The Sep­tem­ber is­sue of De­vel­op­ments Mag­a­zine fea­tures an ar­ti­cle ti­tled Rx For Your Fis­cal Health - An­nual Checkup on Your Re­sorts and HOAs.  In putting the story to­gether, Geri Bain in­ter­viewed Kurt Gru­ber, Baker Hostetler part­ner and Hos­pi­tal­ity Lawg Ed­i­tor.  Al­though the ar­ti­cle pro­vides in­sights from a host of in­dus­try pro­fes­sion­als, we are re­pub­lish­ing here Kurt's com­ments in full.

Ques­tion #1:  With the re­cent eco­nomic chal­lenges, what has changed in re­gard to main­te­nance fee col­lec­tions?  When did you start see­ing the change?  What does this “new world” look like?  Have you seen any prob­lems with real prop­erty tax col­lec­tions (if they are billed sep­a­rately)?

As one might ex­pect, the down­turn in the econ­omy and the re­sult­ing fi­nan­cial chal­lenges faced by peo­ple at all in­come lev­els are hav­ing a sig­nif­i­cant im­pact on main­te­nance fee col­lec­tions.  Time­share man­ag­ing en­ti­ties con­tinue to ex­pe­ri­ence this neg­a­tive im­pact across the full range of prod­uct types and prices, from tra­di­tional, ba­sic time­share pro­jects to high-end, full ser­vice frac­tional re­sorts.

The in­crease in col­lec­tion chal­lenges is not just a re­sult of the eco­nomic hard­ship faced by in­di­vid­ual shared own­er­ship own­ers, but a com­bi­na­tion of a num­ber of cir­cum­stances that have cre­ated a “per­fect storm” for man­ag­ing en­ti­ties.  One of the ex­ac­er­bat­ing fac­tors is the fall­out from those time­share de­vel­op­ment com­pa­nies who now carry a larger main­te­nance fee and tax oblig­a­tion as a re­sult of an over­abun­dance of un­sold in­ven­tory that was con­structed to sup­port a sales and mar­ket­ing ef­fort that is no longer sus­tain­able.  An­other el­e­ment is the ag­ing of in­dus­try prod­uct, with many pro­jects now in their sec­ond and third decades and with a grow­ing num­ber of own­ers who love the prod­uct and who pre­vi­ously paid their main­te­nance fees on time, but who are now look­ing for an exit strat­egy and a way to re­duce ex­penses as their lifestyles change.  A third con­sid­er­a­tion is the large num­ber of time­share in­ter­ests that are stuck in limbo be­cause the time­share owner is in de­fault of both the oblig­a­tion to pay main­te­nance fees and taxes and the oblig­a­tion to pay a mort­gage pay­ment.  Lenders who have no out­let to re­sell in­ter­ests taken back in fore­clo­sure are slow to re­cover in­ven­tory for which they will then be li­able to pay main­te­nance fees and taxes go­ing for­ward un­til they can arrange a trans­fer to an­other party.

This change in main­te­nance fee col­lec­tions be­gan in late 2007, picked up steam in mid-2008 as a re­sult of the sharp in­creases in gas prices, and dra­mat­i­cally ac­cel­er­ated at the end of 2008 when the en­tire econ­omy be­gan to fal­ter.  Since then there has been some im­prove­ment, es­pe­cially as less sta­ble own­ers have de­faulted and moved out of the sys­tem; how­ever, this im­prove­ment has not oc­curred at the pace that man­ag­ing en­ti­ties want to ex­pe­ri­ence.  The “new world” will con­tinue to in­clude steady im­prove­ment in col­lec­tions, and I do not see an­other dra­matic spike in de­faults on the hori­zon so long as the re­cov­ery pro­gresses; how­ever, man­age­ment will con­tinue to need to dili­gently and ag­gres­sively ad­dress col­lec­tion is­sues.

