PROBLEM: Our board is concerned about the economy generally and the real estate market in particular. Homes have been selling slowly and a few owners in our community are having trouble selling their units. This isn’t a crisis by any means, but we know from history that it could become one. Is there anything our board can or should do to prepare for stormy weather just in case it comes?

**SOLUTION:** You are already doing the most important thing any board can do: Thinking ahead.

The financial problems of owners, if they become serious and widespread, will trickle down to condominium associations as an increase in delinquent payments, bankruptcies and vacant units, so you should start by reviewing your policies for handling those issues.

You have already noticed the condominium association equivalent of the ‘canary in the mine’ – an increase in delinquent payments. Boards should always keep a close eye on delinquencies; if they begin to increase even slightly, you should watch them more carefully.

You can’t prevent delinquencies, but you can be prepared to deal with them. This is a good time to review your collection policies. The Massachusetts Superlien statute establishes a priority lien allowing associations to collect up to six months of unpaid assessments and legal fees ahead of the mortgage lender, should the lender or the condo association foreclose.

The priority lien insulates associations from the problems of owners, but only if the board initiates the collection process in a timely manner -- that is, early enough to ensure that the entire six months of unpaid assessments and legal fees will be covered. It is said that justice delayed is justice denied. Collections delayed may also mean collections denied. As a general rule, boards should not wait more than 60 days before turning a delinquent account over to the association’s attorney for collection. An efficient collections policy also protects owners, to some extent, by requiring them to address the problem before the unpaid assessments and related interest and fees have created a mountain of debt they can’t possibly climb.

A strict collections policy is essential but implementing it will require board members to get tough with their friends and neighbors, and that is never easy. For that reason, boards should let association managers handle discussions with delinquent owners up until the point at which the collection is turned over to the association’s attorney.

An increase in delinquencies may also bring an increase in requests for repayment plans. The ability to repay their debt overtime can enable delinquent owners to regain their financial balance – a benefit for them and for the association. Associations should offer these plans when they make sense, which they do only when the owner’s problems are temporary, and repayment is a realistic goal. The plans should be offered on the same terms to all owners, and they should be structured carefully. The terms should require owners to remain current on common area fees while they are repaying the delinquent amounts. Failure to make a regular payment or to include the required repayment amount should automatically trigger the collection process.

A serious economic downturn will almost certainly trigger an increase in both. The priority lien that protects associations in foreclosures does not apply automatically to bankruptcies, where the association is a secured creditor standing in line with other secured creditors when the owner’s assets (possibly including the condo unit) are sold and the proceeds distributed. Bankruptcies and foreclosures are complicated. And yes, I am going to suggest that you need an attorney to make sure the association’s interests are protected.

Owners who can’t sell their units may lose them to foreclosure or may be forced to move before the units have been sold. The result, in either event, would be to leave the units vacant for some period of time. Vacant units can create many risks for community associations. For example, inadequate heat in cold weather could result in frozen pipes and flooding that might damage other units and common areas. A fire in the unit could damage others if it spreads before it can be contained. An undetected pest infestation could spread to other units. Periodic inspections of the unit and easy access in an emergency will reduce these risks. Owners of vacant units should be required to provide a key (or access code) and emergency contact information. They should also be required to provide written authorization for access to inspect the unit and to provide essential maintenance.

Owners who are struggling financially may want to rent their units to avoid foreclosure. Renting may also be an appealing option for owners who want to wait for market conditions to improve before selling their units. Associations may face competing pressures, from owners who want to ease or eliminate existing restrictions on rents, and from owners concerned about “too many tenants,” who want to impose restrictions on rentals or extend existing ones.

Before these theoretical conflicts become real, boards should review the association’s rental policies. The issues are complex and the arguments on both sides must be considered. Too many rentals can change the character of the community; they may also run afoul of secondary market rules, which generally require that 50 percent of the units be owner-occupied. Lenders may not provide mortgages (or refinance existing loans) on units in buildings that exceed the investor-ownership caps.

But tight restrictions on rentals may leave struggling owners with no alternative to foreclosures, which also have negative consequences for community associations, primary among them: Vacant units (discussed earlier) and below-market sales, which can reduce the value of other units. Preventing rentals and setting rental caps too low will also reduce the pool of prospective buyers by eliminating investors and discouraging buyers who might want the ability to rent their units in the future.

Boards that are considering rental restrictions should poll owners to determine how they feel about the issue and make sure they understand the implications of any policy the board adopts.

It is possible that the problems you are anticipating won’t materialize. The real estate market may recover quickly and the economic downturn some analysts are predicting may be avoided. Delinquencies may not exceed current levels, foreclosures and bankruptcies may not increase. You can hope for the best and there is certainly no harm in that – as long as you also plan for the worst and are prepared to deal with it.

If you have any questions relating to this issue, please contact your Mark Einhorn directly or reach our MEEB attorneys at law@meeb.com.

PLANNING FOR HARD TIMES

ADVENTURES IN CONDOMINIUM OWNERSHIP

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