Strategies to Manage Owner Delinquency

It’s a fact of business: owner delinquency is an issue faced by nearly every resort. While the specific effects of delinquency vary from resort to resort, there are some common problems caused by high delinquency. For example, a high delinquency rate can result in the increase of annual fees to cover deficiencies, which in turn can cause a higher delinquency rate, and so on, in a downward financial spiral ultimately leading to a troubled resort.

Owner satisfaction may be caught in a similar downward spiral. As fees increase or as improvements are postponed and amenities curtailed due to a lack of funds, once-satisfied owners may decrease their involvement with the resort, discourage others from owning there or decide to no longer pay the fees themselves.

These problems are exacerbated if a resort does not have a program in place to manage delinquencies in a timely and efficient manner. Further, if a resort does not systematically address owner delinquency, the delinquent inventory may be in limbo and unavailable to off-set or cure the problems associated with delinquency.

So what is a resort manager to do? Following are some basic strategies to manage delinquency at your resort.

Assess & Commit

Before you can fix a problem, you need to identify it. Questions to ask yourself in your delinquency assessment include: What is the scope of the problem? What is the collection rate? How does your resort’s collection rate compare with other resorts in the region? (For instance, a 92 percent collection rate in Florida, where the prime exchange season runs all year, is considered unacceptable, but in New England, high 80 percents are the norm.) What is the age of the average delinquency? How long have the now-delinquent owners owned at the resort and how long were they current? Can you identify any patterns or factors common to some or all of the delinquencies? How does the resort handle the collection of delinquent accounts? Answering these questions will help you understand the specific delinquency problem of your resort and help to tailor your solution.

Monitor & Act

Once you have a clearer understanding of what your resort is facing, make a solid commitment to monitor and actively manage the delinquency issue. To be successful, this commitment must be made by all involved with the resort — including Board members, managers, accounting, receptionists and other staff. Make sure your commitment will succeed by budgeting funds to effectively monitor delinquency, pursue reasonable and timely attempts at collection and foreclose if necessary — an investment that will pay off in the future with lower delinquency rates.

Know your rights. Examine the resort’s declaration, bylaws and other documents and look into laws that may govern your resort to ensure that the interval owners association has the necessary power and statutory authority to enter into payment plans on delinquent accounts, impose late fees and other non-payment penalties, establish and run a rental program and pursue a foreclosure for annual fee delinquency if necessary. If the law allows the association such power but your documents do not, take all necessary steps to amend the documents. The documents should also prohibit any delinquent owner from using his or her week(s) until current and, to the extent permissible under the law, bar a delinquent owner from selling without making the resort whole. In the alternative, the documents could provide that new owners assume liability for any and all unpaid fees and expenses associated with the interest unless they receive a certificate of no outstanding fees from the resort on the day of closing.

Using your assessment findings to assist you, create a simple payment schedule for annual fees with clear and meaningful repercussions for non-payment. Publicize the payment schedule and penalties well to the owners and, most importantly, stick to the schedule and routinely assess the necessary penalties. Draft unambiguous internal policies and procedures to monitor and deal with non-payment. Such policies should ensure that there is an organized program to systematically put delinquent owners on notice when payment is late and should include procedures for immediate and repetitive (every 30 – 45 days) written follow-up when an owner does not pay until the owner either pays or foreclosure is initiated.

In addition, include provisions for routinely preserving the association’s right to foreclose on severe delinquencies by, for example, drafting and recording any liens which may be required. Depending on your resort’s circumstances, the expense of a foreclosure may limit its usefulness. However, the cost of preserving the right to foreclose is usually minimal compared with the flexibility it allows in addressing the delinquency down the road. Further, there are advantages inherent in simply preserving the right to foreclose. By notifying delinquent owners when such rights are being preserved, the resort’s commitment to dealing with delinquency is reinforced and this may prompt a delinquent owner to action. For deeded projects, preserving the right to foreclose usually involves placing a lien on record at the local registry of deeds, meaning such information as the delinquent owner’s name and amount owed are in the public realm. Further, placing a timely lien on record may help preserve the resort’s rights should a delinquent owner submit to bankruptcy or attempt to sell the interval.

Another strategy is for the resort to regularly publish the recorded liens in its newsletters as another way to convey its commitment to dealing with delinquency to both current and delinquent owners. Publication in such a manner may deter future delinquencies and may also encourage delinquent owners to pay.