In my ex­pe­ri­ence, there is not a sig­nif­i­cant dis­tinc­tion be­tween the pay­ment and col­lec­tion of main­te­nance fees and the pay­ment and col­lec­tion of real prop­erty taxes.  If the con­sumer is will­ing and able to pay the one, then he or she will gen­er­ally pay the other.  This is true in part be­cause own­ers of­ten do not fo­cus on these fees and taxes in­di­vid­u­ally, and in part be­cause there is not any real ben­e­fit to pay­ing one but not the other – that is, the tim­ing, process and re­sult of a fore­clo­sure ac­tion is gen­er­ally the same for both.  The same is not true with re­spect to the pay­ment of main­te­nance fees and taxes and the pay­ment of mort­gage oblig­a­tions.  Since the oblig­a­tions are owed to dif­fer­ent en­ti­ties and the reme­dies for fail­ure to pay may be dif­fer­ent, some con­sumers will pay one but de­fer the pay­ment of the other.

Ques­tion #2:   How have man­ag­ing en­ti­ties re­sponded and how have you helped re­sorts and own­ers re­spond to these chal­lenges? 

The re­sponses to the col­lec­tion chal­lenges faced by as­so­ci­a­tions and man­age­ment com­pa­nies vary de­pend­ing on such cir­cum­stances as the dif­fer­ences in op­tions and reme­dies avail­able in dif­fer­ent ju­ris­dic­tions, struc­tures and gov­ern­ing doc­u­ments.  Some com­mon ap­proaches do ex­ist.  The first goal in most sit­u­a­tions is to at­tempt to keep the con­sumer in own­er­ship.  This will save a sig­nif­i­cant amount of money by avoid­ing the costs of fore­clo­sure and re­selling as well as lim­it­ing the prob­lem of the as­so­ci­a­tion own­ing the in­ven­tory in­stead of a pay­ing owner.  To that end, the man­ag­ing en­tity needs to ac­tively en­gage the delin­quent owner, in­clud­ing re-con­nect­ing the owner with the use of the prod­uct or pro­vid­ing flex­i­bil­ity in pay­ment op­tions (such as cre­at­ing a pay­ment plan or waiv­ing late fees and in­ter­est).  If no arrange­ment can be made with the owner, the man­ag­ing en­tity must take in­creas­ingly ag­gres­sive steps to en­cour­age pay­ment.  These steps start with lock-out of use and ex­change, where per­mit­ted, and end with the im­po­si­tion of a lien and ul­ti­mately, fore­clo­sure.  In some sit­u­a­tions, it will make sense to re­tain a third party col­lec­tion com­pany that has more ex­pe­ri­ence in debt col­lec­tion.

On the cre­ative side, I have worked with as­so­ci­a­tions and com­pa­nies to de­velop strate­gies that al­low for amnesty from some of past due fees and taxes in re­turn for a par­tial pay­ment (where per­mit­ted un­der ap­plic­a­ble law) and fa­cil­i­tat­ing and en­cour­ag­ing the trans­fer of the time­share in­ter­est to a per­son ca­pa­ble of mak­ing the pay­ment, like a rel­a­tive or an­other owner at the re­sort look­ing to pick up an ad­di­tional time­share in­ter­est.

Ques­tion #3:   Are you see­ing an in­crease of in­di­vid­ual own­ers us­ing re­lief or trans­fer com­pa­nies for their time­share in­ter­ests?  What long-term im­pact can this have on a re­sort?  Have you found ways to cir­cum­vent or solve this prob­lem?  Is this hav­ing an im­pact right now?

It is def­i­nitely hav­ing an im­pact.  I have also seen an in­crease in own­ers hir­ing com­pa­nies to dis­pute their orig­i­nal pur­chase and try to force the de­vel­oper to re­scind the sale, even if the trans­ac­tion oc­curred years ago.

If all time­share re­lief or trans­fer com­pa­nies were well-cap­i­tal­ized, eth­i­cal, ful­filled their oblig­a­tions and made good on their promises, the ser­vices they pro­vide would be a boon to a strug­gling as­so­ci­a­tion or re­sort by fa­cil­i­tat­ing the trans­fer of own­er­ship from a de­fault­ing or de­faulted owner to a pay­ing owner.  Un­for­tu­nately, there cur­rently are many more bad play­ers than good op­er­at­ing in this space.

