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What's in the Forecast More Financial Stresses In The Cards for 2012

Turn on the evening news, and you’ll get a good idea of the main topic on the minds of community association professionals as calendars flip to a new year: It’s all about the money.

Like it or not, financial considerations affect every aspect of association operations—from a property’s curb appeal to replacement of key building components, from insurance policies to the laws impacting home sales. So it’s not surprising that when members of New England Condominium’s editorial advisory board—professionals who are leaders in their fields in the condominium industry—were asked what’s in the cards for 2012, financial issues rose to the top of the prognostication lists.

“I’d love to paint a rosy picture” for the coming year, suggests accountant David A. Levy, “but it really looks like more of the same.” Levy, with a practice in Brookline, Massachusetts, predicts that associations will continue to put needed projects on hold. And that, he says, “is not going to help the marketability of units,” especially in an already-struggling real estate environment.

Smaller associations, that typically lack large reserve funds, will be particularly stressed. “Banks are willing to lend… to associations with strong financial statements, strong collections,” he says. For that reason, he recommends that associations “be more vigilant than ever” about collections.

Show Me the Money

As foreclosures and the number of owners dealing with job losses and other financial problems have continued to mount, condominium associations are facing a growing wave of delinquent fees. “I haven’t had bad debt in 20 years, since the (superlien) law went into effect,” says David J. Levy, president of Sterling Services in Holliston, Massachusetts. “Now boards are going to have to decide whether to raise fees on everyone else, or to cut down on landscaping, or not paint the hallways,” he says. Being a fiduciary means being prudent; being prudent means planning; and planning means being realistic.

“They’re trying to be realistic in planning budgets. But they’re seeing slower cash flow and potentially some bad debt.” It’s a problem that will affect associations not just in 2012, Levy, the property manager says, but for years to come. “You haven’t seen a lot of write-downs (of bad debt) for a long time, but you’re going to see more of that now.”

As associations entered their budget cycles, Sterling’s Levy says, “They were asking for flat budgets, regardless of what we really think they need. They‘re looking at what they think the homeowners can absorb. They’re asking, ‘What can we cut? How can we manage expectations? What can we defer?’” Those decisions, especially with deferred maintenance he notes, will play out down the road in bigger expenses. “They’re not looking for value, they’re looking for low prices—and over a 20 year period, that’s going to have huge implications.”

Ralph Noblin of Noblin & Associates L.C., Consulting Engineers, agrees that putting too heavy a lid on spending by deferring needed work is a recipe for disaster. “It’s a perfect storm—all the repairs are coming due at a time when the economy is still bad,” Noblin, a professional engineer, says. While many of the older condominiums have already done the major replacement projects, such as siding and roofs, problems have been surfacing at newer buildings—including some that are only a few years old. “We saw a five-year-old condo last year where the roof leaked like a sieve because of the ice damming,” Noblin notes. The situation was so bad, he says, that the only solution was to “tear everything off” and start over.

On the positive side, Noblin predicts that banks will soon be willing to lend money for condo projects. “They’re making millions of dollars available to associations to fix buildings,” he says. Siding projects, he predicts, will be topping many association lists in the coming year, because water infiltration has become a “mushrooming” problem, leading to a deterioration of buildings. “I see siding as the 500-pound gorilla in the room,” Noblin says. “It has to be addressed, and the dollars are going to be significant.” But while associations will be talking about the siding issue in 2012, he also predicts that 2013 will roll around before the work actually gets done.

“People know they have to do these projects,” agrees Bob Burns, president of Burns Associates—Engineers in Portsmouth, New Hampshire. And while it’s relatively easy to attract bidders for projects, he sees a trend in rising prices for materials that will put further pressure on cash-strapped associations. “Despite the competition, material prices are not coming down,” he says. “There’s an increasing demand for materials overseas; it’s so high in the developing countries … it’s putting a squeeze on the U. S. market. The bottom line is you’re going to be seeing higher costs” for much needed repairs.

Managing Expectations

Also carrying the potential for huge financial implications are actions by mortgage giants Fannie Mae and Freddie Mac. Updated guidelines for those agencies were still evolving as the end of 2011 inched closer, but regardless of the details, they will “play a significant role in the ability of people to sell their units,” says Lou Gargiulo, president and CEO of Great North Property Management in Portsmouth, New Hampshire. Gargiulo predicts that “there will continue to be some level of foreclosures and a significant amount of collection issues with delinquent owners. It’s going to be a challenge in 2012.”

And as communities and their managers struggle to meet those challenges, he suggests, some of the smaller property management firms will find it increasingly difficult to satisfy everyone’s needs. “I think you’ll see more consolidation of management companies… that are struggling and not able to compete. We’ve already seen a number of small operations losing clients because they’re not able to provide the level of service and technology that today’s condo associations have come to expect.”

As time marches on, management firms are using increasingly sophisticated integrated account and management software. Associations are looking for easier ways for owners to pay their association dues, for interactive websites that can track maintenance requests, and for systems that can improve the flow of information. In this unsettled economic climate, Gargiulo predicts, smaller firms simply won’t have the resources to meet those expectations. Those shifts in the management industry will affect condominiums throughout New England.