If the delinquent owner does not respond to your notices, take action! With short-term delinquencies this may mean employing an outside collection agency familiar with the timeshare industry to assist with the process. For more severe delinquencies and ones where collection agency attempts have failed, foreclose. If your resort is just starting its delinquency effort and there are many severe delinquencies, it may be advisable to schedule a series of foreclosures — perhaps up to four a year.

As your delinquency program matures, a foreclosure once a year or once every other year may be all that is necessary. In any event, publicize the foreclosures well within your ownership community to let owners know you are serious about combating delinquency. This knowledge will act as a deterrent to potential delinquent owners and as reassurance to paying owners that the problem is being addressed.

Where feasible, establishing or maintaining a good rental program can be an essential part of an association’s delinquency strategy. However, care should be taken to ensure that the rental program allows the association the greatest possible benefit while ensuring that the delinquent owner is not rewarded for his or her delinquency. In some states, the law allows associations to use rental proceeds to offset delinquent fees and retain any residual proceeds. In those states where the residual must accrue to the delinquent owner, extras such as delinquency fees, advertising and extra housekeeping can sometimes be added to the account to minimize the residual amount. Otherwise, the delinquent owner might be rewarded with a substantial check and see no reason to ever pay maintenance fees.

As an alternative to or in combination with collections, foreclosures and rentals, you may want to institute a program for delinquent owners to convey their interests to the association in lieu of paying delinquent fees. Accepting deedbacks can be a cost effective way to quickly get delinquent inventory turned around so that it is generating maintenance income for the resort again through a new, paying owner. By accepting a deedback, the need and the cost of pursing collection or a foreclosure is avoided. As with any strategy, however, there are costs.

A proper title search must be completed for each interest the association is considering taking back to determine if there are any outstanding mortgages or liens on the interest and to verify ownership. The association needs to determine, on a policy level, whether or not it will take back encumbered interests. In limited circumstances, it is to the resort’s advantage, for example, where the resort is fairly certain it will have to initiate foreclosure to cure the delinquency. This is because many liens, especially mortgages, have priority over the association’s lien, meaning that any buyer at the foreclosure will take the interest subject to the mortgage. This can discourage buyers and lead to the association’s purchase of all the burdened interests at the foreclosure auction, landing the association right where it would have been had it accepted the deedback in the first place — owning an encumbered interest — but having also incurred the expense of foreclosure. Even in this situation, however, there are reasons to pursue foreclosure instead of accepting encumbered deedbacks. The resort will have to weigh its options and goals to determine the best path.

In addition to the cost of a title search, there will also be costs for deed preparation, recording and a transfer tax. These costs, however, can be shifted to the owner who is deeding back by imposing a flat fee which covers all of the costs. The association should require the fee be paid in full in advance and ensure that payment has cleared before it initiates the deedback process.
Additional Consideration:

Delinquency Inventory

If the association buys the inventory at the foreclosure or accepts deedbacks from delinquent owners, there must be a strategy in place to manage and re-sell the inventory. Interval interests can be resold by the association either to existing members or new purchasers. Care must be taken to make certain such activity is in compliance with applicable laws governing the sale of interval interests in the state where the resort is located or elsewhere if the sales program has multi-state features. Additionally, the association needs to address any outstanding mortgages and IRS or other liens that may burden the reclaimed interests.

An alternative to direct sale is to establish a trust to hold the inventory of interval interests reclaimed by the association and then sell trust certificates to “beneficial owners” who will have all the rights of direct owners. One advantage of this approach is that the association can avoid the expense and time involved in real estate foreclosures in the future because a trust interest may be terminated through a contractually agreed process. Another advantage to the trust is that the trust can be drafted to empower the trustee to vote the trust interests, thereby ensuring higher voter participation.

The association should also carefully consider its resale pricing strategy. One consideration is the balance between short term value and long term stability of the resort — you don’t want to undermine the current value of interests by selling the reclaimed inventory too low; however, you want the inventory back on line as quickly as possible so that annual fees are being covered.

Luckily, the keys to successfully managing delinquency are not complicated. Understanding, commitment, vigilance and systematic action can help your resort avoid the downward spiral of delinquency.

*W. John Funk is admitted in New Hampshire, Vermont and Massachusetts.

This article originally appeared in the March 2003 issue of Developments magazine, The Voice of the Time Share Industry. Reprinted by permission of the American Resort Development Association.