By Michael Pollick
How do you end the condo death spiral?
Hire an aggressive debt collector, renegotiate any payments going out the door and act diplomatically while you put in more hours than at your day job.
“I gave up pretty much my life and my vacation,” said Oded Neeman, who became president of the Village at Townpark Condominium Association last summer, a few months after buying a foreclosed unit there.
Since then, he has spent as much as 35 hours a week reading old contracts, jawboning with vendors and figuring out which garages belonged with which units at the Lakewood Ranch complex.
He and his board renegotiated every service, from sprinklers to painting. Along the way, they nudged their condo community from having a plethora of listings but no financing to having conventional financing available and hundreds of thousands of dollars banked.
A condo conversion created as the real estate boom was reaching its peak in 2006, Village at Townpark is clawing its way back to level flight from what its collection agency, LM Funding, calls a “condo death spiral.”
By LM’s estimate, nearly a third of all condo units in Florida are delinquent in their condo association payments. The Tampa company provides associations with a percentage of the delinquent debt, and then works to get more, with the incentive of keeping late fees and interest for itself.
These days, that money can save some associations.
“This isn’t pattycakes,” said Monique Steiner, a property manager at Tampa’s Assurance PA, who has working relationships both with LM and with a Miami collection firm, Association Financial Services. “Assessments are the backbone of the community. They are what keep it standing.”
While plenty of staid and proper condo associations that were around before the boom are doing OK, the ones that govern complexes that attracted speculators are often fighting for survival, trying to function when 40 to 60 percent of their units are not paying condo fees.
For the stalwart property owners still writing monthly association checks, the situation has resulted in a double whammy: Their fees are rising at the same time their potential for resale dwindles. The biggest reason: Associations with a large number of non-paying units are cut off from conventional financing, making it harder to sell units even when the lender and owner can agree on a short sale.
From May 2006 to May 2011, the median sales price for a Sarasota-Bradenton condo fell 48 percent, to $142,900, while dropping 55 percent statewide to $98,200.
Delinquencies cut deeply here: there are 38,877 condominiums organized under 1,061 associations in Sarasota County and 30,178 under 677 associations in Manatee.
Village at Townpark was worse off because it was a converted apartment building. Its units sold more cheaply than new condos, drawing lots of speculators. “We had an awful lot of conversions, rentals into condos, and when the music stopped, those are the associations that really had the problems,” said Stephen Thompson of the Najmy Thompson law firm, which represents Village At Townparks.
Neeman, a 33-year-old Israeli who moved to the U.S. in 2000, came late to the party at Townpark, paying $67,500 in April 2010. He is a self-employed real estate investor.
Both he and Audrey Barrientos joined the board that August. Unlike him, Barrientos got sucked into the buying frenzy when the conversion was first announced in 2006.
“Two of my girlfriends were in line waiting to buy at 11 o’clock at night,” said Barrientos, who ended up paying a $5,000 deposit on a three-bedroom, two-bath unit priced at $256,900, for which she saw only a floor plan. Later, after the market fell apart, she averaged down by buying a second unit for $80,000.
By the time Neeman bought, monthly fees already had risen twice. Then came a special board meeting.
“They told owners they must increase the assessment — the dues — immediately, otherwise the association is very close to bankruptcy,” Neeman said.
Neeman’s fee went from $291 to $364. Original owners with bigger units faced an increase from as little as $200 to as much as $500 per month. Coupled with mortgages higher than the unit was worth, the fees prompted some to walk, creating the cascading effect — that so-called death spiral — in which the layering of negatives ensures even more. The mortgage guidelines set by loan repackaging giant Fannie Mae require that no more than 15 percent of a condo’s units can be more than 30 days delinquent on dues.
For Realtors, submitting a contract that requires a bank loan becomes a matter of guesswork.
“In some cases, you are just going in blind, hoping they are below the threshold,” said Scott Norris, who works for Coldwell Banker on Longboat Key.
When Neeman became president a year ago, he began to realize the depth of the condominium complex’s problems.
