The Condominium Parasite
Thursday, December 2, 2010 at 08:10AM
Thick weeds overtake the once lush lawn, and their leafy tendrils snake across the sidewalks and onto the pool deck. The pool itself has evolved into its own sinister, soupy, ecosystem. Roaches scatter undaunted through the clubhouse and common areas.
The remaining owners, trapped by a now almost unheard of devotion to their integrity and financial obligations, feel more helpless as the days go by. What had started out as their long-awaited retirement in Paradise was rapidly becoming a prison sentence.
The parasite was invisible to them, yet it relentlessly and without remorse choked out the life of the community. By now, almost 2/3 of the 400 plus units were in default of their condominium assessments.
Condominium life in many Florida communities was beginning to look like a scene from an Edgar Allen Poe story. But recently, struggling condominium associations have been given a new weapon to help collect delinquent assessments and remain solvent.
Before I discuss this weapon, let's take a look at one of the problems that has plagued condominium associations and their unit owners. Investors have taken advantage of the bottomed-out prices of condominium units in Florida markets and have bought large blocks of units as investments. There are reported cases of some investors owning over 100 units in a single project.
The combination of low purchase prices and low interest rates leads to low mortgage payments and makes it feasible to rent the units and make a nice return.
Condominiums have traditionally been a tough market for landlords because the condominium maintenance fee is usually higher than monthly maintenance expenses for non-condominium properties and, together with the mortgage expenses, makes it difficult to generate a net profit. Now, because of the market conditions I described above, condominium investment has become more popular.
However, it seems that in some cases the investors have not been able to meet their financing obligations. They have quit paying the mortgage and the loan has gone into default. In most cases the bank has begun foreclosure proceedings. Since these investors are in default of their mortgages, they see no reason to pay the condominium maintenance fee. Now keep in mind that during this time, the investors continue to rent the units and collect the rent payments, all of which go into their pockets. The lender and condominium association get nothing.
A classic example of this phenomenon is the Village at Dadeland Condominium in Dade County, a 410 unit project. According to court records, at one point last year 267 of those units were 60 days or more delinquent in the payment of their share of maintenance fees, with the delinquency totaling $863,063.82. The association’s budgeted monthly expenses were $127,573, but the monthly revenue which was being collected averaged only approximately $70,000. As a result of the delinquencies, the association had not been able to maintain the common property: elevators were nonfunctioning, security garden lawn care services had been discontinued, the roofs were in a state of disrepair and the condominium pool had been closed. In addition, Miami-Dade County officials have cited the association with 63 code violations including failure to maintain portable fire extinguishers, failure to maintain smoke detectors, and failure to have fire alarms inspected.
The banks are hesitant to foreclose on the units because they would then become liable for the condo assessments as they come due. This leaves the units in a kind of financial limbo with owners raking in cash and neglecting their legal duties to pay expenses.
What is the new weapon that associations are now using? It's called a blanket receivership. A receiver is a person appointed by the court in foreclosure actions to collect rents and revenue from the property currently under foreclosure. The income collected by the receiver is used to maintain the property and may be applied against the mortgage payments.
Usually, receivers are appointed for individual properties. However, in the Village at Dadeland case, as well as others around Florida, the courts are granting blanket receivership's. This gives associations the right to rent out abandoned units and collect rent from tenants paying owners under foreclosure or who are delinquent in association fees. The blanket receiverships only apply to units occupied by tenants and not owners. Further, the units must already be under foreclosure by the Association.
Will this solve the associations’ financial dilemmas? It may serve as a short-term solution, but the only solid answer will come from a vastly improved real estate market.