In a city filled with selective co-op boards, condos have carved out their own niche by offering buyers an easier avenue into the real estate market.
But as the housing market sputters, condo buildings are increasingly seeing residents fall behind on their payments of common charges — a stark reminder that condo boards don’t exercise the same level of financial stringency that co-ops do.
Analysts aren’t quite alarmed by the trend yet, but even a small rise in fee delinquencies is noteworthy.
Bruce Cholst, a partner at Rosen & Livingston who specializes in co-op and condo law, said he has seen an increase in the volume and frequency of warning letters sent to condo owners for fee delinquency over the past six months. He said many of those owners heed the warnings, but end up back in arrears a couple months later.
Others interviewed said some condos are asking for common charges several months in advance as delinquent owners refinance. They also warned that more condo owners could fall behind as adjustable-rate mortgages reset to higher rates.
While nobody is predicting that condo buyers will suddenly shift to co-ops, buyers are starting to think more about condos as a higher-risk product, said Noah Rosenblatt, vice president at Halstead Property and publisher of UrbanDigs.com.
For all of the fuss about how difficult co-ops make it to pass muster, they have stood as a bulwark against the mortgage meltdown. The same can’t be said for condos, where buyers have paid little or no money for down payments (during the boom years, some buyers secured 110 percent financing).
“You’re going to have pockets of distress because of the severe credit crisis,” Rosenblatt said, referring to condo owners falling behind on their monthly common charge payments.
Still, Rosenblatt and others cautioned that the increased number of condo fee defaults could be just a temporary blip and should not be used to gauge the overall health of New York City real estate.
Marc Luxemberg, a lawyer and president of the Council of New York Cooperatives and Condominiums, said the newer condos are still on steep learning curves when it comes to dealing with operating costs, which have been steadily on the rise. Some condo owners, he said, cannot, or will not, pay rising common charges.
“One of the tendencies [of condo owners] is not to raise charges and not look ahead,” Luxemberg said.
Luxemberg predicted, however, that owners will become more farsighted, and fee delinquencies will go down with time.
Cholst, the attorney, said new condos face steep hikes early on because developers are “notorious for understating the amount of commons charges, because they don’t want that to scare people away.”
Compounding matters is that some residents are having more difficulty absorbing common-charge increases because their
incomes are often not increasing at the same rate, said Cholst.
Co-op boards, by comparison, are known for being diligent about vetting prospective buyers to ensure that they can handle those increases.
Still, the real debate, Cholst said, is
not condos versus co-ops, but renting
versus owning. He predicted that interest rates and the availability of credit will
influence would-be buyers more than increasing carrying charges.
The transition from renting to owning can itself cause problems.
New owners sometimes carry over their renter’s mentality and withhold their maintenance fee if they believe problems at their apartment are being ignored, said Robert Ferrara, a senior property manager at Anker Management Corp.
“They might say, ‘My roof is leaking; the board did nothing to repair it, so I’m withholding my common charges,’” he said. “Doing that in a condo obviously does not work, especially in a smaller condo, where you can really run into a problem.”
When condo owners do default on common charges, the domino effect is very real. Condo boards see a shortfall in the building’s operating budget, the building’s owners become subject to more frequent and unpredictable fee assessments, and improvement projects can get shelved.
The impact of delinquent owners is much more severe for smaller condo buildings, which can see double-digit increases in carrying charges to cover shortfalls, said Cholst. A single owner at a six-unit condo, for example, would contribute almost 17 percent of the building’s budget and could wreak havoc on his or her neighbors with a default, he said.
Lax enforcement of bylaws can leave a building crumbling and operating in the red. That’s what happened several years ago to a prewar condo called Lido Hall at Central Park North and Seventh Avenue after seven of its 35 owners went into arrears, said Monica Rivera-Mindt, president of the building’s board.
The condo faced mounting physical problems and had no money to pay a lawyer, but found one willing to work for no money upfront.
“These are people who could’ve paid, but historically, nobody had dealt with the problem, so the building was in dire straits,” Mindt said.
After starting foreclosure proceedings, all seven delinquent owners paid up the hundreds of thousands of dollars they collectively owed, along with interest and legal fees, and none were forced out of their homes, Mindt said. Now the condo stays on top of problem owners and has built up a reserve fund.
Big luxury buildings, however, have a larger buffer. They often choose to forego bad publicity and quietly send stern, but often less effective, warning letters.
While fee delinquencies alone are unlikely to cause a spike in foreclosures, they have been prompting condo boards to scrutinize owners’ finances more carefully.
Because of their relative inability to exclude prospective purchasers, condos are more vulnerable than co-ops to marginal purchasers and, in turn, to possible defaults, experts said.
“I see some condos starting to request additional information or documents [from buyers],” said Michael Motelson, a New York attorney and president of Dome Property Management, which manages more than 100 condo buildings in the New York metropolitan area.
And boards can amend their bylaws to be more aggressive. Motelson warned that they need to consult an attorney to ensure they don’t go too far.
The best legal remedy condos have against fee delinquencies is the threat of foreclosure, attorneys said.
Unlike co-ops, condos in New York State get second dibs — banks get first — when it comes to divvying up the proceeds of foreclosure sales, but lawyers said that the property doesn’t actually have to be foreclosed upon in order to recoup back payments.
Condo boards are also often hesitant to actually begin expensive and lengthy foreclosure actions against their neighbors, especially when the bank can foreclose and get most of the proceeds anyway, Motelson said.
Cholst said the threat of foreclosure is more effective than a lawsuit, which essentially “stops the clock” on arrears. Payments that are missed after a suit is filed can’t be added onto the suit later.
Bigger buildings have another formidable weapon, Cholst said: They can yank a delinquent owner’s rights to use luxury amenities. That strategy might have worked at the Downtown Club Condominium at 20 West Street, which had nine of its 289 owners in arrears in December, according to a New York Post report.
To avoid foreclosure or pricey assessments when owners are delinquent in paying their fees, condos should have three times the entire building’s monthly carrying charges in a reserve fund, said Cholst.
While foreclosure numbers in the five boroughs have almost tripled since 2006, the number of foreclosures caused by fee delinquencies is negligible, said Jessica
Davis, president and publisher of NYForeclosures.com.
Davis said most of the city’s foreclosures, which take place in the outer boroughs, are a direct result of mortgage
defaults, not condo fee defaults. But now that the issue of condo defaults has become prevalent, she said that “when people are buying into a building, they might ask how many units are not paying maintenance.”
Frank Rathbun, a spokesperson for the Community Associations Institute, said condo boards should get to the bottom of late payments as soon as they notice them.
But he said boards are generally “compassionate” toward their fellow owners, unless of course those who are making late payments are simultaneously spending money on plasma TVs and other fancy objects. “That’s another thing,” he said.