As the recession has lingered on since 2008, co-op and condo buildings  throughout the city—from luxurious downtown buildings to middle-income and lower-income walkups—have found more of their residents in arrears with their monthly fees. Some of  these people have lost jobs, and unemployment has forced them to prioritize  (and sometimes skip) their monthly bills. Credit cards and mortgage payments  often are paid first, followed by utilities and property taxes.  

 Building fees can get back-burnered when a resident’s finances are tight—partly because of the fact that the condo board members aren’t likely to show up on the doorstep of a resident in arrears and demand payment.  Thus, residents who are in arrears often don’t immediately feel an impact from the failure to pay.  

 Even so, there is a real cost resulting from shareholders and unit owners not  paying their fair share. Essential building maintenance sometimes cannot be  done due to lack of funds, or important capital improvement projects such as  new windows throughout the building may have to be put off indefinitely. Simply  put, too many residents failing to pay their monthly fees could ultimately lead  to extra fees for every resident—and this can be downright disastrous if a major repair comes up and the building  is caught seriously short of funds.  

 The Real Impact

 It’s a building, and being just one resident, not paying your monthly fees won’t have much impact, right? Wrong, says Phillip Miller, president of accounting  firm Miller & Cusenza, PC in Manhattan. Residents often assume that the building will survive  if they don’t pay on time, but it’s not true. “If the co-op doesn’t get its receivable fees, they won’t be able to meet their expenses. They won’t have enough to pay vendors, who won’t service the building if they aren’t paid,” Miller says.  

 While a percentage of monthly fee scofflaws aren’t doing so out of necessity, most residents who don’t pay do so because they've fallen upon tough times. “The vast majority of people who are not paying are in economic trouble,” says Jules Frankel of the accounting firm Wilkin & Guttenplan, PC in East Brunswick, New Jersey. But sympathy for neighbors  notwithstanding, “The reality is that everybody else ends up paying for those who aren’t paying.”  

 For some residents, the biggest misconception regarding not paying their fees is  based on a lingering landlord/tenant mentality. Though resident shareholders  are technically the owners of their apartments, they tend to view the co-op or  condo board and management as landlords rather than the elected representatives  and employees they actually are. Such residents may view their board/management  team as bill collectors or adversaries, and don’t see that not paying their fees directly affects their neighbors, says David  Brauner, an attorney with the law firm of Windels Marx Lane & Mittendorf in Manhattan.  

 It’s not uncommon in buildings that have been converted from rental to ownership  for residents to not really grasp that the resident-management relationship has  changed. “The relationship may look and feel the same but fundamentally it’s very different,” Brauner says.  

 Act Now

 Given these facts, and also the reality of needing to live amicably with one’s neighbors, boards and managers of buildings with residents who are in arrears  should tread wisely while dealing with the problem. Making the proper moves to  collect fees could ensure payment or do the opposite, dragging out the  conundrum.  

 Faced with a resident who is not paying his or her monthly fees, some boards  simply fail to act. The building might not have a standardized procedure for  dealing with missed payments, and board members might let the problem go  unchecked because they aren’t sure how to deal with it. In higher-end buildings, a few missed payments from  a resident may not be a big deal but in buildings with tighter finances,  missing payments affect everyone.  

 Depending upon the building’s bottom line, a board or management team could contact a resident about a  missed or late payment after just one time. Miller recommends such a  nip-it-in-the-bud approach. “If I were on a board, I’d contact a resident after one missed payment," says Miller. "After the second missed payment, you have to be aggressive. With  condos, you really have to be very aggressive."  

 Quick action is needed in condos because the bar of financial responsibility on  the part of the condo owner is lower than the bar for many co-op residents.  When buying a New York City condo, a prospective resident’s financial state is not as deeply investigated as they would be if he or she  were purchasing a co-op. “Many co-ops require that residents have monetary reserves,” Frankel says.  

