Who Do You Pay When Your Association is Broke?

Your Association’s Board just sent a letter to homeowners, after careful review it’s officially official… your Association is broke. We’re living in troubled times. The American economy hasn’t seen anything like this since 1929 and we won’t likely be out of it for several years. Condo associations, like the rest of the country, have entered a period of uncertainty, but more to the point, they have entered a period when the cash pool is drying up. Foreclosures, layoffs, bankrupt developers, and owners conserving cash by not paying assessments—it doesn’t matter which, the end result is fewer assessments being paid and way less cash in the Association’s coffers.

The Well Is Dry

Collection actions don’t do much good when the owner is out of work and can barely feed his or her family. Homeowner assessments are way down the list of priorities and what are the association’s options? Record a lien and foreclose? And then what? The lender has a senior lien and it is very doubtful that there is any equity in the property anyway. Small claims court? Sure, and you’ll get a judgment for the unpaid assessments quickly, but after that you have to execute. On what? The fact is, many owners see no value in continuing to pay a mortgage, much less condo association assessments, on a condominium unit that has absolutely no equity whatsoever. And you can’t garnish wages that don’t exist.

Setting Priorities

So now what? It’s time to start prioritizing expenses. Who and what does the association pay? What does it pass over? Yes, that may very well be the subject of an upcoming board meeting in many associations, so we might as well deal with reality now. What is the most important obligation of the homeowner’s association? The health and safety of the owners, for sure. What threatens health and safety if it’s not paid? Garbage collection? Yes. The water bill? Of course. The bill for common area electricity? Yes, especially when there are elevators, pathway and corridor lighting. After that, we would put security services and payment of the premium on the liability and fire insurance premium. Management and accounting services come next so that there is someone to pay the bills that have to be paid. Contributions to reserves should continue with any cash left.

The items at the bottom of our list would be the gas bill for the spa or pool heater; some or all landscaping services; such things as window washing and last of all the cable bill for the clubhouse television! Yes, most of this is obvious, but no board of directors has had to face a situation like this and we want to re-assure them that massive cutbacks in services to accommodate a shrinking budget is not only legal, it would be a breach of their fiduciary duty to sacrifice the health and safety of the owners just to keep the lawns mowed! 

Common Sense Rules

It’s important for every board to consider, and discuss, what you will do as a board member when the cash runs out. Creating an emergency action plan is a proactive approach to help future members as well. If your Association is currently facing such a financial dilemma, think of the personal safety of the owners first and you will usually make the right choices.

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