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Are We Stable Yet? Condos Still Battling an Uncertain Economy

 It’s still all about the economy. The foreclosure avalanche seems to have slowed in  New England, but community associations continue to fight a seemingly endless  wave of financial issues as 2012 ends and 2013 looms. For this year-end  edition, members of New England Condominium’s Editorial Advisory Board were asked to review events of 2012 and consider what  communities might expect to see next year.

 “Foreclosures are still keeping us very busy, but we see some signs that the  non-payment of condo fees is getting a little better,” says attorney Stephen Marcus, a principal in Marcus, Errico, Emmer & Brooks, PC, of Braintree, Massachusetts. At the same time, says David J. Levy, PCAM, president of Sterling Services in  Holliston, Massachusetts, payment problems seem to have moved from the  mid-range properties to some higher-priced communities.  

 “The total receivables are lower today than two or three years ago,” Levy says, “but we’re seeing high-end places having collection issues they didn’t have at all back then.” Part of the problem, he speculates, is related to low interest rates being  earned on investments. “People had CDs that were paying a good rate, but now they’re paying one-half of a percent. It’s having an impact.”  

 The anxiety can be palpable, as condo owners fret over home values. “Financial conditions are such that people still feel negative about their  ownership,” says Stephen DiNocco, AMS, principal of Affinity Realty & Property Management in Boston. “You see it in the type and level of comments you receive; people are anxious,  don’t seem positive. They’re more reluctant to see the big picture.”  

 And in the wake of the foreclosure crisis, the number of units occupied by  non-owners continues to impact associations when insurers, banks and potential  buyers are looking at properties. “Having a higher percentage of rented units goes to the underwriting issue,” Bernie Gitlin, CIC, LIA, executive vice president of Risk Strategies Company in  Randolph, Massachusetts, says. “[Insurers] want stable associations, with good reserves. The insurance companies  have always wanted that, and they’re not rushing to write” policies for properties that don’t meet their expectations.  

 When new policies do come around, he notes, premiums are likely to be higher  than expected. “Number one, 2012 was the worst year in the world for property insurance,” he says. “It was crazy stuff: tsunamis, earthquakes, even a tornado in Springfield.” Many of those losses were being paid by reinsurers who write insurance all  around the world. “They got murdered; they raised their rates, so insurance companies also raised  theirs.”  

 On top of that, he says, the underwriters had investments in three- to five-year  bonds. “Interest rates came off of 3, 4, 5 percent and they’re now getting 1 percent or a half of a percent, so they’re taking the hurt in both directions.” The result, again: higher premiums coming down the pike.  

 While associations may have struggled over the past few years to maintain  healthy reserves, they’re finding that their aging buildings increasingly need work — repairs, renovations and upgrades that seem to get more expensive with every  passing day. “Real estate has gone down, interest rates have gone down, but materials have  jumped 10 percent or more in a year’s time,” notes Ralph Noblin, PE, of Noblin & Associates, LC, Consulting Engineers, in Bridgewater, Massachusetts.  

 Here’s a run-down of topics that are on the minds of industry experts today.  

 Keeping Up Appearances

 “There’s no question, people have been deferring on expenditures for capital projects,” notes Lou Gargiulo, CMCA, president of Great North Property Management in  Exeter, New Hampshire. “It’s been one of the biggest issues we’ve seen this year.”  

 But times may be changing.

 “I’ve been relatively surprised, and pleased, that many associations have moved  forward with major projects despite the economy,” Noblin says. “These projects clearly had to be done” but in many cases, had been on hold as the economy languished. “One association had been dragging its feet on a deck replacement project,” but after the decks were condemned by a building inspector, the association was  convinced that the time had come to bite the bullet, he says. But on the other hand, he adds, a growing number of communities have simply  recognized that their buildings looked “tired,” their roofs were nearing the end of their lifespans, and their driveways and  parking lots gave visitors and residents alike the wrong message. “When these components are getting close to end of their life, they look really  bad. But as projects get done, they raise the ‘happy level’ across the community.”  

 Communities, Levy agrees, are starting to address problems they were  apprehensive about a short time ago. “They see the economy slightly improving,” he says. “People more comfortable pulling the trigger, and we can convince them that now  is the time to get better prices, to take advantage of big need for contractors  to work.”  

 For some associations, repairs and upgrades aren’t an option. As the insurance market tightens, Gitlin says, “insurance companies are underwriting far more strictly. Some associations that  have been getting away with murder are being pushed into high-cost insurance. Say a building has  old writing; some companies previously may have written insurance, but now they’re saying they’re not going to unless you re-wire the building. They’re looking far harder at what’s there, the physical attributes.”  

 While many are still sitting on the fence, some associations, DiNocco says, are  starting to take a look at not only obvious items like roofs, but even some  discretionary items. “Every property is unique,” he notes. “Several properties now have very large projects—like $365,000 to do an entrance way because it felt dated; it wasn’t saying the right thing about first impressions.”  