 Most well-run buildings have a protocol for dealing with missed payments. If you  are late ‘x’ number of days, a letter is sent to you from management asking for payment.  After ‘xx’ days late, a late fee is assessed and a second letter sent to the offending  unit owner. Following those steps, the matter is sent to the building’s attorney to handle.  

 Many buildings do have a bad debt expense allocated in their budget. But during  hard times such as the past few years, it is possible for the number of  residents who are in arrears to overwhelm a building’s resources and derail the management team’s best efforts. Because of this possibility, each board member should remember  the fiduciary responsibility to act in the best interests of the whole  building.  

 “Each board member needs to ensure that they have a process to quickly act when  arrears reach a certain dollar amount and are a certain length of time  outstanding,” Frankel says.  

 Consequences of Debt

 Since the impact of residential debt to a building might immediately be felt by  its management, some buildings might want to take legal action fairly quickly  after finding a resident in arrears. Legal help is an important tool in dealing  with a resident in arrears. After a third month of nonpayment of fees, a board  might want to send the matter to its attorney, Miller says.  

 Some exceptions can be made by some buildings for residents who are in arrears  but are hardship cases, industry experts say. Buildings that are running on  very tight budgets won’t be able to allow such exceptions for very long.  

 The real day-to-day impact of residents being in arrears can be devastating to a  building’s financial state. One Queens co-op building didn’t have enough money to meet operating expenses because there were so many  residents behind in their payments. A significant percentage of residents in  the building were unemployed, and the lack of funds meant the building’s management couldn’t get vendors to work in the building because they thought they wouldn’t be paid. As a consequence, the building was quickly falling apart from lack of  physical maintenance.  

 Another building with similar woes needed its HVAC system fixed but its  contractor balked at the job, fearing he wouldn’t be paid. The management had to hire another contractor at an exceptionally  high rate of pay, just to get the job done.  

 In buildings with financial problems from residents missing payments, the ripple  effect could be fast and severe. The building service world is small, and word  travels fast—buildings whose management is failing to pay vendors in a timely fashion could  quickly become pariahs.  

 “Contractors all know each other, and they want to be paid. To get any services,  you’ll have to start putting money upfront [for work to be done],” Miller says.  

 Such a situation might call for the board putting a special assessment on all  the residents, increasing the financial burden on the residents who are paying  their fees on time.  

 First and foremost, the board must see that the building meets its obligations. “The fiduciary responsibility of a board is to ensure that enough money is coming  in to protect the building,” Frankel says.  

 Disuniting Communities

 The financial costs to a community with apartment owners in arrears can be  quickly evident to everyone but the more insidious effects can amount to a  breakdown in community feeling. People can become less friendly due to  perceived inequities between them and their neighbors.  

 “When the majority of residents feel that the minority aren’t paying their share, it can adversely affect relationships,” Brauner says. “You don’t want to live in a building where people are glaring at each other in the  elevator.”  

 Even more tangibly felt than feuding neighbors, having residents in arrears  could impact the long-term solvency of a building. New FHA loan requirements  for prospective buyers mean that certain buildings with serious financial  issues aren’t always able to welcome into the community new residents, because those  would-be owners can’t get FHA loans.  

 “This is an ironic issue, because certain buildings don’t want to be FHA-approved because they want the prospective resident to  personally have the resources to get a non-FHA loan. In other buildings, FHA  help is critical for buyers,” Frankel says.  

 The recent financial crash and resulting government bailout of financial  institutions hasn’t made any of those companies free with a buck—the opposite is actually true. Lenders, in general, are looking at a building’s financial state before making a loan to a prospective unit owner. “A large amount of arrears in a building might make it hard for a buyer to get a  mortgage,” Brauner says.  

 In essence, money does make the world go round. So make sure your co-op or condo  building has the money it needs to make physical repairs and keep in the black  by aggressively going after late or non-payers.   

 Jonathan Barnes is a Pittsburgh freelance writer and a frequent contributor to  The Cooperator.