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Condos/Co-ops Plus Committee April 19 2010 Seminar
with Attorney John H. Bickley III: Necessary FHA filings; managing deliquencies and evictions
A service of the Hyde Park-Kenwood Community Conference, its Condos an Co-ops Committee, and the HPKCC website www.hydepark.org. Join the Conference: your dues and gifts support our work.
Report on the April 19, 2010 Associations Law Seminar
Updates on banking law changes and filing requirements, collections
with Attorney John H. Bickley III of Kovitz Shifrin Nesbit
By Gary Ossewaarde, committee co-chair
Attorney John Bickley III of Kovitz Shifrin Nesbit shared critical information for condominium boards at a seminar sponsored April 19 by Hyde Park-Kenwood Community Conference and co-sponsored by the offices of Aldermen Toni Preckwinkle (4th) and Leslie Hairston (5th) at the Hyde Park Neighborhood Club.
Mr. Bickley explained new rules for filing registration with the Federal Housing Authority; without such filing, it may not be possible to sell units or for prospective buyers to obtain financing in your condo building. Associations should, Mr. Bickley stressed, start the process and get in line right now, using an experienced law firm. He walked attendees through the process and criteria and described some of the obstacles to qualifying—most of which, he explained, should be on the radar for correction in any case. Some of these obstacles include delinquency rate (the biggest problem), adequate reserve, unit owners having owner liability insurance, and rate of owner occupancy. Note that these regulations do not apply to cooperative buildings or single-family home associations.
Mr. Bickley also described in great detail effective practices for collection of assessments and resolving delinquencies and why speed and consistency matter.
Meeting the Filing Requirements
New federal regulations became effective February 1, 2010. The terms for FHA mortgages in multi-family dwellings was set in new regulations by the Department of Housing and Urban Development (HUD) established in late 2009. Therefore, prompt action is necessary by association boards. Those that delay could end up with unhappy owners who cannot sell units and will blame the board. The regulations impact financing for condominium and townhouse units and hence non-complying associations could be “frozen out” of closings and their property values suffer. Note, there is no longer such a thing as “spot approval” short of full certification.
Fast action is needed because not only is there a huge and exponentially growing backlog and delay being created of associations seeking certification—from just 4 offices so far!, but all associations will have to recertify every two years—and those who have not recertified will be removed from certification December 7 of this year.
FHA is expected to finance up to 90 percent of sales in multi-family dwellings; such financing no longer carries drawbacks it once did, is also effectively the only player left, the mortgage rate is lower—so less of a drag on resale. Also, FHA rate of foreclosure is one percent vs. five for traditional, FHA requires owner occupancy, full income disclosure, and mortgage insurance. FHA guarantees up to over $700,000 of a loan. Also, owners in a registered building can refinance lower to FHA and are VA eligible.
There are some side advantages to having certification, including that it is now OK for an association to have “right of 1st refusal” so long as that is not used to block an FHA mortgage or discriminate against protected categories, and if using 2/3 approval rule, speculative buying can easily be blocked.
There are three ways to apply for certification: 1) Do it yourself, but HUD is not set up for that and requires a lawyer’s review anyway. 2) Wait for a lender to file an application for you, but what is a lender’s incentive to do that for one closure in your building, and what is their experience?- You will do most of the work anyway, and if they err and the application is denied, you have to wait a full year to reapply. 3) Third party, preferably by one that does the full review and lets you know whether your association qualifies or what you have to do to qualify. (Some, such as FHA Pros, have a very large database on eligibility and work with legal firms that specialize in servicing condominium associations. You are likely to have to pay in the range of $2000 (but it should not be considerably more) and associations are allowed to recoup the costs and more from future purchasers.
Criteria that can sometimes bar certification
Having a high delinquency rate. No more than 15% of units can be over 30% delinquent. (Late fines that can reduce catching up are therefore not recommended.) If a bank is responsible for a delinquency, sue the bank—they usually pay up. An association can write of delinquency as debt, but loses the right to collect. This is the most frequent problem.
Unit owners must have HO6 condo liability insurance on improvements. It is recommended that the association pass a rule requiring it and submission of a copy as proof.
Over 50% investors (not owner-occupied but rented out) disqualifies. That rate should not be over 30% anyway—if it is, it’s hard to get loans.
The association must have an adequate (“reasonable”) reserve. If you cannot easily show this, you may be required to have a reserve study not more than a year old. Having one is a good idea anyway, for planning and setting assessments and because any member can sue the association if it doesn’t. The study looks at the “useful life” of everything and attributes future replacement costs. This does not mean you have to have enough set aside for any big item or catastrophe that comes along—set aside enough and reasonable every month so you can get a loan for that and can assess to pay that down—but it’s hard to borrow for a big ticket item if you have more than a 10% delinquency rate in the building. A common cost for such a study is $3,500.
So, what’s reasonable—can’t use what used to be called “five factors of the law.” Put ten percent of the budget into capital reserve- maybe less if you things like boiler insurance. (The reserve needs to be in a separate account—all manager firms require that anyway and if you don’t, you pay income tax on it instead of it being a deduction!, and put it in a federally insured account.) Note- cooperatives do not have a capital reserve rule, but a fiduciary duty not to be negligent.
Substantial litigation against the association also bars.
Note: If you need rule changes to correct what may be barriers to certification, get them through going around for proxies—don’t depend on who shows up for a board meeting, quorums etc.
Managing collections and hence delinquencies and evictions
Boards in Illinois have a unique advantage- “forcible entry and detainer.” But “do” budget for bad debt and “don’t” engage in practices of deprivation coercion (“constructive eviction”) that might be construed as creating more than one class of membership. The board itself is allowed means under fair debt collection laws, such as knocking on the door, that management companies and lawyers do not.
What are the advantages of forcible entry and detainer? Can be done in six or seven months, is inexpensive and effective—not least because it seldom comes to having to heave an occupant and their belongings out (or having to store the latter).
But you have to start it fast, do everything right and on time, because likely you are in a race with a bank—and a mortgage has first right ahead of your association (first in time, first in right). Your advantage is that it takes the bank/mortgage company longer to get through the courts. Beware of payment plans and turn the delinquency over to collection by your attorney as soon as it’s clear—60 or even 30 days late. (Naturally, you have to be ready to show—keep clear and accurate books, such as good spreadsheet—a judge will toss out what’s in squiggles or inconsistent.)
Next step is that the lawyer files by certified mail a 30-day-notice-and-demand. About a third pay up at that point.
File suit. You usually get a trial in 30 to 45 days (latter if papers are hard to serve).
Trial. Only the lawyer needs to go, with a copy of your ledger. A judgment-in-favor is granted, with late and attorney fees, along with an order for possession. The latter includes right of temporary possession to collect rent for up to 13 months in order to recover delinquency. The delinquent can move back in if they pay up, with a 60 days stay. Most actually do, especially when they see that 5-day notice from the sheriff.
This leaves only a handful who go all the way to eviction. In that case, you have to provide the moving force, and of course change the locks. In this case of actual possession, do not grant a regular lease, use 30-day terminable and charge less. If the judgment is against a mortgage company as owner, they have to assume the rent; sue them if they don’t. If you sell the unit, the buyer has to pay up to six months of unpaid assessments plus attorney fees.
If the owner has gone bankrupt or filed a bankruptcy petition, there is an automatic stay of execution—but this only applies on what’s owed—they are responsible for assessments etc. from that time on—if don’t pay for 60 days, go to court and get the stay lifted and evict as above. “in rem--” the person, not the unit filed bankruptcy.
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