Termination of condominium terminations?

• Author: Schwartz, Martin A.
• Position: Florida

Condominiums, like humans, age. This is especially true for buildings along Florida's two coastlines exposed to the corrosive effects of salt water. The current Florida Condominium Act, F.S. Ch. 718, was adopted in 1976. Prior to that time, the statutory basis for condominium ownership was F.S. Ch. 711 enacted in 1963. The condominium form of ownership in Florida has, therefore, been in effect for more than 50 years. Some of these condominiums, like automobiles, may have reached a stage in which their repair costs exceed their value.

Until 2007, unless the condominium declaration provided otherwise, the only method of terminating a condominium was to secure agreement from all unit owners and all mortgagees, (1) an almost impossible task. However, in 2007, Sen. Steven Geller, whose constituency included older oceanfront condominiums in Hallandale Beach, spearheaded an amendment to [section]718.117 of the Condominium Act (termination statute) permitting termination of condominiums by 80 percent of the owners if more than 10 percent of the owners did not object. (2) This amendment applied to all condominiums in existence in recognition of Florida's aging condominium stock. For Senator Geller's constituency, it permitted owners in aged buildings experiencing extensive repair costs to unlock the value of their appreciated land by selling their property for redevelopment.

Coincidentally, 2007 was a watershed year in which the bull market in real estate reached its zenith. The next several years would see dramatic declines in real estate values. Beginning around 2003, however, investor sentiment for real estate, including condominiums, was unquenchable as a source of quick profit. Builders could sell out a to-be-built project in a single day or a week. Given the helium-based market conditions and the inability to provide enough ground-up construction due to the long lead time involved in development, conversions flourished as a source of ready product to fill the gap between supply and demand. The chart of conversion filings with the Division of Florida Condominiums, Timeshares and Mobile Homes on the following page is instructive to graphically illustrate the conversion phenomenon. Existing multifamily projects, never intended to be condominiums, were converted to condominium ownership at a dramatic rate to satiate investors' demands for a get-rich-quick opportunity.

In 2008, the music stopped, and the market came crashing down. Converters were left with substantial unsold inventories and units that were sold failed to close. Investors who had purchased units as a means of instant wealth abandoned their units and ceased paying their mortgages. Lenders, in the face of an illiquid market, held back on completing foreclosures. The net effect of the downturn was to starve condominium associations of operating income and necessary funds to maintain their projects.

In adversity, there are also opportunities. Investment groups, aware of a robust market in multi-family rentals buoyed in part by the loss of rentals through the conversion craze, acquired units in failed projects to terminate the condominiums and convert them back into rental housing. The effect of these reversions was to increase the stock of rental housing and prevent the loss of existing housing units which, in many cases, were in a state of continuing deterioration. Observers of the reversion phenomenon credit bulk purchasers with stemming the deterioration of Florida's housing stock and truncating what would otherwise have been a long recession in Florida real estate. (3)

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