Managing Bank Foreclosures in Associations

Today I will be discussing the impacts of a bank foreclosing on a developer, the impacts that has on the membership, and the steps a bank's asset manager should take after taking the property over. To narrow the topic, I want to focus my point on banks foreclosing on developers who held a majority of unsold units in an association.
When a bank forecloses on developer who owns a majority of units in an association there are two things to consider: 1) the property, and 2) the corporation that exists behind the property. I've bulleted five items below to start the hamster wheel moving on the topic: 

-          From a property level the biggest factor to consider is if the property is in shape enough to be marketable. If the property isn’t in good shape, then you need to consider the best route to bring the property up to par, likely by issuing a special assessment from the association. For example, if the project is a condo and the association is responsible for fixing the roof or painting the buildings, we would facilitate the best way to issue a special assessment. Even if the project isn’t a condo, there are other factors to consider, such as painting the curbs red or conducting an asphalt slurry.

-          The next level to think consider is the association’s corporation. Now that the original developer is gone, who is in control of the board? Every association is a non-profit mutual benefit corporation, and like any corporation you need to have a Board of Directors in place. When a bank forecloses on a developer, you likely have a “headless” corporation on the association level and need to elect a new board. We find that banks want to take control of the board because they own a majority of units in the association, and want to be in the position to make property and financial decisions.

-          Is the association’s corporation current on tax returns, and other state filings (statements of information, statement by CID, etc.)?

-          Is there a property management company hired to handle hiring vendors, placing them in contract, and paying bills or was the developer handling?

-          Was the developers declarant status transferred? Developers in CC&R’s are considered the declarant, and often have super majority voting rights, rights to elect the majority of the board, etc.

Let's face it ... If a developer is foreclosed on by a bank, the association's bank account is probably run thin, and there may be outstanding assessments never collected from the original developer. If a well versed association manager doesn't grab this problem by the horns there could be potential liability for all parties involved. I've consulted on multiple of these projects, and 9 times out of 10 the association isn't being addressed properly.

Who pays the consulting fees for this type of project? Well, I've seen banks pony up the cash so they have a better understanding of what they now own, and I've seen associations pay the fees to ensure everything is in proper working order. Think about it like this, if you suddenly were a 70% owner in a corporation would you want to know everything was being handled properly? I would. Banks do. Potential buyers of units in an association do. An association is a corporation, and by taking ownership of the building, you are essentially buying stock in the association. Very few people buy stock without doing some research, and many hire a professional to advise them before making a final decision.

Happy New Year! I wish you the best in 2012.