be involved. If theback fees are $20,000 but thebank would only pay $4,000(because of the statutorylimit), the condominiumwill agree to an amountsomewhere in the middle.Not only did I get a biggerpayment than I’d get fromthe bank if it foreclosed, butI now have a new unit ownerwho will pay me in the future.

“If you’re talking abouteffective ways of gettingmoney, you can get aheadwith short sales,” Ralph pointsout. But, not every associationis willing to facilitate a sale foran owner who has been delinquent for an extended periodof time, Ralph has observed.New Waves

A bank loan or line of creditmay be an option to covershortfalls in cash. However,Marc indicates, “These loansused to be much easier to get.”Banks are often examining thenumber of owners with delinquent accounts to determinecreditworthiness.

Another source of creditmay be found in conjunctionwith use of a collections agency.“As one of our loan products,we offer a zero-percent interestloan against the past dueaccounts receivable amount,”Ken says of loans offered by

so an association wasted a lot of time going down that route only tobe reversed by an appeal court.”

Another procedure that has been struck down in some courts is formation of a blanket receivership. Ralph Ruocco, collections attorneywith Glazer and Associates, P.A., explains, “Some associations wereappointing a receiver for all the units in foreclosure, and they couldcollect rent from tenants and go after amounts owed by unit owners.For a small time it was a fad and working well, but some judgesstepped back for a minute and said, ‘I’m not 100 percent sure we caneven do this.’ Some are still in effect, but this office is not sure of the

constitutionality of them either.”Ralph describes a turn-around

Most associations will need to in policy toward delinquent own-tighten up policies and proce- ers who are willing to make stepsdures on many fronts—cutting toward repayment. “We used toexpenses; improving record say, ‘Sorry, if you can’t give me

keeping, communication, and a payment plan of six months orcollections; and accelerating less I have to move forward onforedosures to benefit their your case.’ That’s thrown out theassociation—skills that~ window. If you can get the assessments moving forward and evengo with them into the future. one-twenty-fourth of the delin

quency, you’re in better shape

than if I foreclose on the unit. In years past, that wasn’t acceptable.In today’s game, you take what you can get. Three years ago, I wouldhave told you the opposite! Some can’t honor their obligation, but alot who make the effort to call set up legitimate payment plans. If it’snot honored, you don’t lose the ability to proceed with legal actionlater.” Ralph notes, “There are a lot of empty units out there. Youhave to change your school of thought from what applied threeyears ago, especially if you’re not in a desirable location with prospective buyers.”

Ken finds, “Communication is key in every aspect, with bothgood-paying and bad-paying owners. Often you can get them tobecome good-paying owners just by communicating with them. Ifyou communicate not only the amount but the details of the delinquency, they know they can discuss it if there is a problem. You’dbe surprised how much can be resolved before you put down theultimate hammer,” he remarks.

If a property does move toward the destination of liens and foreclosure, condominium associations, in particular, stand to lose a considerable amount of the fees owed. The cap on back fees due by theforeclosing lending institution is the lower of six months of assessments(recently raised to 12 months, as it is for homeowner associations) orone percent of the mortgage value. This cap does not motivate banksto quickly close so they can start paying assessments as the new owner,and foreclosures on average take 12—18 months. Ralph explains thatone step their firm is taking to hasten closure is setting the case fortrial. “By setting a trial date, it’s pretty certain it will be resolved,”Ralph notes. Though an actual trial would be an extra expense forall parties, Ralph relates, “I tell the bank attorneys, ‘Unless you geta judgment and set a sale date, there’s not much I can do.”

Dade and Broward counties have gone to online foreclosure sales,which Eric considers a plus. “Now the only way to cancel a sale is by

18 Aug2010 FLCAJ

going to cost thousands ofdollars to get Joe out of thepool, and he still won’t havepaid his fees. The legislatureappeared to get tough, butthey should have focused onbanks and insurance companies and the court foreclosureprocess!” Eric exclaims.

To resolve the woes of manyassociations, Marc says, “It wifitake a major recovery in florida’soverall economy that willallow associations to be full ofowners who can afford to paymaintenance fees in a timelymanner.” Until that time, mostassociations wifi need to tightenup policies and procedures onmany fronts—cutting expenses;improving record keeping,communication, and collections;and accelerating foreclosuresto benefit their association—skills that will go with theminto the future.

his firm. No interest is charged to the association, though the collection agency will keep the interest which is charged to the delinquentaccount by the association.

SB 1196 may provide some options for associations to consider, butKen anticipates, “Based on our analysis, it won’t have the dramaticeffect associations are expecting.”

Eric agrees, saying, “It’s not going to mean much. They now allowassociations to prevent people who are 90 days delinquent from usingcommon areas like the pool or from being on the board. The legislature should have forced banks to foreclose faster and pay more whenthe banks take title, but they did none of these things.”

Unfortunately, pool overcrowding and late-paying board membersaren’t the issues creating a crisis for associations; money is. “The legislators want you to believe that banks now have to pay double becausethey raised the limit on unpaid assessments owed from 6 months to12 months, but they kept the one percent of mortgage cap in. On 99percent of condominiums, the one percent is the lower cost to beginwith so it wouldn’t matter if you said 10 years or one percent, whichever is less,” Eric states.

Denying use of common areas may prove to be a small part of anassociation’s policies to deal with delinquent fees, but Eric notes, “Alot of attorneys refer to it as the Florida Condominium Attorney ReliefAct. If a client calls because Joe is 90 days delinquent and is usingthe pool, we’re going to have to write a letter, Joe’s going to ignore it,and the condominium is going to have to ifie some sort of arbitrationaction. The police are not going to get involved, naturally, and it’s

/ r i will your Association be ready?Leading hurricane forecasters are currently predicting above-average activity

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20 Aug2010 FICM