The New York TimesJune 22, 2012A SUCCESSFUL condominium depends, in large part, on owners’ paying their monthly fees promptly and in full. Delinquencies can mean less money for maintenance and amenities — and draw the ill will of fellow residents. While the sheer size of larger buildings can often blunt their impact on the budget, small buildings with a high number of delinquencies can be toxic for buyers and a millstone for sellers.
Now, with New York’s economy seemingly recovering, condominium boards are growing more aggressive in cracking down on delinquent owners, according to brokers, lawyers and board members.
Some are publicly shaming deadbeats by posting their names on hallway bulletin boards or barring them from facilities like health clubs and concierge services. Others are reflexively filing liens against owners who are more than 60 days in arrears. And boards are writing requirements into their bylaws to provide additional protections.
According to data from PropertyShark, in the first quarter of 2011 through the first quarter of 2012, condo boards in Manhattan started 111 foreclosure proceedings against owners for common-charge delinquencies, the most since January 2007, when the company first began tracking the information. The median lien amount in the first quarter of this year was more than $16,500, also the highest figure since 2007.
Alexandro Padrés has sat on the board of his building, 184 Thompson Street in Greenwich Village, for five years. Since it was converted to condominiums in 2007, the building has battled owners who fell behind with their monthly common charges and has even navigated the labyrinthine process of a bank foreclosure.
“We have had a lot of experience with this,” said Mr. Padrés, 38, a corporate lawyer who became president of the board in 2010, “and we are adopting a zero-tolerance policy. You can’t have situations where an owner is delinquent for six or seven months and just says that they forgot to pay, even though they were being sent monthly notifications. It just isn’t believable.”
To ensure payment, the building uses a number of strategies, including a 10-day grace period, after which a letter is sent to the owner. If there is no response, the property manager sends a second letter and refers the matter to the building’s lawyer. If there is still no response, the building files a lien against the unit.
Boards are becoming more proactive for a number of reasons: an improving real estate market means there is a greater likelihood that delinquent owners can sell their units for enough to repay the condominium; a proactive approach fits with condominiums’ increasing stringency on buyers’ financials; and finally, after enduring the downturn for several years, boards are growing impatient with owners who are in arrears.
“When the market was soft and there were serious problems,” said Stuart M. Saft, a chairman of the New York real estate practice at the law firm Holland & Knight, “no one wanted to go through the foreclosure process because it was expensive, time-consuming, and at the end, they might not be able to sell the apartment.”
Most buildings would still rather file a lien, a relatively quick and inexpensive process. When a lien is placed on an apartment, it makes it difficult for the owner to sell, since the buyer will want the lien satisfied before closing. Also, banks are often unwilling to refinance a mortgage or provide a new loan to the owner until the lien is removed.
At the same time, condominiums have begun employing other, nonlitigious tactics to persuade the delinquent owner to pay up. This can include barring the owner — or the owner’s tenant, if the unit is being rented — from using nonessential services in the building like the health club or the pool. Doormen may be required to stop accepting packages and deliveries. Some buildings even resort to public humiliation by posting names in common areas.
“A number of our buildings, especially those with high-level amenities, are now passing house rules that revoke the privileges of owners or their tenants who are in default for more than 60 or 90 days,” said Dan Wurtzel, the president of Cooper Square Realty, which manages more than 500 buildings in New York City.
One complex, Zeckendorf Towers at 1 Irving Place, recently instituted a rule that prohibits a tenant from paying the unit owner advance rent, so that if the owner becomes delinquent it will be able to collect directly from the tenant.
“Now, in the event the owner doesn’t keep up with the common charges, this gives the board the ability to go directly to the tenant and have them pay us,” said Lynda Deppe, a senior vice president of City Connections Realty and a resident broker at Zeckendorf Towers. “If they had already paid their rent, we wouldn’t have that leverage.”
Other options include working with the owner to create a payment plan, or persuading the owner to sell the unit and use the proceeds to pay outstanding common charges. Even if there is not enough money left to repay the condominium, a sale frees up the apartment for another buyer, who will pay common charges.
If all else fails, boards can pursue foreclosure. But the process can take a year or more, during which the unit is still not generating the common-charge payment. In addition, the owner may also have defaulted on his mortgage, so the bank may be pursuing its own foreclosure action. When there are competing claims, the bank takes precedence. Back taxes, too, take precedence over claims from a condominium.
