As the recent recession has lingered on, co-ops and condo associations across  the region—from luxurious waterfront high-rises to sprawling suburban developments—have found more of their residents in arrears with their monthly fees. Some of  these people have lost jobs, and unemployment has forced them to prioritize  (and sometimes skip) their monthly bills. Credit cards and mortgage payments  often are paid first, followed by utilities and property taxes.  

 Condo fees can get back-burnered when a resident’s finances are tight—partly because of the fact that the association board members aren’t likely to show up on the doorstep of a resident in arrears and demand payment.  Thus, residents who are in arrears often don’t immediately feel an impact from the failure to pay.  

 Even so, there is a real cost resulting from shareholders and unit owners not  paying their share. Essential building maintenance sometimes cannot be done due  to lack of funds, or important capital improvement projects such as new windows  throughout the community may have to be put off indefinitely. Simply put, too  many residents failing to pay their monthly fees could ultimately lead to extra  fees for every resident—and can be downright disastrous if a major repair comes up and the HOA is caught  seriously short of funds.  

 Real Impact

 It’s a building, and being just one resident, not paying your monthly fees won’t have much impact, right? Wrong, says Denise Lindsey, vice president of Access  Property Management in Flemington. "Until it's explained, a lot of homeowners  don't understand that they are part of an association, and that the only way  the association gets its funding is from the homeowners' maintenance fees."  

 While a percentage of monthly fee scofflaws aren’t doing so out of necessity, most residents who don’t pay do so because they've fallen upon tough times. “The vast majority of people who are not paying are in economic trouble,” says Jules Frankel, who is with the accounting firm of Wilkin & Guttenplan, PC in East Brunswick. But sympathy for neighbors notwithstanding, “The reality is that everybody else ends up paying for those who aren’t paying.”  

 For some residents, the biggest misconception regarding not paying their fees is  based in a lingering landlord/tenant mentality. Though these residents are the  owners of their apartments, they tend to view the co-op or condo board and  management as landlords, rather than the elected representatives and employees  they actually are. Such residents may view their board/management team as bill  collectors or adversaries, and don’t see that not paying their fees directly affects their neighbors, says Lindsey.  "Many times, the [owner's] misconception is that the managing agent hasn’t budgeted properly and has caused the fees to be too high. We need to constantly explain that the operating budget is to keep the  association running, and that the board approves the budget. We also remind them that the board members pay the fees, too and are equally  affected by the non-payment of maintenance fees."  

 “I think one of the misconceptions is that they may feel that they are the only  ones who are in arrears and feel that it won’t hurt the community very much,” adds Bob Rogers, a regional community manager with Taylor Management Company in  Whippany. “The fact is that most communities have a number of delinquent unit owners and as  we move forward, we need to budget properly for 'bad debt.' This is likely to increase the monthly fees for the entire community.”  

 Even more importantly, says Elysa D. Bergenfeld, an attorney with the  Lawrenceville-based law firm of Stark & Stark, "Many owners believe that if they choose to stay current with their  mortgage to the detriment of other bills—including the association assessments—they can prevent a foreclosure. That is simply not accurate. Condominium and homeowners associations are  authorized via their governing documents to file foreclosure complaints with  regard to delinquent owners."  

 Act Now

 Given these facts, and also the reality of needing to live amicably with one’s neighbors, boards and managers of buildings with residents who are in arrears  should tread wisely while dealing with the problem. Making the proper moves to  collect fees could ensure payment or do the opposite, dragging out the  conundrum.  

 Faced with a resident who is not paying his or her monthly fees, some boards  simply fail to act. The building might not have a standardized procedure for  dealing with missed payments, and board members might let the problem go  unchecked because they aren’t sure how to deal with it. In higher-end buildings, a few missed payments from  a resident may not be a big deal, but in buildings with tighter finances,  missing payments affect everyone.  

 "Condominium associations must begin the collection process early," stresses  Bergenfeld. "Studies show that an association can improve its recovery of  unpaid assessments by an upwards of 75 percent via letters and other  non-litigation efforts while the balance remains manageable. By waiting, the  association simply allows its competing creditors to get the first crack at  what is likely an ever dwindling source of funds and/or income. Management must be the leader in this regard, constantly focusing on the delinquency list and ensuring that no owner is allowed to generate a  significant arrearage."  

 Most well-run buildings have a protocol for dealing with missed payments. If you  are late ‘x’ number of days, a letter is sent to you from management asking for payment.  After ‘xx’ days late, a late fee is assessed and a second letter sent to the offending  unit owner. Following those steps, the matter is sent to the building’s attorney to handle. Depending upon the building’s bottom line, a board or management team could contact a resident about their  arrears after just one missed payment. Indeed, most management and financial  pros advocate such a nip-it-in-the-bud approach—including revocation of amenity privileges for non-payment.  

