The foundation of any properly run condo association or HOA rests on residents paying their monthly fees on time and in full, with no delays or delinquencies. However, thanks to the lingering effects of the ebbing  recession, many buildings and associations are feeling the pinch of late and/or  missing maintenance payments. Many owners are also unable to cover the cost of  special assessments to fund much-needed capital repair and improvement  projects.  

 Hard Times vs. Hardball

 Most real estate industry pros have seen the effect that non-payment and arrears  have on buildings and HOAs, and say that it’s a problem that has surged in some buildings in recent years, for an array of  reasons. According to one community manager, the reasons for non-payment vary. “It can be because of financial hardship,” he says. “They've lost their job, or have other expenses that have come up—but it’s mostly employment.”  

 Residents who have a beef with their board for one reason or another may also deliberately withhold fees or assessment payments in protest, though the pros agree that such situations are uncommon.  

 So, just one resident not paying their monthly fees couldn't possibly have that  big an impact on the whole community, right? Wrong, says Denise Lindsey, CMCA,  AMS, PCAM, the vice president of business development at Signature Property  Group, a management company located in North Brunswick, New Jersey. Whether because of  hardship or to 'send a message' to the board, non-payment of fees has a  deleterious effect on the entire community by drying up the cash flow necessary  for day-to-day repairs and maintenance operations.  

 "Until it's explained, a lot of homeowners don't understand that they are part  of an association,” says Lindsey, “and that the only way the association gets its funding is from their homeowners'  maintenance fees."  

 This lingering “landlord/tenant mentality” prevents association members from viewing their elected representatives and  employees as just that, casting them instead as bill collectors or enforcers, and missing the point that not paying their fees directly affects  their neighbors. "Many times, the owner's] misconception is that the managing agent hasn’t budgeted properly and has caused the fees to be too high,” Lindsey continues. “We need to constantly explain that the operating budget is to keep the  association running, and that the board approves the budget. We also remind  them that the board members pay the fees too, and are equally affected by the  non-payment of maintenance fees."  

 “I think one of the misconceptions is that they may feel that they are the only ones who are in arrears and feel that it won’t hurt the community very much,” adds Bob Rogers, executive director, high-rise division for Eatontown, New Jersey-based Wentworth Property Management Corp., a First Service Residential Management Company.  

 Multiple and ongoing arrearages can have a trickle-down effect across an entire  association, limiting the funds the community has available for both regular  maintenance work and important capital projects, and leading to maintenance  increases to cover non-paying owners' 'bad debt.'  

 The real day-to-day impact of residents being in arrears can be devastating to a  building’s financial state. Lindsey recalls one instance where a community's pool was  closed for an entire summer for just this reason. “The board needed to look for ways to be able to pay for the daily operations of  the association,” she says, “such as property insurance and keeping the lights on in the building. In another  community, all deferred maintenance was put off until they could catch up on  their outstanding invoices for necessary services. The community was in dire  need of having the wood painted, but for the safety of the residents, they  needed to keep the association insured and well lit.”  

 When to Act

 Acting quickly to address arrears - and putting that action in writing - is key,  say the pros. “Board members have a fiduciary obligation to manage the fiscal health of the  association,” says one real estate attorney, “and too often, they wait too long before taking action. We typically counsel  boards to send a first notice promptly after the first month of delinquency and  to then initiate formal action (via a 30 day notice) after a second month of  delinquency. Waiting any longer does not generally benefit the association.”  

 "Community associations must begin the collection process early," says Elysa  D. Bergenfeld, an associate attorney with the Community Association Practice  group of Princeton-based law firm Herrick, Feinstein LLP. "Studies show that an association can improve its recovery of unpaid assessments  by an upwards of 75 percent via letters and other non-litigation efforts while  the balance remains manageable. By waiting, the association simply allows its  competing creditors to get the first crack at what is likely an ever dwindling  source of funds and/or income. Management must be the leader in this regard,  constantly focusing on the delinquency list and ensuring that no owner is  allowed to generate a significant arrearage."  