“Unless a foreclosure sale brings in far more than the mortgage, our claims are wiped out,” said Jesse Krasnow, a member of the condominium board at the Ansonia at 2109 Broadway. Mr. Krasnow is also a partner of the building’s sponsor and the president of Sirius, the Ansonia’s building manager. “Add to this the fact that bank foreclosures drag on for years, and at the end of it all, the condominium can be out a tremendous amount of money.”
At 184 Thompson Street last year, a unit sold at a foreclosure auction for $610,000, which did not cover its $780,000-plus mortgage. “We saw no proceeds from the sale,” Mr. Padrés said.
A second option is to sue the unit owner for a money judgment. But, said Richard Sharan, a partner at the law firm Pollack & Sharan, “if a unit owner is in arrears on his common charges, he probably doesn’t have much money to collect.”
Money judgments are good for 20 years in New York, however, and can negatively affect an owner’s credit. They can result in eventual payment to the condo if the owner’s other properties are sold or refinanced, said Steven R. Wagner, a partner at the law firm Wagner Davis.
It is easier for boards in co-op buildings to recoup maintenance fees, because they can terminate a shareholder’s proprietary lease and force the sale of the unit. Also, the co-op takes precedence over a bank in the case of a bank loan default, and is paid back first.
Yet while a co-op has a greater chance of collecting, “it still requires hiring a lawyer and commencing legal proceedings, which can cost money and take time,” said Eva Talel, a partner in the real estate group at the law firm Stroock & Stroock & Lavan. “The building ends up not getting maintenance for the unit over a long period of time and has to spend money it probably hasn’t budgeted for.”
When Jack Cassaro, an information technology director at a Wall Street firm, was trying to buy a one-bedroom co-op at 160 East 26th Street in Kips Bay, the board refused to interview him until the seller, who was thousands of dollars in arrears, sent a letter stating that all back maintenance, late fees and legal expenses would be paid in full at the closing.
“It was a nightmare,” Mr. Cassaro said.
In addition, the board required that Mr. Cassaro put six months of maintenance payments in an escrow account until he moved into the unit.
His broker, Elizabeth Kee of CORE, said, “This was supposed to be a cash deal that closed in 10 days, but it turned into a seven-month-plus process.”
But although co-ops and condominiums can face an uphill battle in collecting monthly fees that have gone into arrears, the overall impact on the building often depends on its size. At large buildings where hundreds of apartments share the burden of paying the fees, a handful of delinquencies can have a muted effect.
Not surprisingly, the buildings in Manhattan that have started the most foreclosure proceedings since the start of 2007, when PropertyShark began tracking them, generally have hundreds of units. They include Worldwide Plaza at 350 West 50th Street, with 14 filings; Trump World Tower at 845 United Nations Plaza, 12 filings; and the Ansonia at 2109 Broadway, 8 filings. Trump Tower at 721 Fifth Avenue rounded out the Top 10, with 6 filings over the past 5 years, according to PropertyShark.
At Trump World Tower, for instance, the building is contending with a unit in a bank foreclosure; over the past five years, it has initiated its own foreclosure filings against a dozen others. But with 370 apartments, “it is still less than 2 percent of the building that is in trouble,” said Michael Cohen, the treasurer of the condominium board and a special counsel to Donald J. Trump.
“We build in a 5 percent cushion annually into our budget that allows us to handle these unfortunate situations,” Mr. Cohen said, adding the building had $2 million in its reserve account.
Still, while size can often cushion the effects of a delinquency on a building’s overall health, the issue is becoming more urgent for buildings across the board. “I am increasingly seeing apartments in better buildings that are issuing notices or instituting foreclosure proceedings,” said Mr. Wagner, the lawyer. “It is something that is on everyone’s mind.”
CONDO boards have a few options when an owner stops paying his monthly charges. Unfortunately, the most effective remedies are often the most expensive and time-consuming — and while a legal procedure like a foreclosure drags on, the unpaid bills continue to pile up. Legal experts recommend the following steps:
POLITE BUT FIRM Start off with a letter requesting payment if it is 30 days past due. Then follow up, if the money is not forthcoming, with a more strongly worded letter, perhaps from the building’s lawyer. The board could offer to work out a payment plan.
THIS IS SERIOUS If the bill still isn’t paid, the board can file a common-charge lien on the unit. At this point, the owner’s access to amenities or doorman services could be suspended. In rare cases, the board could offer to buy the unit.
THE GLOVES ARE OFF If all else fails, the board can sue for monetary damages or start a foreclosure filing. (Of course, the owner’s bank may already have done this.)