Times Are Tough. Get Creative!

Published in the ECHO Journal, February 2009

The economic crisis facing our country today is undoubtedly impacting everyone. Given the size of the crisis, countless individuals and companies nationwide, including homeowner associations, are forced to make very difficult decisions. But there is a silver lining to a crisis like this. It forces all to consider options they would not otherwise consider and to get creative. As the crisis has grown, we have seen a number of creative solutions implemented to help associations get more from less in their day-to-day business.

The first area naturally affected by the crisis is collections. Homeowners in droves are feeling the economic pinch and falling behind on their association dues. Many associations cannot function without this stream of income. As a result, associations have become creative when it comes to collections.

One option associations are implementing is hiring a law firm that implements alternative billing practices, like contingency fee arrangements. Under this arrangement, the association pays the attorney a percentage of the dollars collected. The advantage is the association does not have to advance any legal fees to recoup the debt. Instead, the law firm receives a percentage of the dollars collected from the homeowner. This has saved thousands of dollars for association’s legal budgets.

A second option that is getting more attention is selling or assigning the association’s liens or accounts receivable. Here, the association sells the lien to an investor, who may then choose to pursue collection or not; but regardless, the association receives all or some of the outstanding balance immediately. A similar but more radical approach that is taking root in Florida is the selling of accounts receivable to a third party. Here, the association sells its entire accounts receivable for dues in exchange for a monthly cash payment for the dues owed. Collections of the dues becomes the right of the purchasing third party. The third party makes money by charging a monthly service fee, and retaining any late fees and interest on any past due accounts it collects. The benefit to the association is it receives full payment on all of its dues each month from the third party.

A third solution to the collection dilemma is implementing foreclosure. There are several factors when considering this option that will not be discussed here. Suffice to say, however, that this can be effective; unless of course your county sheriff takes the lead established in Cook County, Illinois (Chicago). In October, the Cook County Sheriff announced he would no longer execute on eviction orders that were granted after the successful completion of foreclosures. The sheriff’s position was based on his morals and, while unique, underscores the severity of the crisis and the impact it is having on everybody.

Another solution some associations are implementing is an offer of amnesty to delinquent homeowners. Here, the homeowners are offered a certain period of time to become current on the principal amount owed to the association. If a homeowner pays the principal amount owed, the association agrees to waive any late fees, fines, attorney fees, and interest on the account. This solution can prompt an immediate influx of money for the association to pay for daily maintenance and build a sense of community. A twist on this approach could be offering a drawing to owners that prepay or are current on assessments as of a certain date.

A second area that has been impacted by the economy is the interaction between associations and vendors. Many vendors are becoming more aggressive in their billing practices and collections. We are seeing an increasing number of disputes over the reasonableness of charges or services provided by vendors. Associations should monitor closely any additional charges they see on vendor invoices. Associations should confirm that the work was actually performed and the services are indeed “additional services,” outside the scope of any underlying agreement. If the amount for the services is high or unreasonable, an association should negotiate agressively for a reduced fee.

Associations should be careful, however, when pursuing the latter approach. Refusing to pay any amount or negotiating too aggressively could result in a mechanics’ lien or lawsuit. Vendors have become more aggressive in pursuing the amounts owned on these invoices and often record liens and file collection lawsuits.

A third area that is being impacted by the economy is community maintenance. With the revenue stream impeded, associations are often forced to reconsider maintenance projects, including daily maintenance. For example, associations are holding back from starting large scale projects such as installing a new roof and in some cases even considering shutting down amenities like clubhouses, pools and the like. Associations should exercise extreme caution when reducing services or access to an amenity and obtain legal advice about the propriety of this option.

One solution associations are implementing in this situation is obtaining short-term loans. The loans can be used to help the association get through the economic crunch and avoid a logjam of deferred maintenance. Granted, the loan will have to be repaid, but this can be spread out over five to ten years, which gives the association time to absorb the expense. This can be better than the alternative, which is the logjam of deferred maintenance or, in the example above, unwanted an unnecessary roof leaks that cause damage to the common elements of the building and interior units. This only leads to additional unexpected costs to repair the damage, and places a further pinch on the shrinking budget.

A fourth area where associations are seeing an impact on their communities is an increase in the number of rented units. As homes become more difficult to sell, owners are turning them into rental property. The common complaint about this group is they take no pride in the community and cause a decrease in property values. Thus, many associations are inquiring about their ability to limit the number of rental units in the community and, in a few cases, taking steps to do so. This approach should also be considered carefully because the impact might force owners into foreclosure, which could have a substantial impact on property values in the community as well as reducing assessment revenue. Always consult with an association attorney before imposing any type of rental restriction.

While many of these solutions have helped associations cope with the current economic times, associations should be cautious of “creative solutions” that could end up costing more money in the long run. For example, in the spirit of cutting costs, associations may decide to cut back on various services like management, legal, or accounting, and to attempt to take care of these items “in-house.” This approach is frequently risky because it often results in tasks being improperly completed or not completed at all. Ultimately such occurrences can increase the likelihood of a future dispute that will cost the association money in the long run. These risks should be avoided, even in today’s economic climate.

Every association is different with different needs, but the solutions discussed in this article have proven to be effective for many complexes during this time. Inevitably, some of these solutions will become commonplace as a more efficient and effective means to do business, which is one of the silver linings we can take from this challenging time—a new and improved association.

Brian Martin is a litigation attorney at the Colorado law firm HindmanSanchez. This firm provides legal service to more than 2000 associations throughout Colorado.