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Leading Question

By Hannah Wallace September 30, 2009

›› The thankless job of managing a condominium or homeowners association has morphed into pure misery in this period of record foreclosures.  Community associations, most of which are run by volunteer boards of neighbors and friends, have less to spend on maintenance and more legal headaches.

The financial health of community associations in Sarasota and Manatee varies widely, say local legal experts. Unfinished subdivisions and the high-priced condos that were built during the boom are the hardest hit. Most associations have at least a couple of residents who aren’t paying their assessments, says David Muller, shareholder with Becker & Poliakoff, which represents nearly 400 community associations in Sarasota, Manatee and Charlotte counties. Some, he says, have delinquency rates as high as 30 percent.  

Muller is also co-executive director of the Community Association Leadership Lobby, Becker & Poliakoff’s lobbying arm in Tallahassee. After conducting a statewide survey of associations in January of this year, CALL released a report entitled “A State of Distress.” Among the 1,589 respondents, the majority of whom were board members of their associations, two-thirds said the foreclosure crisis was causing a revenue shortfall. One-third reported they had delayed capital improvements, maintenance, or upkeep because of it.

The result? Some neighbors aren’t paying, or have walked away, and the remaining owners are footing their share of the bill.  Associations are operating on shoestring budgets, and discretionary spending is all but nonexistent, Muller says. Special assessments, the most common recourse to meet required maintenance expenses after cutting costs, can create financial hardship among even more residents.

But it’s the properties in foreclosure that are causing the biggest headaches. Some lenders are dragging their feet, taking up to a year or more to foreclose. From an association’s perspective, the foot dragging favors lenders while the bills pile up. Property owners who want to sell may be penalized, because FHA and Fannie Mae won’t approve financing of properties in communities with delinquency rates higher than 15 percent. Lenders don’t have to pay the full amount of past due assessments, even after they’ve taken ownership.  

If a property is bound for foreclosure, the association is often better off once the bank or lender buys it back and assumes responsibility for all fees and special assessments, Muller says. Recently, he has been appearing before judges in Sarasota and Manatee to ask them to require banks to speed up the individual foreclosures on behalf of associations, and with good success, he says, adding, “The light at the end of the tunnel is the judges in Sarasota and Manatee understand what’s going on.”

A few community associations in South Florida have gone so far as to file bankruptcy to get relief from bills or contracts they approved during the boom. To Muller, bankruptcy is a drastic response, and one he hasn’t seen reach Southwest Florida.

Attorney Scott Gordon, partner with Lutz, Bobo, Telfair, Eastman, Gabel and Lee, who represents more than 60 community associations in Florida, hasn’t heard his clients talk of filing bankruptcy, either. His associations are tightening their belts and negotiating with vendors.  “I don’t think it’s going to get better immediately,” Gordon says. Yet he often has to advise his boards to get tough with their neighbors before they lose their ability to recoup losses. “I advise my clients to take a step sooner than later, especially if a foreclosure action is filed. Establish the rights you’ve got,” Gordon says. “It’s time for boards and managers to not be kinder and gentler and take a business approach. They can’t afford, given the economic situation, to be a bank for everybody else.” ■ 

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