 The time a board or association will wait before initiating collection  procedures will vary, depending on what is written into the community's bylaws.  There are also restrictions as to what can be charged with respect to state and  federal laws.  

 According to the pros, initiating a lien on the unit, then either trying to go  to small claims court for judgment, or forcing a lender to start a foreclosure  action is normally the typical course of action. If the unit is rented to a  third party, the association can try appointing a receiver to get rent paid  directly to the association. If not, forcing the bank to start a foreclosure  may be their only option. Doing so is extremely expensive, running into the  tens of thousands of dollars—but if a resident is paying his or her mortgage and not the monthly condo association  charges, then commencing legal proceedings is the board’s strongest way to bring the matter to a head, once all other efforts have been  exhausted.  

 The Role to Play

 While the management of community associations and HOAs is their niche, in recent years  management companies have also had to become experts in the field of debt  collections. Many boards and residents don’t recognize that debt collection is a whole separate business and expertise, and  one that is secondary to most association management companies. Similarly, a  community's accountant or financial advisor is also largely uninvolved in  collecting arrears. It's the association's legal counsel who is crucial in  pursuing proper collection and/or foreclosure.  

 Experts say that an accountant doesn’t become a key player in any collections action; most often, it will be the  association manager upon whom the board will be relying on for advice and  guidance. Once the legal team gets involved, they will report to the property  manager on the status of the legal proceedings.  

 A Helping and Fair Hand

 If a resident is open and proactive in communicating with their board about a  temporary financial hardship from the beginning, a board may agree to give the  resident a payment plan that keeps the association solvent while easing the  pressure on the individual as well.  

 Whatever specific terms the board and owner agree to, however, “It just needs to be documented properly,” says Lindsey. “It’s in the board's interest business-wise because taking the next steps for  collection requires a lot of time, money and effort, which you may not get  back. Also, it’s in your best interest as a neighbor, because you are buying goodwill.”  

 The Fair Debt Collection Practices Act applies at the beginning of a proceeding  and requires advanced noticed of 30 days. Collecting a past-due assessment  requires sensitivity, and it’s important that the association does not violate the owner’s rights. The FDCPA requires that when the association writes to an owner to  collect late assessments, it must state that the letter is an attempt to  collect a debt, any information the debtor gives will be used to collect the  debt, the amount of the debt that has accrued and the name of the association,  and that the owner has 30 days to dispute the debt’s validity in writing. If a debt collector violates the act, the FDCPA says he  or she may be liable for damages to the debtor, such as emotional distress or  slander.  

 Final Thoughts

 Regardless of how a board chooses to act on an association member's non-payment,  the refrain from the professionals is that the board must act; promptly,  consistently, and fairly. Any other approach simply is not in keeping with the  board's responsibility to the community they were elected to serve.  

 “First and foremost, the board must see that the building meets its obligations,” says Bergenfeld. “"When one unit owner—or multiple owners—decide not to pay, other owners have to foot the bill for the rest of the owners  within the community. Non-payers are essentially stealing services and being  unjustly enriched. Associations need to understand this and take a hard-nosed  approach to collections. It is their fiduciary duty to do so.” Even as the economy limps back to solvency, “It is extremely important that boards be aggressive, talk to their lawyers and be creative about how to collect fees."  

 Fortunately, the days of rampant arrears may be on the wane, but if your  building is among those still struggling to collect delinquent common charges  however, you are faced with essentially three choices: Enter into a payment  plan with the defaulting owner, sue for money damages, or foreclose. Whichever  method is chosen, it’s important to do it in a timely, formal manner to maximize the recovered funds  and minimize the impact on residents in good standing.    

 Keith Loria is a freelance writer and a frequent contributor to The New Jersey  Cooperator. Associate Editor Hannah Fons and staff writer Christy Smith-Sloman  contributed to this article.