REALITY QUICKLY SET in for many in the community association industry. The question was not whether the COVID-19 pandemic would create conditions leading to a rise in delinquencies. The question was how bad it might get—and what steps boards should take to soften the blow.
“There's no way it's not coming," says Michael Johnson, CMCA, AMS, PCAM, CEO of FCS Community Management, AAMC, which handles about $8 million in monthly assessments for more than 200 communities in Utah. “We need to be acting every day and in every decision that we make like the tidal wave of delinquencies is going to hit in August or September."
Delinquency rates did not spike earlier this year as state governments imposed stay-at-home orders and as economies temporarily shut down. Professionals say a variety of factors helped mitigate the effects, at least initially. Banks seemed willing to grant forbearance to struggling mortgagees, and Congress was quick to approve relief packages that included stimulus payments and enhanced unemployment benefits.
Unfortunately, financial problems haven't ceased for workers whose jobs became casualties of the virus. Unemployment across the U.S. hit nearly 15 percent in April, the highest level since the Great Depression. Three states—Hawaii, Michigan, and Nevada—each had jobless rates of more than 20 percent. Even if the national economy rebounds later this year, it's possible there could be future waves of COVID-19 infections followed by more lockdowns.
Observers say it's not a leap to recall the Great Recession, which stymied community associations only a decade ago as assessments dried up. Then, unemployment peaked at 10 percent nationally, and personal bankruptcy filings surged.
It's not a perfect comparison. The economic disaster that began in late 2007 was tied to bad loans, plummeting property values, and a reluctance by banks to gain control of underwater mortgages, notes Kevin M. Hirzel, managing member of Hirzel Law in Farmington, Mich., a fellow in CAI's College of Community Association Lawyers (CCAL), and a CAI Board of Trustees member.
“It remains to be seen how bad it will be," he says. “But when we went into this latest downturn, a lot of people had equity in their homes, and they had more savings."
Boards did not make dramatic changes to their existing budgets early in the pandemic. A handful of community associations across Johnson's portfolio in Utah opted to reduce assessment levels for three to six months as a hedge against potentially tough times, he says.
In Seattle, some communities under the management of CWD Group, AAMC, temporarily suspended plans for project-based special assessments, says Paul D. Grucza, CMCA, AMS, PCAM, director of education and client engagement, and a CAI past president.
“They're going to wait until things settle a little bit," he says.
One property Grucza manages, the 60-unit Kelleher House in downtown Seattle, seemed unaffected. Assessments currently range from $400 to $2,000 a month at the luxury high-rise. Board president Linda Ryan says she and her colleagues likely would approve a modest 3% to 5% increase in assessment levels when approving the 2021 budget later this year. “We should know a lot more of the effects of this pandemic by then," she says.
Others are bracing. Memories of the last recession remain fresh for Jessica Towles, CMCA, AMS, PCAM, vice president of suburban property management for FirstService Residential Illinois, AAMC.
Delinquency rates across her office's portfolio hit more than 20% at some communities, with a couple of them nearing 50 percent, says Towles, chair of CAI's Community Association Managers Council. The average delinquency rate has hovered around 10 percent in the stability of recent years.
“We're in the infancy of this situation," she says, referring to the pandemic, “but we can take the lessons that we learned in 2008, 2009, and 2010 and apply them now. What we do is really risk management."
Professionals say the issue of collections is on the front burner. A variety of strategies may help associations weather the storm, if one is indeed coming.
COLLECTIONS 101
It may seem like a no-brainer, but every community association should have a collections policy to serve as a road map for dealing with delinquencies. Such a policy defines the series of steps the association's agents will take when a homeowner or unit owner fails to pay their assessments on time.
“There are many boards that haven't adopted a policy. Maybe a prior board adopted it, and the current board members didn't know, and they're not following it. Sometimes, those things don't get passed along," says Julie McGhee Howard, managing partner of Nowack Howard in Atlanta, a CCAL fellow, and a CAI past president.
Managers tend to deal with the early stages of collections, which may include sending a late notice after the first lapsed month. Later, attorneys for the community association may take the lead—and incur billable costs—when it's necessary to do a title search, record a lien, or begin foreclosure proceedings.
“It hurts when we get involved," says Frank A. Lombardi, a CCAL fellow whose Lincoln, R.I., law firm, Lombardi Law Group, handles collections for condominiums and homeowners associations.
Whichever way the tasks are assigned, boards must follow their collections policy and apply it evenly to all residents, Howard says. “It doesn't matter who it is—everyone is treated the same."