“People are starting to develop a Depression mentality,” says Stephen DiNocco, principal of Affinity Realty & Property Management in Boston. “Things look bleak, and they see no end in sight. They’re making decisions based on the perception that it’s not going to get better.”

But, he said, many associations have actually made some gains in the past year; they have the required funds in their operating budget, and they’ve kept up their reserves.” But in some cases, boards are now reluctant to expend the funds. “They’re not taking the long-range view; they want to keep fees as low as possible. That could become a real problem” as time goes on, he says.

Managers are going to be spending more time convincing boards that deferring maintenance is a short-sighted approach. “They want to save every penny; they’re worried about the future,” he says.

On the other side of that coin,” DiNocco says, “I’m an optimist. It always gets better, and I think things will get better again.”

A Realistic Approach

While associations are counting their pennies and preparing tight budgets, one area they need to keep an eye on is insurance rates. “Rates should have gone up” in the past few years, but really haven’t moved noticeably, says Bernie Gitlin, president and CEO of Global Insurance Network in Needham, Massachusetts. “I’ve been getting calls daily from associations looking for budgeting figures,” he says. “I tell them they might get lucky (with static rates) but it’s a good idea to budget at least a 10 percent increase. If the cost ends up a little less, they’ll be okay, but if they’ve had significant losses, they’d better budget more.”

A noticeable rate increase “should have happened three years ago” but hasn’t —leading Gitlin to anticipate that the day of reckoning is overdue. After a period in which insurance companies got hit by “the whole nauseating ice dam situation,” hurricanes, and even tornado-related claims in New England, rates will have to rise, “or companies won’t be able to survive,” he says.

And along with price increases, insurance companies will also be “toughening up underwriting requirements,” Gitlin predicts. “This will not bode well” for associations that have been deferring maintenance during fiscal hard times, he says.

On the legal side, condominium associations will continue to face a wide array of issues in the coming year.

“We’re looking forward to a lot of interesting cases coming up,” says attorney Henry Goodman, principal in the Law Offices of Goodman, Shapiro & Lombardi, LLC, located in Dedham, Massachusetts and in Providence, Rhode Island. He foresees more cases arising related to issues ranging from mold and water intrusion to smoking restrictions. “It may be coincidental, but as the economy gets harder, and money gets tighter, there seems to be more litigation,” he says.

“Smoking, noise, smells, pets—people look to the board to fix problems, and when the board doesn’t, they decide to sue,” he says.

The legal tug-of-wars between associations and developers over construction defects, and between unit owners and association boards over repair issues, are also likely to escalate, Goodman says, as buildings experience problems like the water infiltration issues that Noblin mentions. Unit owners, not surprisingly, expect their homes to be protected from the elements, and when leaks occur, they expect to see repairs done. “A lot of condos have tried to make these fixes on the cheap,” Goodman says, “and if the problems re-occur, owners argue that it’s because the board has not undertaken to make substantial repairs … and is deemed to be negligent.”

Attorney Stephen M. Marcus, a partner in the Braintree, Massachusetts, law firm of Marcus, Errico, Emmer & Brooks, agrees that “as buildings age, there are going to be more suits by owners to make repairs”—again, coming down to the problem of association finances. “If the association doesn’t have the money, and can’t get a loan, it puts the board in a difficult position,” Marcus says.

Which brings him back to the issue of collections. “Collections and non-payment of fees will continue to be a problem in 2012,” Marcus predicts. “We thought it might slow down, but it really hasn’t.”

Also on the attorneys’ minds as the new year approaches are issues related to the FHA, Fannie Mae and Freddie Mac. The FHA requirements, Goodman notes, are “still a work in progress,” and will continue to hamper the ability of owners to sell their units, adding to the stress on associations.

In the face of pressures to repair buildings, Marcus predicts that condo associations will increasingly turn to financial institutions to borrow money. “There are six to eight lenders, local and national, that are filling the need with competitive rates,” Marcus says, “and I think condo association loans will explode” in the coming year.

On a more inter-personal level, Marcus anticipates seeing a rising number of discrimination cases in the year ahead. “Cases related to discrimination against children and against persons with disabilities will continue to come up” in the community association setting, he predicts.

What do all these pressures mean for condo owners and association board members?

Jasmine Martirossian, a lecturer in the Law, Policy and Society Program at Northeastern University in Boston, suggests that it’s time for everyone to take a breath, slow down a moment, and work at defining their expectations.

“We tend to jump the gun …. We do not step back and realize that the thing we are thinking about does not happen in a vacuum,” she suggests. As people have adopted new technologies, they are increasingly multi-tasking and becoming more impatient. “Our attention span has evaporated completely,” she says. In the community association environment, this can lead to boards making decisions too quickly. “We sometimes do not go to the level of depth we need to go to,” she says.

For communities to work, especially in the stressful economic environment that is expected to continue in the new year, “you have to recognize that you have moved into a community. People’s values may be different; but you have to think in terms of being neighbors.”

Pat Gale is a freelance writer and an associate editor at New England Condominium.

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