A big part of his mission was what he calls bringing “order within the association,” things like, “Who said this renter is supposed to be there? How do you know somebody didn’t just walk into a unit and start living there?”
Occasionally, he has found himself acting as house therapist as well. One Friday night, a unit dweller showed up at his door, cursing him.
Neeman spent that evening talking to the man, “just to calm him down.”
On another weekend, he learned at 1 a.m. that someone’s kitchen had caught fire. The blaze had been put out without causing widespread damage, but Neeman pulled on his clothes to go make sure.
A free-standing billiards room near the clubhouse had to be closed because it had been vandalized. The furniture in the clubhouse also was damaged.
The sprawling property off Town Park Boulevard now gets good marks for appearance. The clubhouse sports new furniture, the billiards room is reopening, the lawn is gradually being re-planted, and the parking lot is being repaved in carefully mapped-out stages.
But Neeman prefers not to talk much about how LM Funding goes about its grim task of squeezing lenders and investors. “We try to separate ourselves from this procedure,” he said.
But LM basically invests in the association’s receivables, paying the organization a basic amount up front, with the potential for more later. LM makes its money by keeping the accrued interest, typically 18 percent, plus any late fees.
“We are incentivized to try to return as much as possible to the association instead of getting whatever we can get and then deducting a fee from it,” said Aaron Gordon, LM’s in-house counsel.
LM hits up the obvious debtors — former and current investors who did not pay assessments. That accounts for about 30 percent of collections.
But the company also gets 40 percent by looking up all the gory details in mortgage and debt documents filed by lenders that are either trying to foreclose or already have and that are now interested in settling up cheaply with the association.
“Most of these condo loans were done in 2003 to 2006, when there were a lot of sloppy mortgages,” said Frank Silcox, LM’s chief executive. “A lot of these mortgage positions are not that strong, and we challenge them.”
The remaining 30 percent of LM’s take also is bank-influenced. Say the bank is doing a mortgage modification with an owner, or is agreeing to a short sale, in which the investor wants to get the lender to agree to a sale at a price less than the amount owed on the mortgage.
“All these things require the lien to be cleaned up and released, so whenever that happens we get a payoff,” Silcox said.
The biggest chunk comes from extracting more from a lender than the basics required by statute. Lenders enjoy a law crafted for their benefit, serving to limit their liability for past fees to 12 months worth, or 1 percent of the mortgage amount, whichever is less.
After four years of slumping real estate, there are cases where a lender would owe a great deal more than that. That debt is accruing interest at a rate set at 18 percent, unless the condo documents specify a lower rate.
“If an account has been delinquent for three, four years, the association may be owed 30 to 40 grand,” Silcox said.
Some of the region’s law firms hold LM in low regard, but Thompson, the Najmy Thompson lawyer, is more philosophical: “If you have people who are not paying, you have to figure out ways to get money in the door.”
The idea of using LM Funding to get aggressive on debt collection came from C&S Management, which had seen the firm in action on another property.
“They used LM with somebody else, so we were like, ‘Let’s do this,'” Barrientos said.
A year ago, 60 percent of the 272 units were delinquent on fees and there was no money in the bank account. Now the association has $300,000 and adequate reserves.
“They had three quarters of a million in receivables,” said Gordon, the LM general counsel. “We have gotten them hundreds of thousands of dollars back.”
While LM pulled the condo out of its financial spin, Barrientos credits Neeman with pulling the board together and using the new cash wisely.
Neeman said some contracts were handed out based on friendships with board members. Meanwhile, as finances eroded, other contracts, such as for lawn care, were pared down to rock bottom at the expense of the property’s appearance.
“Every day he was on it, researching, changing contracts,” Barrientos said. “We just changed everything, completely.”
Neeman said “a lot of good people put a lot of hours into this,” but his pride is clear. There were 24 units up for grabs when he moved in. Sitting in the newly renovated clubhouse, he asked, “How many do you think are for sale today?”
He make a circle out of his thumb and index finger.