These are tough times for everyone, but when homeowners fall on hard times, they are often late paying condo fees. Some can’t even afford to pay them at all.
Add in to the equation contractors who have gone out of business or boards that are reluctant to spend money on repair and other capital expense projects, and it can be a rough time to be in the property management industry.
“Clients are more cautious with expenditures and budgets have been reviewed more closely than in past years,” says Steve Lewis, AMS, a principal at Harvest Properties, LLC, in Melrose, Massachusetts. “The increased due diligence by banks surrounding condo sales and the restrictions imposedby HUD and the FHA have forced all associations to focus on reserve funding. Increases in reserve funding requirements have impacted smaller condominium associations the most in the form of larger increases in condominium fees.”
More Demands, Less Pay
Len Brotman, PCAM, owner of Enhanced Management Services in East Granby, Connecticut, says that business is both good and bad, but tough times often lead to overall cost cutting and that can hurt managers and their fees. “Because of the economy, condo boards are more likely to change management companies looking for a better deal,” he says. “At the same time, they are putting more demands on management companies and looking to pay less.”
Although many management companies have contracts with the associations, Brotman says that the contracts often have 60- or 90-day cancellation clauses, based on mutual agreement, or they can just cancel withnotice. “So what value do you have in these times?” he asks, referring to the rhetorical question that management firms need to ask themselves.
Regardless of the answer to that question or the economic times, Brotman describes himself as someone who doesn’t get anxious over the economy. “I don’t get anxious because anxiety makes for a longer day,” he says. “We’re trying to produce more with less. Clients want a higher level of information quicker and there is more push from homeowners to have things fixed, but the boards want to know if the work or repairs can be delayed because they don’t have the money. I try to tell them that a small repair now is a big repair later.”
Adding to the woes of some managers are difficulties in getting loans for repairs, like replacement of common elements such as roofs, windows, siding, doors or HVAC systems. Some condo owners survey the declining curb appeal of their community and erroneously blame themanagement firm for the problem.
Alan Seilhammer, senior vice president of NewAlliance Bank in Manchester, Connecticut, says he began to notice a downward spiral around three years ago. “It became noticeable in 2007 when the appetites of the board members and management to get loans started going down and they started requesting less,” he says. “Due to the financial strain on homeowners – even if they do have jobs – they are less likely to approve a speciallump sum assessment,” he says. “So either the projects are getting turned down, or if they are going forward, the association is getting a loan.”
Seilhammer says that business picked up again in 2008, stabilized in 2009 and started on the uptick again in 2009 and into 2010. “What’s changed now, however, is that it’s much harder to get an association approved for a loan,” he says. “Many of them have high delinquency rates of more than 10% over 60 days delinquent.” He works with associations to quantify the level of delinquency that they haveso they understand the cash flow, structure the loan and they take into account the group of non-payers.”
One additional problem that property managers have to deal with, says Seilhammer, are contractors that go out of business or struggle financially. “We’re seeing it often – and if the contractor isn’t going out of business, they are bidding so low they are making little or no money,” says Seilhammer. “A construction line [of credit] has a time frame to it and if you lose the contractor, you have to get a new one and that typically starts to use up their credit line period. It’s not a big impact on us and we’re trying to be accommodating, but it’s somethingthat needs to be resolved.”
Some Unscathed by Economy
Depending on the associations, some managers and condos have escaped unscathed from the economic turmoil. “Fortunately, we have not seen many lender foreclosures at the properties we manage,” says Michael Phillips, CEO at The Copley Group, based in Boston. “In the few cases that the condominium association has had to institute or threaten foreclosure over unpaid fees or assessments we have been successful in getting everything paid.”
Lewis says that his management company has minimized the number of foreclosures and limited their impacton property operations by staying on top of collections actions against delinquent owners.
Nik Clark, director of client services for Reserve Advisors in Milwaukee, Wisconsin, provides reserve analysis for condo and homeowners associations. “We have an engineer or architect go to the properties and do an analysis of a 30-year projection to prepare themselves for and let them know how much they should be putting into a reserve account each year so they don’t have to have an assessment done,” he says. “These reports allow boards to setmonthly fees accurately putting into account so they have enough money.”
Clark says there was actually an uptick in business thanks to the economy. “The downturn in the housing market leads to an increase and demand for our services,” he says. “Associations use the study to prioritize and make tough business decisions since the associations don’t have enough money to do more than one project.”
When it comes to the reserves, Phillips says that the poor economy has led to lenders being more diligent at underwriting reserves and, as a result, most boards are focused on maintaining their reserve levels, cuttingback spending and waiting out the economic rollercoaster ride. Some are increasing fees just to add to the fund, but that’s not necessarily sitting well with homeowners.
Higher Reserve Contributions
“Boards are increasingly willing to have a higher portion of regular monthly condominium fees contributed to the replacement reserve fund and this is helping maintain reserve levels,” he says. “The problem is getting new projects funded. Instead of running reserve levels down, in many cases the work just isn’t being done. There is resistance to increasing fees or approving assessments for capital projects because of concerns that unit owners are underfinancial duress in this economy.
“This becomes especially difficult at properties where there are real building issues that need to be addressed. Often boards are split where some trustees are adamantly resisting any increases or assessments and other trustees wantto do the proper thing to protect the asset and preserve owners’ values despite the difficult economy.”
When looking at the obstacles that his associations are facing, Lewis explains that the biggest obstacle is “associations that have not appropriately planned for the replacement of capital items are finding it difficult to raise funds from owners and/or from banks,” he says.
Silver Lining to Flat Economy
Interestingly, when an economy gets tough and people stop spending, the prices in some industries come down. Phillips says that, ironically, the sluggish economy has helped to balance some things. “For example, energy prices decreased dramatically, which was a boon to many operating budgets, although this is starting to go the other way,” he says. “Insurance rates have been flat and vendors have been willing to hold the line on prices. The condominiumsthat are putting fee increases in place are often doing so just to increase reserve levels, not to counterbalance increasing operating costs.”
While the managers have hope that things will improve next year, they are also being realistic. Seilhammer believes that 2011 is going to be even worse. “It’s going to be worse next year, because so many pent-up foreclosures are yet to be made and those will tend to drive down prices even more,” says Seilhammer. “As a result, even if people have capacity to pay, there will be a decline in property value. The number of people employed won’t improve in 2011 which means the populace won’tfeel the economy is improving and this will carry over into 2012.”
If Seilhammer’s predictions turn outto be true, many property managers will have to continue the hard road they’ve known all too well for the past few years.
Lisa Iannucci is a freelance writer and a frequent contributor to New England Condominium magazine.