And yet collections policies should leave wiggle room for community associations to be flexible, depending on an owner's individual circumstances or hardship. Towles says boards should be “fair, consistent, and reasonable, with an asterisk."
“We need to be coaching our boards to act with some grace," she says. “There are always going to be exceptions. What do we do if somebody is in quarantine and can't work?"
This does not mean forgiving a debt owed to the association. But boards may choose to offer payment plans that provide delinquent owners the opportunity to catch up. Such an agreement needs to be put in writing to create an enforceable document, attorneys say.
Boards, too, may opt to dangle a carrot by offering to waive late fees, interest, and other penalties if a delinquent member agrees to square up with their community association.
“The goal always is to help the homeowner get current," Johnson says.
Boards should not assume all stories will end happily. Attorneys advise filing notices of lien per the policy, even if delinquent owners agree to repayment terms. Anything can happen.
“It's really important to preserve lien priority," says Hirzel, the Michigan lawyer. “A lot of people are going to go on the payment plan the boards are going to offer them. They're all going to go into them with the best of intentions and hope they work out. But given the economic situation, that's somewhat unpredictable."
CONSTANT EDUCATION, COMMUNICATION
Industry leaders say communities must continually educate owners about the importance of assessments. The money, of course, helps provide the services residents expect. But community associations with high delinquency rates may have trouble getting bank loans or qualifying for Federal Housing Administration insurance.
“People need to know that they have to pay the condo fees. It's not like it's a discretionary expense," says Lombardi, the Rhode Island lawyer.
That hasn't necessarily stopped owners from complaining that some amenities, such as pools, have been sidelined during the COVID-19 crisis. Towles has noticed critical comments from residents on social media, effectively asking: Why should I have to pay for something I'm not able to use?
“There's education of the homeowners," she says. “We can't cut your assessments right now because we still have to maintain the pool. It's still this giant body of water. We've got to flush the system, we've got to winterize it."
In the meantime, some communities have incurred new, unexpected cleaning costs as they step up efforts to sanitize common areas, entrances, and elevators. “Those are costs right now that have not been embedded in budgets," Grucza says. “And somebody's going to have to pay for that."
BE PREEMPTIVE
When delinquencies do happen, community associations should reach out and invite owners to discuss possible solutions with board representatives, professionals say.
“It's so much harder to collect $2,000 than it is to collect $500," says attorney Howard.
Johnson's Utah management firm included a flyer with the late notices sent out in March, as it became evident the pandemic would disrupt the economy. The simple, one-page communication assured recipients, “Your well-being is important to us," and encouraged anyone to call or email the company if they were having financial problems related to COVID-19.
“In our industry, you're always providing lifelines," Johnson says.
Community associations should be careful not to cast too wide a net when signaling leniency, Johnson and others say. Otherwise, boards may inadvertently compound their delinquency problems.
The aforementioned flyers went to past-due accounts only.
“My biggest advice for (boards) is be compassionate, be caring, but only to the people who need it," Johnson says. “Don't be a pushover. (Associations) have real bills and expenses to pay, and sometimes those expenses are even greater right now."
The onerous option to foreclose on delinquent properties is rarely used, many professionals say, because community associations usually are not in an advantageous position when compared with the mortgage company or bank. A rare exception is when a delinquent resident owns their unit or home outright.
“We've had instances where the owner didn't have a mortgage," Howard says.
EXTERNAL FORCES
Community associations may have more than delinquent owners to contend with. In an effort to protect renters and homeowners alike during the economic upheaval, some governors have used their emergency powers to issue temporary moratoriums on evictions and foreclosures.
In Washington, Gov. Jay Inslee, noting that “members of our workforce are suffering economic hardship," issued a proclamation barring condominiums and homeowners associations from charging late fees and interest on delinquent payments for the duration of the state of emergency.
Grucza says that didn't stop his company from flagging delinquent accounts.
“Many of the associations are truly not having any issue with collections right now, and they're cash-flowing the way they need to do," he says.
In the nation's capital, debt-relief measures surfaced as part of congressional stimulus plans. One proposal pushed by the House Financial Services Committee sought to suspend the collection of rents, mortgage payments, and certain types of consumer debt until after the pandemic ends.
Representatives of the community association industry, including CAI, worried that this type of measure could end up including assessments.
“For community associations, this is our only source of income," says Towles, the Chicago area manager. “Realistically, they are small municipalities. And it's treating them like businesses."
Mike Ramsey is a Chicago-based freelance writer.