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Turnaround Case Study: Venetia Country Club

By November 22, 2011 No Comments

In just nine months, an association in Largo, Fla., went from more than $350,000 in delinquencies—and near–collapse—to having reserves in the bank. Here, we speak with board member Scott Simms about how Venetia righted its sinking ship by getting non–recourse capital from LM Funding in exchange for giving LM the right to keep interest and late fees on delinquent amounts it recovered.

Why Venetia Took a Chance

The Venetia Country Club was in dire straits. Simms is a real estate broker and investor with Progressive Asset Management, and he’d purchased 30 distressed Venetia condos from a lender. “So many people weren’t paying their fees that the people living in Venetia were saying, ‘If nobody else is paying their condo fees, why should I?'”

Simms is one of the hundreds of reluctant association board members serving throughout the country. “I didn’t want to be on the board when I bought the units,” he says. “The board didn’t know what it was doing, but that wasn’t their fault. They weren’t in real estate, and the situation was more than they could handle. Board members got so frustrated that I agreed to go on the board.”

The association was underwater by then. “Venetia was days from having the whole complex’s water shut off and having no hurricane insurance,” says Simms. “I’d heard of LM Funding through a contact in the property management business. By the time I contacted them, we had a 55–60 percent delinquency rate to the tune of around $350,000–$400,000.”

Simms was skeptical about whether LM Funding could help, and he researched and mulled whether to sign on for three months. “Our options were so limited,” he says. “But we needed someone to give us money to pay the water company.”

Venetia’s board started by giving LM Funding a fraction of its delinquent units on which to pursue collections. “We didn’t give LM Funding every single unit that was behind,” says Simms. “We picked out about 20 units owned by investors who owed us $10,000– $12,000 whom we knew had no intention of paying us.”

What LM Funding Does

How could LM Funding help? “We work with condo associations, not HOAs, because the statutes in Florida for each are different,” explains Frank Silcox, CEO of the Tampa company. “We help them with their delinquent accounts by providing up–front cash in exchange for assigning to us the late interest charges and fees that have accrued on the accounts. We pay all legal costs and pursue recovery of the delinquent accounts. When we get payoffs, we retain the interest and fees, and the association gets the back assessments. To date, we’re averaging 92 percent recovery.”

How does LM achieve those results? “What we do particularly well is on bank foreclosures, instead of settling for the statutory safe harbor amounts, we’re recovering 100 percent,” says Silcox. He’s referring to the Florida law that allows banks that have foreclosed on condos to pay to the association the lesser of 12 months delinquent assessments or 1 percent of the mortgage amount. “We’re averaging over 600 percent recovery on the statutory minimum.”

The difference between the statutory amount banks are required to pay and the total amount owners may owe can be substantial. “If you’ve got an owner who hasn’t been paying the assessments and the bank has stalled the foreclosure, there could be three years of back assessments,” says Silcox. “When banks foreclose, they’re obligated to settle up with the association. Often they’ll argue that they don’t owe the entire, say, $30,000 in delinquencies for a unit, but, say, $1,500, or one percent of the $150,000 mortgage.”

“We’ll challenge the banks on that,” says Silcox. “To use the safe harbor, banks have to have done everything right. There are about 50 things they can do wrong, and our attorneys are very good at challenging the banks on those things. A lot of the bad condo loans in the past 10 years were improperly done or improperly assigned. Nine times out of ten, we’re going to find a deficiency with the mortgage or assignment of the mortgage that allows us to get the whole $30,000 and not just $1,500. We have the money to fight with the banks, where condo associations are often little nonprofits, they’re adverse to risk, and they don’t like getting in fights with banks. We don’t mind doing it because it benefits us and condo the association.”

Running Venetia’s Numbers

When Venetia signed up with LM Funding, LM Funding paid Venetia $23,445 up front. “That wasn’t a loan,” says Silcox. “The amount we typically advance is the association’s worst–case scenario that assumes the bank will pay only the last 12 months’ assessments or one percent of the mortgage amount. The advance usually ends up being 80 percent of that worst–case scenario amount.” In the 10 months LM has been working with Venetia, it has spent $18,945 on legal fees and paid Venetia an additional $17,711.

Simms was happy to have that initial cash funding. “That money, no matter what happened, Venetia didn’t have to pay back,” he says. “That got us to where we could be behind only on some bills. Once we started collecting funds and the people in the complex saw we were going to make it, more and more owners started paying. We’ve also got some really good people on the board now. It’s been a total turnaround, and we now have money in the bank.”

Venetia still faces challenges. Its delinquency rate is still about 22 percent. It was also hit with a lien from the city of Largo to the tune of about $700,000. “We negotiated it down to $40,000, and with the continued LM funding, we’ve paid it down to $12,000 because we’re getting funds in from people living in the complex,” says Simms. “Next week, we’re going before the Largo City Council to get the lien removed. When that happens, unit prices will go up. Right now, they’re still in the depressed stage. But we’ve got Venetia to a point where we could see it was viable because each step made other steps fall into place.”

Not only does Venetia have money in the bank, it’s also improving the complex. “We got our saunas fixed, had landscaping done, redid the deck and the pool, and have done other things to make Venetia a place people want to come home to,” says Simms. “Before this, people couldn’t sell because of the liens. Now owners can transfer clear title to their units, and everything in the association is operating.”

Won’t Work for Everybody

Simms was willing to take a chance on LM Funding because it didn’t require Venetia to turn over every delinquent account. “If you have situations where you know you’re going to get paid over time, you may not want to turn them over,” he explains.

Silcox agrees. “If you just have lazy owners who’ll eventually pay off their debts, most attorneys and associations can mange that,” he says. “Our strengths are delinquencies where we can negotiate with the banks.”

LM Funding works primarily in Florida, though it has also done some work in Alabama. It’s investigating expanding to other states, but Silcox says its model may not work where state laws aren’t like those in Florida. “Each has different statutory collection policies,” he says. “For example, Florida requires a judicial foreclosure process, but Nevada is a nonjudicial foreclosure state. So our program may be a different in other states. We’re still working those things out.”

Be sure you work with a company that follows your state law, advises Elizabeth White, a shareholder and head of the community associations practice at the law firm of LeClairRyan in Williamsburg, Va. “What we’re encountering with creative collection schemes is that the efforts of nonlaw firms to collect bad debt are constrained by states’ unauthorized–practice–of–law rules,” she explains. “In Virginia, we’ve got very tight rules that don’t allow most collections that have any meaning—the filing of memorandum of lien or warrant in debt or a lawsuit—to be done by outside agencies. A lot of companies think that because they have in–house counsel somewhere who’s come up with a form for employees to use, that satisfies Virginia’s unauthorized–practice–of–law requirements. A lot of nonlawyer board members also don’t know that the groups that do this don’t have the authority to do it.”

Simms is just glad he took a chance on LM Funding. “There are so many associations that don’t know what to do,” he says. “If I hadn’t been told about LM Funding, I’m not sure Venetia would have made it.”