New Condo Law Paves Road to Recovery
By David Weisman, Esq.
Board Certified Real Estate Lawyer
The hardest hit segment of the real estate market during the plummeting downturn of the past several years has been the sale of new condominium units. Certainly in South Florida, perhaps more than other parts of the state, as real estate boomed, developers brought more and more new condominium projects out of the ground or acquired previously constructed rental buildings for conversion to condominiums for sale.
While the entire real estate market has suffered greatly through the past several years, the oversupply of condominium units resulted in an even more depressed market in this area. The problem was made more severe because many of these properties were targeted for sale as investment property or vacation homes, not primary residences. This meant that these were the first buyers to walk away from deposits or allow foreclosure of the property. This resulted in the eventuality of forcing developers who specialized in this type of market and the banks that financed them to go out of business.
The Florida legislature has reacted to this element of the crises by enacting the "Distressed Condominium Relief Act", Section 718.702 of the Florida Statutes, in order to offer what hopes to be a shot in the arm for the condominium development industry. In describing the Legislative intent, the preamble to the act states, in part:
The Legislature acknowledges the massive downturn in the condominium market which has occurred throughout the state and the impact of such downturn on developers, lenders, unit owners, and condominium associations. Numerous condominium projects have failed or are in the process of failing such that the condominium has a small percentage of third-party unit owners as compared to the unsold inventory of units. As a result of the inability to find purchasers for this inventory of units, which results in part from the devaluing of real estate in this state, developers are unable to satisfy the requirements of their lenders, leading to defaults on mortgages. The Legislature finds that individuals and entities within this state and in other states have expressed interest in purchasing unsold inventory in one or more condominium projects, but are reticent to do so because of accompanying liabilities inherited from the original developer, which are by definition imputed to the successor purchaser, including a foreclosing mortgagee.
There have been a lot of real estate investors sitting on the sidelines over the past few years afraid to put money into the crashed real estate market. A further impediment preventing these investors from buying up the inventory of condominium units is the fact that when a person buys a bulk quantity of condominium units and offers them for sale in the ordinary course of business, that investor becomes a successor developer. Up until the new law, the label of successor developer carried with it a bundle of obligations and liabilities that many real estate investors were unwilling to assume.
While some of the obligations such as the filing of registration statements and the compliance with disclosure laws have not changed, the burden of liabilities of the original developer for construction defects and other issues has been lifted from an investor who takes on only the label of a bulk buyer or bulk assignee under the new act. There are different obligations which a bulk assignee must assume, but the assumption carries many of the beneficial development rights of a successor developer.
Already, investors are coming into the market buying units at well below what they were selling for at the peak, often for less than half of the selling prices of the high points of the market. These investors, in turn, are able to offer the units for sale at a dramatically reduced price. The preferred business model is to acquire the units cheap and sell them for a reasonable profit with a quick turnaround.
In some cases, where the developer has rented out the units in order to produce some income while holding the property, the customers who purchase from the bulk buyers have found a vehicle to invest in a rental income property with the tenants already in place.
The new law is not without difficulties. Given the severity of the crises in the real estate market, the legislature rushed a bit and there is some inherent conflict in the law. Definitions and restrictions regarding, for example, a bulk buyer's right to maintain an onsite sales office seem to have different treatment in different parts of the statute. Already, leading condominium law attorneys around the state are working to correct this glitch. Hopefully, the statute and the benefits to the marketplace, both at the developer level and eventually at the retail level will help to ease the condominium oversupply and help to bring about recovery in the real estate market.