Condo Conundrum (JPM)

Condominium Associations Hit Hard by Foreclosures Consider Bankruptcy

by Joseph Dobrian

The following is an excerpt from the May/Jun 2010 issue (Volume 75, Number 3) of JPM^®, Journal of Property Management.

With the recent proliferation of condo foreclosures and owners falling behind on their monthly assessments, many condo associations are struggling to find a way to pay their bills and vendors. They are even considering bankruptcy.

“When people start to go under financially, they stop paying condo assessments before they stop paying the bank,” said attorney Evan C. McKenzie, associate professor at the University of Illinois at Chicago. “By the time they get foreclosed on by the bank, they’re already deeply in arrears to the association. And when banks foreclose on a condo unit, they routinely refuse to pay assessments, past or present. That’s breach of contract, but they do it anyway.”

While it’s not the norm for condo associations to file Chapter 11 bankruptcy, it is a recourse that’s increased in the past couple of years, particularly in overbuilt markets. California, Arizona, Nevada and Texas are the markets where most condo foreclosures are occurring, McKenzie said.

At first glance, it would appear that Chapter 11 wouldn’t be available because associations are pass-through vehicles, not property owners. Still, more and more associations are finding ways to test bankruptcy law - and their efforts could lead to considerable litigation over the next few years.

The full article is available as an online exclusive in the May/Jun 2010 issue of JPM^®, Journal of Property Management.

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