 Fortunately, Noblin and others say, as condos think about needed work, financial  institutions have loosened the purse strings, and association loans are readily  available. About a half-dozen institutions serving Massachusetts associations—including Brookline, Rockland Trust and Community Association Bank — are making association loans today, he says. “I think you’ll see more loans in 2013; it’s an easier way to make the cost palatable” to owners, Noblin says.  

 Those loans are often running into the range of $2 million to $4 million, he  says, as associations face the problems head-on. “The attitude is to borrow now and take care of everything. I think buildings are  doing the right thing, tackling these issues, but that doesn’t mean that the unit owners paying the freight are any happier.”  

 In fact, says Marcus, a conflict between the cost of the projects and the  ability of the unit owners to afford them seems to be creating a movement  toward votes to remove the board. “There’s a conflict between the need for money to keep the building in reasonable  repair and the ability of owners to pay for it,” he says.  

 Who’s in Charge?

 Conflicts between boards and owners do seem to be escalating, says attorney  Henry Goodman of Goodman, Shapiro & Lombardi in Dedham, Massachusetts. “Issues that have cropped up that we haven’t seen in the past include questions like ‘who controls the board meetings?’” Board meetings, he notes, are business meetings of the board; their structure  may be included in the condominium documents. “But where the documents are silent, I think it is the board that determines the  administrative rules of the meeting. The documents may call for a particular  agenda — that’s a minimum agenda, with a roll call, minutes, and so forth — but the board may add to that agenda and may also determine the rules of the  meeting,” he says. The board may also determine the nature of proxies that will be  accepted and counted.  

 Questions about the conduct of board meetings, he notes, have arisen in a couple  of cases lately — which may or may not be coincidental.  

 Also cropping up, Goodman notes, have been issues about priority liens. At a  time when foreclosures continue to affect condominium communities, “lenders are kicking back against more than one priority lien,” and at least two cases were recently underway, one in a bankruptcy court and  one in a district court. “It hasn’t gone to a higher court yet, but presumably will in the coming year,” he predicted.  

 One “hot button” issue that is likely to smolder throughout New England in the year ahead is the  smoking ban, Marcus predicts. “No-smoking buildings are becoming more prevalent,” he says. “I think you’ll see more associations become no-smoking buildings. Developers of new  condominiums want those restrictions out of the chute, and it seems to be a  trend in existing buildings.”  

 That, of course, can lead to a tug-of-war among advocates of smoking bans,  boards that are inclined to go along with them, and current smokers who don’t want to see their liberty infringed upon. Some recent bans, Marcus says, “seem to be going smoothly, especially if you grandfather it in. Some do and some  don’t grandfather; more are doing grandfathered — but some are doing straight prohibitions. We haven’t seen the legal battles yet.”  

 Managing Management

 While juggling concerns about finances and improvements, community associations  have faced some difficult management issues in recent times.  

 “There’s been a failure of controls in some of the smaller management companies,” Gargiulo says. “There have been situations where money has been lost; as a result of that,  boards have become more concerned and are seeking out companies that have the  capacity and systems in place to see that their associations are protected.” Two recent cases of fraud or theft, including what Gargiulo terms a “huge” one, occurred recently in New Hampshire. “It always seems to be very small management companies that have these problems — companies that haven’t been around a long time, don’t have the people and systems in place, and the associations have been  victimized.”  

 Those problems, he suggests, can often be tied back to the economy.  

 “I think a lot of it is that some boards are looking for the least-costly  provider. It’s a low-cost entry business; there’s no licensing, no bond required. I think it’s a huge issue that’s going to get bigger. I’d love to see a movement toward licensing … it’s a step,” he says. “There should be requirements where companies have to meet certain financial  standards.” As an example, he notes that real estate professionals are required to post a  $50,000 bond. “I strongly believe,” he adds, “that there should be a minimum level of accreditation” for property managers.  

 Finding good managers isn’t a problem only for associations; it’s proving lately to be a challenge for management companies, too. Condominium  management, Levy notes, “is a time-demanding career” that isn’t attracting a lot of people these days. “The difficulty in getting property managers is constricting the growth of  companies,” he says.  

 Gargiulo agrees it’s a challenge. To meet it he says, Great North is using its resources to create  a new generation of managers. “We’re hiring and training people internally,” working with new folks for a year or two, he says. “We have 27 managers; to maintain that level, you have to be able to internally  produce them, so we can continue to grow.”  

 Keeping on Track

 While uncertainty about the economy continues to shape decisions, industry  professionals are taking a positive outlook for the year, or years, ahead.  

 “I’m always encouraging people to have a reserve study done, etc., to look at  continual renewal” of the condominium property, DiNocco says. At Affinity, “just about every property that was in need of capital projects has a program in  place.  

 “I feel positive about the coming year,” he says. “Those who have planned well and have been attentive to collections and finances,  repair and replacement, are going to face next year as just another year, with  new challenges, of course.  

 “But if you have property that’s waiting to make repairs and replacements, waiting for the economy to turn  around before they properly fund their budget, next year is not going to be any  better than this year. Let’s face it: You’re not going to see 2006, which was probably the best year for real estate  market, anytime soon. It’s not going to happen overnight.”   

 Pat Gale is associate editor of New England Condominium.

 

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