Newswire Management

Handling Defaults of Monthly Payments

In the past, severe financial turmoil, such as in the early 1990s, the dotcom bust and the 2008 financial crisis, has led to an increase in residents of condos and co-ops falling behind in their monthly charges.

This puts pressure on boards, particularly of co-ops, to be vigilant in approving new purchasers and aggressive when a resident is in arrears in maintenance charges. In both co-ops and condos, residents’ failure to pay burdens the property as well as other unit owners or shareholders who must cover the reduced cash flow. This is a heavier burden in co-ops, where real estate taxes are included in the monthly payments. In condos, the unit owner pays directly to the city.

Richard Montanye, CPA, managing partner at Marin & Montanye LLP, said that boards work on tight budgets with little room for cuts as most expenses are fixed. It’s estimated that about 90% of costs fall into this category. Montanye recommends that boards closely monitor expenses and determine maintenance increases that cover costs. This is especially true in the past year with eye-opening upticks in energy, labor and taxes.

What steps should a board take? Montanye advised boards to closely vet the finances of the prospective buyer, adding that banks are less stringent in looking at the applicant’s information and permit higher levels of financ- ing. He also warned against applicants who have a variable mortgage rate. As we have seen in the past year, rates can skyrocket in a short period.

For applicants with borderline finances, Attorney Aaron Shmulewitz of Belkin Burden Goldman LLP, said boards could obtain a year’s worth of maintenance charges as security to be held in escrow. However, Shmulewitz noted, boards must refrain from imposing requirements so stringent that many buyers would not qualify and current shareholders could not sell.

So, what is a board to do when a resident starts to fall behind? Both agree the board should commence legal action after the second month of non-payment. One effective tactic Montanye has seen is denying the parking space or gym use to delinquent payers. Shmulewitz suggested that boards can loosen their rules on subleasing.

Besides a non-payment eviction procedure in Housing Court, another option for boards is to take what is called a plenary action in the Supreme Court where the cooperative sues for the amount due. Co-op boards should also notify a delinquent shareholder’s secured lender of the shareholder’s maintenance payment default, and demand that the lender pay the arrears under its recognition agreement with the cooperative. Lenders typically do so, and then start loan foreclosure proceedings against the shareholders.

The economic outlook is cloudy, but we have learned from experience that boards and property managers need to be ready to act quickly and aggressively if residents withhold monthly payments. Now is the time to establish action policies.

Ira Meister
President and CEO
Matthew Adam Properties Inc.
375 Pearl Street – 14th Floor
New York, NY 10038