All the bad ac­tiv­ity in this area cre­ates its own sig­nif­i­cant prob­lems.  In par­tic­u­lar, many of these com­pa­nies take the owner’s money and pro­vide no real ser­vice in re­turn, sim­ply “list­ing” the time­share in­ter­ests for re­sale on an in­ac­tive in­ter­net site.  The own­ers are still dis­sat­is­fied and have even less money to pay the re­sorts.  Some com­pa­nies take an owner’s money in re­turn for a promise to trans­fer the prop­erty to a third party but never com­plete the trans­fer.  In these sit­u­a­tions, the past due main­te­nance fees and taxes may not get paid; the orig­i­nal owner stops pay­ing main­te­nance fees and taxes and is no longer ac­tive with the re­sort; the trans­fer com­pany does not have ti­tle and there­fore has no oblig­a­tion to pay; and no new owner ex­ists to make the main­te­nance fee and tax pay­ment.  Un­der other sce­nar­ios, the trans­fer com­pany will take ti­tle to the time­share in­ter­est but may not pay past due main­te­nance fees and taxes, does not pay new main­te­nance fees and taxes and ei­ther lets the time­share in­ter­ests sit in a de­fault sta­tus (thereby forc­ing the as­so­ci­a­tion to in­cur fore­clo­sure costs) or bank­rupts the trans­fer com­pany and sets up a new one.  In each of these in­stances, the as­so­ci­a­tion ac­cu­mu­lates an ever grow­ing bad debt and of­ten is un­aware that a trans­fer has oc­curred and no longer has a clear un­der­stand­ing of its owner base.  This is a cur­rent and grow­ing prob­lem.

Short of sup­port­ing own­ers who pur­sue a com­plaint with the ap­pro­pri­ate reg­u­la­tory agency or a claim for fraud or vi­o­la­tion of an ap­plic­a­ble con­sumer pro­tec­tion law, the man­ag­ing en­tity will have lim­ited op­tions to cir­cum­vent prob­lems cre­ated by un­scrupu­lous time­share re­lief or trans­fer com­pa­nies.  It is im­per­a­tive for the man­ag­ing en­tity to de­velop an owner ed­u­ca­tion pro­gram us­ing newslet­ters, alerts and as­so­ci­a­tion meet­ings to ed­u­cate own­ers of the po­ten­tial short­com­ings of these com­pa­nies.  De­vel­op­ing a strong re­sale pro­gram through co­op­er­a­tion with the ex­ist­ing de­vel­oper or a vi­able, eth­i­cal re­sale provider is po­ten­tially the best so­lu­tion be­cause it pro­vides a mean­ing­ful and safe method for own­ers to trans­fer their time­share in­ter­ests to a new pay­ing owner.

Ques­tion #4:   How do you han­dle the de­faulted weeks?  Do you fore­close?  What are the ad­van­tages/dis­ad­van­tages in this?

As pre­vi­ously noted, the best so­lu­tion for deal­ing with de­faulted time­share in­ter­ests is to at­tempt to en­gage with the de­fault­ing owner to de­velop a so­lu­tion, get them us­ing the prod­uct again and hope­fully get some pay­ment in the door.  If all else fails, fore­clo­sure is the only al­ter­na­tive.  The ma­jor dis­ad­van­tages of a fore­clo­sure ac­tion are the cost and time that it takes to com­plete the re­cov­ery of the in­ven­tory.  In some ju­ris­dic­tions, at­tor­ney’s fees and court costs can ex­ceed $1,200 per time­share in­ter­est.  Court sys­tems al­ready bogged down with an ever-in­creas­ing num­ber of home fore­clo­sures strug­gle to process thou­sands of time­share fore­clo­sures, re­sult­ing in a ju­di­cial fore­clo­sure pe­riod that can last as long as eigh­teen months.

