A Palm Beach County condo community is turning to an unusual solution to deal with foreclosure-related problems that are sapping its finances: Bankruptcy court. The approach, experts say, could point the way for other condo and homeowner communities struggling with financial problems because owners can't pay monthly assessments.
In 2010, The Spa at Sunset Isles — with 232 units in
Last summer the community had a bank balance of about $25,000 and was $126,000 in debt to vendors and creditors. It had to raise monthly assessments from an average of about $358 per month to $400 per month — depending on size of each home — and required owners to pay special assessments.
So to get out of financial trouble, the Spa's board decided to file for Chapter 11 bankruptcy in August 2010 in the United States Bankruptcy Court in the Southern District of Florida
"This is new legal ground," he said. "We have done our research and believe this is the first condo bankruptcy case of its kind in the nation." Kinsey was joined in representing the association by Boca Raton attorney Bradley S. Shraiberg, who also specializes in bankruptcy law.
Fast forward to today: The community has emerged from Chapter 11 and now has more than $490,000 in its bank accounts and the board hopes to drop monthly assessments from a current average of $400 to $251 in 2012. John Bazos, president of the condominium association, said the board also plans to make capital improvements to the property, including repairing roads and fixing a broken water fountain at the entrance.
"The community had a complete turnaround from being destitute to being prosperous," Bazos said. "The result is increasing the real estate value because the financial strength we were able to gain via the legal avenues of Chapter 11."
The community still faces financial difficulties because of the downturn in the market and the region's pressing foreclosure problems. Five years ago, a two-bedroom, two bath home in the community sold for about $280,000. Today a similar home sells for around $45,000, say board members. But Kinsey said the bankruptcy filing saved the community from financial disaster.
Kinsey said the Spa's board had to pay about $1,000 in court fees to file for bankruptcy and accrued about $50,000 in legal fees in the process.
By filing for bankruptcy protection in federal court, the community obtained court orders requiring banks to begin paying monthly assessments to the association and take title of homes in foreclosure, Kinsey said. Once the banks take title to units, they are required by Florida law to pay the monthly assessments for those units. And while most people think of financial reorganization under Chapter 11 as being only for major corporations, such as automobile companies and major airlines, condo and homeowners communities are also entitled to file for bankruptcy.
Some of the Spa's homes had been locked in foreclosure proceedings for as long as 36 months, which meant that the association was unable to collect assessments from previous owners that had defaulted on mortgages or from the banks that hold the mortgage notes.
Florida laws could not achieve the same results, Kinsey said, because the statutes do not require banks to pay assessments before they take title nor require them to foreclose on a particular deadline. But in bankruptcy court, Chief Judge Paul G. Hyman had the authority to make the banks involved start paying the association their share of monthly assessments.
That's because bankruptcy laws allow any entity that pays to maintain a bank's collateral to recover its costs. In this case, the board was paying to maintain the common areas of the homeowners community, which are tied contractually to home loans in a shared community and considered part of the bank's collateral. The next step was Hyman's order, handed down in February, which enabled the association to force the banks to take title to units independent of their mortgage foreclosure actions.
"The association had to file Chapter 11 in order to accomplish any and of this," Kinsey said. So far one bank has complied with Hyman's orders and the association has begun filing lien foreclosure suits against the rest, Kinsey said.
Bazos said the community's budget and morale are in the best shape in years.
"Our owners are very happy because their properties are standing on financially sound ground and the properties are easier to sell because you don't have an association that is in default and you have an association that is able to make improvements to the property."