The Successor Developer Conundrum in Distressed Condominium Projects

The question of whether to become a successor developer in a distressed condominium project is a complex one. There are both advantages and disadvantages to this status. Advantages may include gaining certain rights and control over the condominium association, while disadvantages may include potential liability and loss of control. The ability to control the board of directors of the condominium association is a key point of confusion in this issue. Becoming a successor developer has its advantages. When a condominium is developed, the developer reserves certain rights that are important for the project, such as the right to make changes to units without approval, maintain model and sales offices, and be excused from certain fees. If an acquirer wants to exercise these rights, they need to get an assignment of the developer’s rights. Without this assignment, the acquirer may not be able to use these reserved rights. So, it’s important for a successor developer to secure these rights to protect their interests in the project. Becoming a successor developer can have disadvantages, such as being responsible for previous mismanagement of the condominium association, including not funding deficits and reserves, not holding meetings, and not electing a unit owner representative to the board. There may also be claims for not producing association records if the transfer of control triggers a turnover to nondeveloper owners. The law in this area is limited, but there is a case where a construction lender was held responsible for certain things, but it was based on common law and not the Florida Condominium Act. Ocean Beach Resort, Inc. bought a bunch of units in a motel that was turned into condos. They spent a lot of money fixing up the place and then wanted the other owners to help pay for the repairs. Some owners refused, so Ocean Beach sued them. The court said Ocean Beach could make the other owners pay for some of the repairs, but they couldn’t make them pay for reserves and contributions because Ocean Beach didn’t originally convert the motel into condos. When a project goes downhill, the original developer may not properly manage the assets and responsibilities of the condominium association. This can cause problems for the buyer. It is important to address these issues and comply with the Condominium Act. Warranty claims for construction defects can also be a problem for the new owner. The lender may also face tough choices if they inherit liability for construction defects from the borrower. It’s important to understand and address these potential liabilities when buying a property. If someone is trying to buy or lease units regularly, they might be considered a developer even if they don’t want to be. The state of Florida has some rules to determine if someone is selling units, like if there’s a listing agreement, if the prices are high, and if there are ads for the units. It could be hard to argue that someone isn’t selling units if they have sales agents, an office, and ads for the units at lower prices than before. Offering units for sale is important for controlling the condominium association. If someone is only leasing units, they won’t have as much control. There are rules about selling or leasing units in the “ordinary course of business.” If someone sells or leases more than seven units in a big condominium or five units in a smaller one, they are considered a developer under the law. This test seems simple, but it’s tricky when it comes to distressed condos. If a lender takes over unsold units in a foreclosure and then sells them all to one buyer, they don’t have to follow certain rules for developers. But, this only works if they sell the units right after the foreclosure. If they try to sell or rent out the units before doing a bulk sale, they’ll be considered a developer. And even though this rule only applies to filing paperwork, the lender could still face other legal issues related to the condo’s construction and finances. So, there’s still a lot of risk involved in buying up condo units in bulk. If you buy a lot of units in a condo, you might not be able to control how the place is maintained. It depends on if you’re considered a developer or not. If you’re not a developer, you could lose the right to choose who is on the condo board and how much they charge for maintenance. This means you could end up paying a lot for maintenance and not have a say in how things are run. If a lender or buyer takes over a condo project from the developer, they have to take on all the responsibilities and liabilities too. This is called an assignment of developer rights. But in some cases, the lender or buyer may not want to take on all the liabilities. The current rule says they have to, but this might not be practical, especially if the condo project is struggling. It might be better to change the rule so that the new owner doesn’t have to take on all the liabilities, but still gets the developer’s rights. This would make it easier for a struggling condo project to get a new owner without causing more problems. If a company buys a condo development but doesn’t follow all the rules to become the official developer, they can still take control of the condo association if they sell units in the development. But if they just lease the units, they might not have as much control. However, a recent change in the rules may allow a company leasing the units for a short time to still have control if they own most of the voting power in the association. This change helps protect their investment. In a condominium situation, if a bunch of different groups under the same control buy a majority of the units, they can still be considered developers. Also, when a developer sells a bunch of units at once, the buyer might have to pay extra money to the condo association. But in one case, the court said the buyer didn’t have to pay because they got the rights from the original developer. When a condominium developer sells off all unsold units, it triggers a takeover of the condominium association by the new owner. The new owner has to provide an audit of the association’s finances, but it’s not clear who is responsible for this audit. The rules say the new owner only has to provide an audit for the time they are in control of the association, not for the period before they took over. It might be difficult or expensive to get all the necessary financial information from before the takeover, making it hard to do a complete audit. This could create problems for the association and the new owner. When someone wants to buy a bunch of condos at once, they might try to avoid certain taxes and rules by buying the ownership shares of the company that originally built the condos, instead of buying the condos themselves. But this might not work if the company still has the same purpose. Also, they have to consider the tax consequences of being a condo seller. If they just rent out the condos, they might get a tax break when they eventually sell them. But they might have to give up control of the condo association. If they try to keep control by selling the condos, they’ll have to pay more taxes when they eventually sell them. The status of a developer under the Florida Condominium Act comes with a lot of responsibilities and potential liabilities. It’s hard to avoid being considered a developer under Florida law, and the consequences of being deemed a developer are unclear. It would be helpful for the law to be clarified and for additional legislation to be passed to protect acquirers from liability and to establish a fund to address future warranty claims in failed projects. There has been a proposal to provide temporary relief for bulk acquisitions, but it has not been passed yet. Martin A. Schwartz is a lawyer in Miami who works on real estate law. He is also part of a committee for The Florida Bar. This article was written for a section of The Florida Bar, and it talks about real estate law.

Source: https://www.floridabar.org/the-florida-bar-journal/the-successor-developer-conundrum-in-distressed-condominium-projects/