Seven Primary Condominium Financial Issues in a Distressed Economy
April 1, 2009
We are living in desperate economic times and no person, business or condominium association is immune from the effects of our distressed economy. In fact, condominium associations have seen an explosion of economic related issues in recent months adversely affecting the operation of their association.
From unit owners failing to pay monthly assessments and increased unit foreclosure filings, budgetary issues are a topic at virtually every board meeting; however, with sound decisions and policies, condominium boards can mitigate the effects of the seven primary financial issues in a distressed economy.
1. FAILURE TO PROMPTLY COLLECT OVERDUE ASSESSMENTS
During difficult financial times, boards often provide unit owners extra time to pay their assessments. This is a common mistake. Sometimes, the unit owners are allowed to become three to six months behind.
While the board’s intention is to assist unit owners in a financial crises, the board is actually jeopardizing the cash flow of the association, which is necessary to timely pay its financial obligations. Further, the board may be setting up precedent for other unit owners to make late assessment payments routinely without the fear of legal action.
Tip: Boards should enact a collection policy for delinquent assessments where legal action commences 60 days after assessments are past due.
2. FAILURE TO MAKE BUILDING REPAIRS
Boards have been known to delay approving necessary expenditures for preventative building maintenance and/or necessary building repairs due to the financial hardship it will impose upon unit owners in financial distress.
While boards usually empathize with unit owners in financial distress, building disrepair does not choose the timing of its damages. Failing to promptly make building repairs exposes the association to emergency expenses and increased repair costs.
The board has a fiduciary obligation to all unit owners to maintain, repair and, if necessary, replace the common elements of the building and must fulfill that obligation regardless of the condition of the economy.
Tip: If the common elements requires repair, take appropriate action.
Sometimes a unit owner fails to pay his or her mortgage (in addition to not paying assessments) and the mortgagee will file a foreclosure action against the unit in response. In those situations, foreclosures may take nine to twelve months before the foreclosure action is complete and the lender is required to pay assessments.
The board should promptly direct its attorney to file an Appearance in the foreclosure litigation and Answer or Counterclaim in the event the unit’s assessments are not current to protect the association’s interests. Additionally, condominium boards must take action to collect delinquent assessments per section 9(g) of the Illinois Condominium Property Act (“Act”) to trigger the requirement that subsequent purchasers of a foreclosed unit pay six months of assessments.
The association, however, is not likely to recover more than six months worth of past due assessments unless the unit is sold for more than the debt of the first mortgage holder.
Tip: The board should promptly assert its rights in the foreclosure litigation as well as initiate collection of delinquent assessments to protect the association’s interests.
4. FAILURE TO MAINTAIN REASONABLE RESERVES
A common mistake boards make during difficult financial times is to freeze contributions to the reserve fund. Due to empathizing with the unit owners in financial distress, boards do not raise assessments or adopt special assessments in order to maintain reasonable reserves. Under Section 9(c)(2) of the Act, the board is required to maintain reasonable reserves for the association.
Tip: Budgets should always contain a line item for reasonable contributions to a reserve fund.
5. THE FAILURE TO ADOPT NECESSARY SPECIAL ASSESSMENTS
Boards are typically reluctant to adopt special assessments during difficult financial times. The mistake that boards make is to delay approving special assessments for necessary building maintenance and/or repairs due to the financial burden it will impose on its unit owners.
If the association’s reserves are low or non-existent, and the need for a large capital repair project exists, the board should adopt a special assessment when necessary despite the financial times. Under Section 18(a)(8) and 18.4(a) of the Act, the board has the authority to repair, replace or restore the common elements and to adopt special assessments, if needed.
Tip: Do not delay special assessments if necessary for building maintenance and/or repairs.
6. FAILURE TO REVIEW ASSOCIATION FINANCIAL STATEMENTS
Boards often fail to review monthly financial statements to ensure that management is properly handling its funds and that the association is fiscally sound. Responsibility for the economic welfare of the association rests with the board.
Tip: The board should be vigilant about reviewing the association’s monthly financial statements.
7. THEFT OF UNIT OWNER OR ASSOCIATION PROPERTY
During difficult financial times, boards may see an increase in theft of personal property from storage lockers or the common elements. Boards must be vigilant about protecting the property of the unit owners and the association. If proof of a theft exists, besides reporting the theft to the proper legal authorities, under Section 18.4(l) of the Act, a board may fine a unit owner, or his/her guest, for the theft of property The board must give the unit owner notice and an opportunity to be heard to levy a reasonable fine.
Tip: The board should promptly prosecute any unit owners, or their guests, who are caught stealing unit owner or association property.
Filed under: Community Association
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