As more condo owners find themselves upside down or facing foreclosure, condo associations are discovering it’s getting harder to collect monthly maintenance fees, which is turning them upside down as well.
In the first of what some experts foresee as a coming trend, a cash-strapped Miami Beach condo association has filed for chapter 11 bankruptcy protection.
The Maison Grande Condominium Association faces almost $1 million in liabilities, including $583,451 on a disputed recreation lease for its pool and parking and another $106,000 owed to the City of Miami Beach for code violations for repairs and upkeep it could not afford, according to documents filed in the U.S. Bankruptcy court in Miami last month.
“Unfortunately, I think this is going to be a trend going forward,” said Aleida Martinez Molina, an attorney in the Miami office of Becker & Poliakoff, which is not involved in the Maison Grande reorganization but is considering it for other clients.
Martinez Molina said there is nothing new about associations filing for reorganization, noting that many have after various hurricanes.
“What’s new are the dynamics that are bringing associations to their knees,” said Martinez Molina, referring to the drastic drop in property values and the increasing inability of condo owners to pay mortgages or association fees.
“I think more and more associations are going to look at Chapter 11 reorganization to resolve problems,” she said.
Michael Hoffman, an attorney with Messana & Stern in Fort Lauderdale, which is representing Maison Grande, is more skeptical about how common a trend reorganization might become for associations.
“Maison Grande has an exceptional circumstance with its large recreation lease. They’re paying hundreds of thousands to use a pool,” said Hoffman. “And bankruptcy has a specific solution – bankruptcy allows the debtor to reject leases.”
Maison Grande at 6039 Collins Avenue has 502 condos and the not-for-profit association manages the upkeep of common areas with revenues from monthly maintenance fees.
In court filings the association said it “has fallen on hard times.” It said: “Largely due to the high number of foreclosures, nearly one of every five units is delinquent on its maintenance dues. Prior to seeking bankruptcy protection, the (association) did all it could to say afloat. It raised maintenance fees on multiple occasions and imposed a number of special assessments in the past two years.”
Despite the association’s efforts, the condo has fallen into such disrepair that the city of Miami Beach is fining it daily for various code violations.
The Association’s heftiest expense is the $112,241 it is expected to pay monthly to Maison Grande’s developer, Dorten, as part of a 99-year lease that covers the pool and parking. The association is in year 34 of that lease.
In court documents, the association said the monthly lease payment eats up 33 percent of the association’s monthly revenues. The association criticized the lease as “a vestige of early condominium practice in Miami Beach which was punitive to associations and unit owners.” The association said the developer turned the building over to the association in 1971 but retained the pool and parking areas and then leased it back to the association “at a prohibitive price.”
Now the association is stuck. At the beginning of every year, the monthly fee is adjusted. In 2009, Dorten increased the price to $112,241 a month. The association made one payment in January of $15,000 and ceased regular payment. It tried to negotiate lower monthly fees.
On April 24, Dorten filed a lawsuit against the association for breach of contract and on May 26 sought the appointment of a receiver to impose a special assessment and claimed the association owed $658,451 as of June 1.
In court papers, the association said it paid $75,000 on June 1 and then four days later the association voted unanimously to file for Chapter 11. It filed for bankruptcy protection on June 9 and filed a motion to reject the pool and parking lease on June 12.
The association said that if it cannot negotiate a lower monthly fee or even buy the leased areas, it will seek post petition Debtor-in-Possession financing to build a new pool and parking area.