Q: I'm on the board of our association. We have 100 units and eight are in foreclosure. Two more looks like they are headed that way. We are going to have to do something to cover our basic expenses. Should we just issue a special assessment to the 90 paying units to cover the deficit? Should we just calculate next year's budget on the revenue we expect from those who do pay? Will we ever receive these unpaid assessments?
A: These questions are being raised with increasing frequency as the negative impact of the current economic situation becomes broader and deeper. Community associations that seldom experienced nonpayment of fees are now exploring how to account for unpaid assessments, how to book bad debt and how to fund needed maintenance and repairs.
Yes, you may receive some of these unpaid fees in the future. For example, financial institutions that foreclose upon condominium properties are responsible for up to six months of unpaid assessments. You could also receive additional unpaid fees if you take the proper legal steps, file liens, etc. Let's put those issues aside for the moment.
Some of these fees will undoubtedly become bad debt. Your challenge, of course, is that bad debt does not pay for association expenses. You will need to find the funds to do this.
You should certainly discuss this with your management company and/or accountant but they will probably tell you that the association should estimate the amount of the uncollected fees, including those that are for special assessments, and charge them to bad debt.
After that, you will probably need a special assessment to cover expenses. It seems like a wasted step but all fees, including a special assessment to cover unpaid fees, must be applied to all the units, even those you know will not pay and/or are in foreclosure.
The special assessment may take into account the amount that you estimate you will need but that will not be paid because of the foreclosures. Let's say that you need $100,000 and 10 percent of your units are in foreclosure. You could assess for $110,000 to realize the amount needed even though you will probably net $100,000, the amount you really need. All the units, including those in foreclosure, must be assessed. The financial records must indicate that delinquent owners' accounts reflect the unpaid assessments.
These are indeed challenging times and you are wise to better understand this aspect of association management. If you are not sure about all or part of this, seek the advice of an attorney who is familiar with community association legal issues.
Attorney Sylvia Heldreth is a Certified Specialist in Real Estate Law. Her office is located at 1215 Miramar Street in Cape Coral.
This article is not intended as specific legal advice to anyone and is based upon facts that change from time to time. Individuals should seek legal counsel before acting upon any matter.