Should cash-strapped condo associations rent units in foreclosure?

Article Courtesy of The Sun Sentinel

By Daniel Vasquez

Published March 18, 2009

 

Renting out empty units may help your community association cope with budget woes caused by owners in foreclosure or delinquency, who do not pay maintenance fees.

As the problem grows, so does the number of associations turning to tenants to generate revenue. Here are some things to consider before your association proceeds.

Can my association rent units?

If an empty unit is not owned by the association, it has no right to lease, rent or do anything for profit with it. That is, unless there is some provision in the governing documents granting that right, or a receiver is appointed to specifically collect rent from an existing tenant in connection with a pending foreclosure action.

However, the receivership process can be costly and time consuming and the money earned from it can be placed in escrow for a long time, said Leigh Katzman, of Katzman Garfinkel Rosenbaum, which represents more than 1,000 associations statewide. "Associations can spend a lot of time and money and in the end spend more money than they will eventually recoup."

And whether your association may legally become a landlord also depends on your documents.

Florida law won't stand in your way. Unless prohibited by an association's declaration, articles of incorporation or bylaws, state law (F.S. Sec. 718.111(9) ) gives an association the power to purchase units in its own community and rent, lease or sell them, said Steven Rubin, a Boca Raton attorney who specializes in condo law.

Rubin said it's important to note state law does not limit an association's right to purchase a unit at a foreclosure sale resulting from the association's foreclosure of its lien, or to take title by deed in lieu of foreclosure.

Two condo cases

"There are two circumstances which must be analyzed separately," Rubin said.

The first is when the association purchases a unit not in connection with its own lien foreclosure action. In this case, which is uncommon, if there is no prohibition in the governing documents, renting is permitted. Some documents, however, may require a certain percentage of unit owners' approval.

The second case is the association's purchase of a unit as a result of the foreclosure of its assessment lien or when a deed is given to the association by the unit owner in lieu of foreclosure. Renting is absolutely permitted in this case, Rubin said.

This applies no matter what documents say and without any membership vote.

"Assuming the association owns the unit which it acquired at its lien foreclosure sale, the association could lease the unit and receive the rents," Rubin said.

Rental responsibility

Whenever an association leases a unit, it has the same obligations as any other landlord would, and is subject to the Florida Landlord Tenant Act contained in Chapter 83 of the Florida Statutes.

Any rental income received by the association must be reported to the Internal Revenue Service, but that will not affect its not-for-profit corporate status. The rental income is usually designated as operating income.

Before the association decides to lease, it should calculate the amount of income it will receive relative to the expenses it will incur, including any refurbishing, experts say.

And associations should understand that if the unit is subject to unpaid real estate taxes or a superior mortgage, the association is not liable to pay those debts. However, those lienors may themselves foreclose.

"From a business standpoint, leasing a unit pending sale or other disposition gives the association the potential to recoup lost assessment income and could be a very wise decision," Rubin said. "On the other hand, the association must also be prepared to comply with its landlord obligations which oftentimes are the source of inconvenience and annoyance to board members, and occasionally require the association to evict the tenants for noncompliance with the lease."


Daniel Vasquez can be reached at:

[email protected] or at 954-356-4558 (Broward) or 561-243-6686 (Palm Beach County). His condo column runs every Wednesday in the Local section and at www.sunsentinel.com/condos. You also can read his consumer column every Monday in Your Money and at www.sunsentinel.com/vasquez 

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