 "[Owners in arrears] are immediately denied any of the privileges such as the  pool, use of the gym, clubhouse, etc.," says Rogers of the communities he  handles. "In addition, late fees are added to their account, as well as any  legal fees associated with the collection of the debts.  

 Generally, delinquent unit owners get 30, 60 and 90 day delinquent letters,  which then usually generates the involvement of the attorneys. Rarely would the  board ever get involved, other than to authorize certain legal action to take  place. Once it's in the attorney's hands, they are responsible for all legal  fees associated with that collection process. That includes all letters, liens,  judgments, etc. If they are seriously delinquent, the legal fees could reach between $5,000 and  $10,000."  

 Many buildings do have a bad debt expense allocated in their budget. But during  hard times such as the past few years, it is possible for the number of  residents who are in arrears to overwhelm a building’s resources and derail the management team’s best efforts. Because of this possibility, each board member should remember  their fiduciary responsibility to act in the best interests of the whole  building.  

 “Each board member needs to ensure that they have a process to quickly act when  arrears reach a certain dollar amount and are a certain length of time  outstanding,” Frankel says.  

 Consequences of Debt

 Since the impact of residential debt to a building might immediately be felt in  its management, some buildings might want to take legal action fairly quickly  after finding a resident in arrears. Legal help is an important tool in dealing  with a resident in arrears. After a third month of nonpayment of fees, a board  might want to send the matter to its attorney, the experts say.  

 Some exceptions can be made by some buildings for residents who are in arrears  but are hardship cases, industry experts say. Buildings that are running on  very tight budgets won’t be able to allow such exceptions for very long.  

 The real day-to-day impact of residents being in arrears can be devastating to a  building’s financial state. Lindsey recalls one instance where a community's pool was  closed for an entire summer for just this reason. “The board needed to look for ways to be able to pay for the daily operations of  the association,” she says, “such as property insurance and keeping the lights on in the building. In another community, all deferred maintenance was put off until they could  catch up on their outstanding invoices for necessary services. The community was in dire need of having the wood painted, but for the safety of  the residents, they needed to keep the association insured and well lit.”  

 Another manager points to one Jersey City co-op building that didn’t have enough money to meet operating expenses because there were so many  residents behind in their payments. A significant percentage of residents in  the building were unemployed, and the lack of funds meant the building’s management couldn’t get vendors to work in the building because they thought they wouldn’t be paid. As a consequence, the building was quickly falling apart from lack of  physical maintenance.  

 Another building with similar woes needed its HVAC system fixed, but its  contractor balked at the job, fearing he wouldn’t be paid. The management had to hire another contractor at an exceptionally  high rate of pay, to get the job done.  

 In buildings with financial problems from residents missing payments, the ripple  effect can be fast and severe. Most managers acknowledge that the building  service world is small, and word travels fast—buildings whose management is failing to pay vendors in a timely fashion could  quickly become pariahs. According to one management pro, “Contractors all know each other, and they want to be paid. To get any services,  you’ll have to start putting money upfront [for work to be done.]"  

 Such a situation might call for the board putting a special assessment on all  the residents, increasing the financial burden on the residents who are paying  their fees on time. First and foremost, the board must see that the building  meets its obligations. "When one unit owner—or multiple owners—decide not to pay, other owners have to foot the bill for the rest of the owners  within the community," says Bergenfeld. "[Non-payers] are essentially stealing  services and being unjustly enriched. Associations need to understand this and  take a hard-nosed approach to collections. It is their fiduciary duty to do so.  In this lingering recession, it is extremely important that boards be  aggressive, talk to their lawyers and be creative about how to collect fees."  

 Disuniting Communities

 The financial costs to a community with apartment owners in arrears can be  quickly evident to everyone, but the more insidious effects can amount to a  breakdown in community feeling. People can become less friendly due to  perceived inequities between them and their neighbors.  

 “When the majority of residents feel that the minority aren’t paying their share, it can adversely affect relationships,” say one attorney. “You don’t want to live in a building where people are glaring at each other in the  elevator.”  

 Even more tangibly felt than feuding neighbors, having residents in arrears  could impact the long-term solvency of a building. New FHA loan requirements  for prospective buyers mean that certain buildings with serious financial  issues aren’t always able to welcome into the community new residents, because those  would-be owners can’t get FHA financing.  

 “This is an ironic issue, because certain buildings don’t want to be FHA-approved because they want the prospective resident to  personally have the resources to get a non-FHA loan. In other buildings, FHA  help is critical for buyers,” Frankel says.  

 The recent financial crash and resulting government bailout of financial  institutions hasn’t made any of those companies free with a buck—the opposite is the reality. Lenders, in general, are looking at a building’s financial state before making a loan to a prospective unit owner. “A large amount of arrears in a building might make it hard for a buyer to get a  mortgage,” says Bergenfeld.    

 Jonathan Barnes is a Pittsburgh freelance writer and a frequent contributor to  The New Jersey Cooperator.