With
unpaid association fees mounting, some South Florida condo associations
are turning to bankruptcy, a largely untested strategy that could pose
even more financial risk.
Article Courtesy of The Miami
Herald
By MONICA HATCHER
Published June 14, 2009
At least seven Florida condo associations
have filed for bankruptcy since the real estate market took a nose dive --
and there may be more on the way.
For a growing number of strapped condo
associations, bankruptcy could be the last defense against their hallways
going dark and their spigots running dry.
In one of the most recent Chapter 11
filings, the creditors of Maison Grande in Miami Beach are planning to
meet Tuesday to discuss the bankruptcy.
A rare occurrence in better days, such
filings now are seen as a last-ditch bid by associations to shield
themselves from bill collectors and find a way out of mounting financial
problems.
While an association is in bankruptcy,
utilities can't cut off the power or turn off the water, problems that
have already surfaced at some South Florida condos.
''Without question it's being talked about
and asked about,'' said Robert White, a managing director for KW Property
Management in Coral Gables, ``especially in some of these associations
that have delinquencies that exceed 30 percent. They're looking for
options about how to solve the problem.''
Maison Grande, a complex of 502 luxury
condos in Miami Beach at 6039 Collins Ave., filed for Chapter 11
protection in June after Dorten developers sued the association for about
$658,000 in back payments on a recreational lease for the pool and parking
areas. Chapter 11 bankruptcy offers private companies protection from
creditors while they reorganize their debts, restructure contracts and
find new sources of revenue.
Forty-four units are in foreclosure at the
Maison Grande, and about 165 owners are two months or more past due on
association payments.
Also last month, Legacy Park town home
association in the Central Florida city of Davenport filed for Chapter 11.
Among its biggest creditors: Comcast, which says the association owes
$105,305 for a past-due cable bill.
With the weak economy, many condo
associations -- which are classified as not-for-profit corporations --
find bills are piling up as units enter foreclosure and homeowners stop
paying association fees, putting enormous financial strain on residents
left holding the bill.
A RISKY ALTERNATIVE
Still, filing for bankruptcy is a costly
endeavor -- and may not be a cure. It's unclear whether any Florida
association has successfully reorganized in bankruptcy in recent years.
Bankruptcy attorney Thomas Lehman with Tew
Cardenas in Miami said he wasn't sure how bankruptcy could benefit
associations, because their only assets are the property's common areas
and, possibly, their ability to assess individual unit owners.
Corporations need an exit strategy when
filing Chapter 11, Lehman said. He added it wasn't clear how an
association having trouble covering basic monthly services could
reorganize. They also have nothing to sell off, except common areas such
as the lobby and rec room.
''They're better off trying to negotiating
with vendors to come up with an out-of-court restructuring plan,'' Lehman
said.
Last month a Miami bankruptcy court
dismissed a bankruptcy petition by View West Condo in Kendall essentially
because its creditor, Z Roofing, won a state case upholding its lien and
forcing a special assessment on unit owners to pay a balance of more than
$100,000 for repairs.
''The thing about a condo association is
that often times their main asset is really only its accounts receivable
from unit owners paying maintenance fees or assessments,'' said Carla
Barrow, an attorney who represented Z Roofing in the matter.
The company also won approval from a state
court to foreclose on individual unit owners who failed to pay their share
of the assessment.
Filing of the petition did little to
protect the association, Barrow said, because it still owed the roofing
company for the work, as well as $50,000 in legal fees and court costs --
not to mention fees owed to its own attorney.
PUNISHING THE PAYERS
While a condo association's ability to
repay creditors by levying special assessments could be a stumbling block,
Lisa Magill, an attorney with condo firm Becker & Poliakoff, said a
high rate of fee delinquencies could make that less of an issue.
''If you have nonpayers, and those who are
paying don't have the ability to pay more and you have a signification
number of owners that have abandoned the property, your ability to levy
assessments is limited,'' Magill said. There comes a point when paying
owners may also throw in the towel and stop payments if their assessments
rise too much.
Despite the potential pitfalls, Magill said
there are benefits to be gained by filing.
Bankruptcy protection allows debtors to
renegotiate onerous leases, like the one saddling Maison Grande. It could
also delay, and even prevent, creditors from seizing assets and garnishing
bank accounts.
Utilities and other vendors would have to
get court permission to drop services, said Robert Kaye, a partner with
Kaye & Bender law firm in Fort Lauderdale, which represents close to
700 homeowner associations.
After several months of investigating the
matter, residents of St. Andrews condo in Miramar decided against filing
bankruptcy earlier this year, even though nearly half its unit owners at
the time were in foreclosure and the association had fallen behind on
several bills.
William Quigley, who served on his
association's budget advisory committee, said the association determined
that filing for bankruptcy would cost more money that it would save. They
were told, he said, it would cost about $30,000 to pay lawyers just to
file the petition, not to mention costs going forward.
''Now you are going to have to assess the
community to file rather than working out what you owe to your vendors,''
Quigley said.
In the end, the association decided to
level with vendors and find ways to begin slowly paying off past due
balances.
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