HOAs: Like Businesses, Cash Flow is Key   Leave a comment

You know the tune, it’s like the Macarena and it will not stop playing in your head, “the economy is terrible and money is tight.” Just like everywhere else, you can hear this tune when it comes time to try to fund your homeowner, condominium, or commercial property association dues and assessments.

But just what is an association to do when that song results in tens of thousands of dollars in payments that go unpaid? How is the landscaping at the entrance going to be maintained? The water paid for? There are a myriad of services that associations, both residential and commercial provide to their member-owners and when the money falls short, it can seem that there is no where to turn to pay for these items.

I am discovering that many associations are waking up to discover major shortfalls in their collections. In some cases, it just snuck up on the board running the association. In others, the board was on top of things but the numbers got so large, they just were not sure what to do next.

If this describes your association, hang in there and read on.

The rights that your association has to collect assessments are spelled out in the documents that are recorded in the land records for your county and affect your property. Depending upon how your development is formed, this document can be called a “Declaration of Condominium”, “Declaration of Covenants, Conditions, and Restrictions” or some other variation on that theme. For the purposes of this column, we will just call the document a “Declaration”.

The Declaration will identify any statutes that govern the development. Statutes, like the Georgia Condominium Act or the Georgia Property Owners Association Act, can give additional collection rights or give more power to collection rights reserved in the Declaration.

Depending upon your Declaration, your association should have a variety of ways to enforce assessment collections, although some are more effective than others. For example, suspending the right to use amenities can be very effective in residential associations during pool season! Suspending a member’s right to vote due to delinquent payments can have some effect prior to a contested vote. But by far, the most effective collection mechanisms are the rights to put liens on property for the failure to pay, to sue a property owner personally for the debt, and to foreclose on those liens. These provisions are the real teeth in the association collection arsenal.

In the past, one of the most effective methods of enforcement was putting liens on property. Generally, at worst, units eventually sold and the lien would be paid off. Depending upon the Declaration, and the application of a statute, the association would need to file a lien in the land records and make sure it allowed for the collection of assessments, late charges, and attorneys’ fees that accrue after the lien was filed. If the development was has lien rights via statute, actually filing the “paper lien” is unnecessary, as the lien rights are automatic and ongoing.

If a lender holding the first mortgage to a property (meaning an active, un-canceled mortgage that has priority over any other mortgages against the property) forecloses on its loan, it likely wipes out any existing lien up through the time of the foreclosure. The association can continue to collect assessments that become due against the property starting after the foreclosure, but cannot lien the property or pursue the new owner for the old assessments. . . usually. There are some exceptions, and it depends heavily on your Declaration.

However, even in the case of foreclosure, the owner of the property at the time the delinquent payments came due is still personally liable for the money owed. An association can sue to collect that money. However, depending on the situation, the owner is probably unlikely to have the money to pay the overdue assessments if they were unable to pay the mortgage and there are other risks in this process. It is unwise to start to sue to collect the funds until you have an idea of what the problems are and what the probability of recovering is – otherwise the association will be out the unpaid assessments AND the related attorney and court costs.

Also, statutes that can affect Declarations can give the association’s lien “super priority” status, which would allow the lien to survive a foreclosure and give the association the right to any monies paid over and above the money it took to pay off the mortgage that was foreclosed. Again, you have to check your documents to see if you have this right.

Another drastic collection right is the ability to foreclose on the association’s liens. That means that the association does have the right to go through the foreclosure process and try to sell the property on the courthouse steps. This option has its own quirks and before considering it, the association should consider if there are buyers for the property (or if the association will get stuck with it, with the obligation to pay any liens existing on the property that have greater priority than the association’s), if the amount of the debt is big enough to justify such radical action (if the debt is less than the costs of the foreclosure, probably not), and other issues.

Problems also arise when a delinquent owner files for bankruptcy. There are a whole set of intricate rules governing what you can and cannot do to collect a debt from a person or business that has filed bankruptcy. Unless someone on your association board is familiar with these rules, it is wise to get help.

That leaves us with the question – what can the association do? How do we take positive steps in this situation?

1. Keep your budget realistic and trim costs where possible. Depending upon your Declaration, new budgets can be adopted during a fiscal year.
2. Know your collection rights. Study your Declaration and know the statutes involved (or hire an attorney that can do this for you).
3. Be vigilant. Watch your collections and take steps to collect unpaid assessment quickly. Don’t let late payments create a deficit that sneaks up on you!
4. Charge late fees and reasonable collection costs, actually incurred against the late-paying owners.
5. Keep an eye on owners with delinquencies – does it look like they will be filing bankruptcy? Is the property heading for foreclosure? Make sure the association’s rights are secured as early as possible to protect the association in this instance.
6. Consider charging paying owners a special assessment to fund shortfalls. Be sure to communicate the need for more money ahead of time and make sure the owners understand all the steps that were taken before you asked them to find more money for the association.

By Amy H. Bray, partner in our Commercial Real Estate Department

Do you want to use this blog article?

You may, as long as you include this complete bio with it:

 Amy H. Bray is a Georgia attorney, focusing her practice in community association and real estate law matters. 

 Her firm, Andersen, Tate & Carr, P.C., works with all manner of clients in business and personal matters, providing “big firm” sophistication with suburban law firm attention and service.

Website: www.atclawfirm.com

Blog: www.andersentatecarr.wordpress.com

 Copyright © 2009 & 2010, Amy H. Bray & Andersen, Tate & Carr, P.C.

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