By Bruce M. Rodgers / Published August 2016
When a member of a community association fails to pay his association fees, it is his neighbors who suffer—the neighbors who moved in under the assumption that the quality of life advertised to them would remain intact throughout their stay. There simply cannot be enough money to sustain the expected quality of life while some neighbors withhold dues. The roof of a condominium may go without upkeep for years; or perhaps a neighborhood will only be able to pay for landscaping work a third as often, leaving common areas mangy and unkempt. Any number of problems can arise, and the neighbors paying their dues promptly are not going to see a refund just because the board wasn’t able to afford what they promised under the assumption that everyone would pay. When the paying neighbors realize that their fees are going toward nothing, it removes their incentive to continue paying their dues… and so on and so forth.
This cyclic pileup of debt can cripple or even destroy an association if left unresolved. When eight percent of an association’s units fall behind on their payments, many banks will no longer loan them money for capital improvements. At 15 percent delinquency, an ass-ociation can no longer attain a federally-backed mortgage, meaning that only cash buyers are eligible to purchase their foreclosed units. Because there is no competition from traditional mortgage backed buyers, these cash buyers pay far less than what the property should be worth.
Unfortunately, debt collection is a generally difficult and always tedious process, and traditionally the only real option has been to hire a collections lawyer and hope for the best. Debt collection cases can last for years, and legal fees aren’t cheap. With this model, it is not uncommon that the time and money spent collecting the debt will outweigh the debt itself.
In early 2013, LM Funding LLC (LMF) introduced the New Neighbor GuarantyTM (NNG). In this plan, an association’s debt is assessed on a unit by unit basis, and then each unit’s fees going forward are paid on time and in full for either an agreed upon amount of time or until the unit is occupied by a new tenant. In return, LMF is entitled to any and all collections made upon those units’ debts in the future, including interest. The first portion of LMF’s share is used to pay all legal fees incurred in the process of collection. The association never pays any fees to anyone, legal or otherwise, and is guaranteed the cash they need to keep their community up to the standards of those residents who expect and deserve what they are paying for.
Itopia Private Residences of St. Petersburg, FL, has always been regarded as quite a nice, middle class neighborhood to live in. It was also one of the first associations to use NNG. By 2012, Itopia was drowning in debt, and their property values were plummeting as the board worked on a tighter and tighter budget and the grounds saw less and less maintenance. They began to use a much slower plan with higher potential payoff for the association. This plan was successful in collecting upon a handful of debts and would likely have continued to succeed over time, but Itopia’s situation had become so dire that they simply didn’t have any time to spare. They were on the verge of a crisis and needed immediate funding, but their delinquency rate was well above the 15 percent threshold for a federally- backed mortgage. The newly established NNG was their only option.
Itopia signed the necessary contracts and within a week began receiving funding to cover the association dues owed by their delinquent units, leaving LMF and their preferred law firms to worry about actually collecting upon the debt. With payments coming in on a regular basis, Itopia’s board was finally able to properly budget again for painting, landscaping, and all of the other amenities they would have been able to fund if everyone had been paying their fees in the first place.
To date, the debt has been paid off for 151 of Itopia’s 384 total units—just under 40 percent. The legal fees incurred by LMF to collect upon these debts—fees which would have fallen upon the association under the traditional collection model—amounted to roughly $242,000. At Itopia’s lowest point, property values were averaging at about $60,000. Today, that average is $100,000.
Rosy Badwal, president of Itopia, has nothing but positive words to say. “Over the past several years when the first contract was signed with LM Funding in reference to the many foreclosed units at Itopia Private Residences, the program has been extremely beneficial to our community. The community received income through the program and was able to continue maintaining the property,” she says. “The community has gained immensely from our partnership with LM Funding, and we feel very fortunate to continue with the partnership to this day.”
LM Funding’s entire business model revolves around collecting debts at no cost to the association and offers multiple collection plans, one of which is designed to collect fully upon any and all debt an association has already accrued. For many associations, this is ideal, but in just as many cases, the delinquency rate is so high that the only solution is immediate assistance. Having seen a huge spike in property values at absolutely no cost to the association or any of its members, Itopia is the shining example of why the aforementioned business model is such a viable solution.
Bruce M. Rodgers
Founder and Owner of Business Law Group
Bruce M. Rodgers, a graduate of the Levin College of Law at the University of Florida, has worked closely with LM Funding since its inception in 2008. As the founder and owner of Business Law Group, he personally oversaw the collections for a substantial number of delinquent units before relinquishing his position and accepting the job of CEO at LM Funding in early 2013. On October 23, 2013, LM Funding closed its initial public offering and became an officially listed NASDAQ corporation. For more information, call (866) 235-5001, e-mail firstname.lastname@example.org, or visit www.LMFunding.com.