Non-ju­di­cial fore­clo­sures (in ju­ris­dic­tions that rec­og­nize such) oc­cur out­side of the courts and can greatly re­duce the time and ex­pense of the fore­clo­sure process.  In this re­gard, I played a sig­nif­i­cant role in ARDA-Florida’s re­cent suc­cess­ful ef­fort to ob­tain the pas­sage of a non-ju­di­cial fore­clo­sure process for time­shares in Florida, which was a first of its kind law that we are hope­ful will make a big dif­fer­ence in the ex­pense and time de­lay cur­rently ex­pe­ri­enced by as­so­ci­a­tions in Florida.

One ad­van­tage of the fore­clo­sure process is that it does mo­ti­vate some de­fault­ing own­ers to pay past due main­te­nance fees and taxes.  Many own­ers will not take any ac­tion un­til the re­ceive the for­mal court pa­pers, but then will bring their ac­count cur­rent rather than risk the loss of their time­share in­ter­est or a po­ten­tial neg­a­tive credit re­port.

Ques­tion #5:   Do you have any ad­vice and/or cau­tions for re­sorts fac­ing large num­bers of de­faults and/or delin­quen­cies?

The best ad­vice I have is to de­velop a multi-level strat­egy that is con­sis­tently and ag­gres­sively im­ple­mented.  As is usu­ally the case, com­plex prob­lems re­quire com­plex so­lu­tions.  The man­ag­ing en­tity that can mar­shal and co­or­di­nate many dif­fer­ent re­sources has the best chance of at least hold­ing its own un­til the econ­omy im­proves or bet­ter pay­ing own­ers re­place delin­quent ones.  As­so­ci­a­tions and man­age­ment com­pa­nies should not be slow to act, since car­ry­ing a large amount of de­faulted in­ven­tory can lead to a death spi­ral where pay­ing own­ers who are in­creas­ingly shoul­der­ing an ex­pand­ing bad debt ex­pense or see the qual­ity of the re­sort sig­nif­i­cantly de­te­ri­o­rate cease to make pay­ments and the re­sort even­tu­ally goes bank­rupt.  In­stead, best prac­tices should in­clude as­sem­bling a team com­pris­ing prop­erly trained, in­ter­nal staff fo­cused on re-en­gag­ing the owner and out­side le­gal, ac­count­ing, ti­tle and col­lec­tion ex­perts who can tackle the prob­lem on many fronts.

Ques­tion #6:   Is there any­thing else you’d like to add?

First, as­so­ci­a­tions and man­age­ment com­pa­nies must know the doc­u­ments that gov­ern their re­sort and the as­sess­ment and col­lec­tion process.  Sim­ply re­ly­ing on prac­tices de­vel­oped at other pro­jects or as set forth in ap­plic­a­ble laws may re­sult in the vi­o­la­tion of pro­vi­sions of the time­share doc­u­ments and in­val­i­date the ac­tiv­ity or ex­pose the man­ag­ing en­tity to li­a­bil­ity.  It is worth hir­ing an at­tor­ney to re­view the doc­u­ments and pro­vide ad­vice on the in­ter­play of the doc­u­ments and ap­plic­a­ble law.

Sec­ond, man­ag­ing en­ti­ties han­dling col­lec­tions need to be aware of the ac­count­ing and le­gal lim­i­ta­tions and re­stric­tions in­volved in the process.  For ex­am­ple, the man­ag­ing en­tity is well ad­vised to seek out ex­pert ac­count­ing ad­vice to prop­erly ac­count for bad debt and ef­forts to write-off bad debt.  In ad­di­tion, there are many laws that ap­ply to the man­ag­ing en­tity’s col­lec­tion ac­tiv­i­ties such as the fed­eral Fair Debt Col­lec­tion Prac­tices Act; state time­share or con­do­minium laws re­strict­ing waiver of past due main­te­nance fees or the im­proper use of re­serve funds to pay for op­er­at­ing ex­penses; or en­gag­ing in col­lec­tion ef­forts by non-at­tor­neys in vi­o­la­tion of statutes gov­ern­ing the un­law­ful prac­tice of law.  While it may be tempt­ing to avoid spend­ing the money by go­ing it alone, the po­ten­tially se­vere con­se­quences of evad­ing ap­plic­a­ble ac­count­ing rules or laws may out­weigh the few dol­lars that are saved.