Condo Terminations – What Are They and How Do They Work?
The Miami Herald published an article last year – “Real Estate Developers Ran Out of Waterfront Property. Now They Might Want to Buy Yours” – and the title says it all. This complicated process is called condominium termination.
It’s difficult for real estate investors to find vacant waterfront development sites in Miami and Miami Beach. The last two real estate cycles have seen just about all of these sites acquired and developed. So, to solve this problem, developers have increasingly turned to condo terminations. Notably, terminations have not only been driven on the developer-side—condominium owners are also teaming up to market their units, collectively, as part of a group sale allowing termination (and redevelopment) by the buyer.
Condo terminations are a complicated, and sometimes controversial, process. Typically, older condominium buildings in prime locations might be facing millions and millions of dollars of necessary repairs due to age and/or the 40 and 50 year recertification processes for buildings. Sometimes, the repair costs (that must be assessed and then paid by the unit owners) far exceeds the building’s value and/or the condo owners simply cannot afford to fund the necessary repairs, setting off a domino effect of assessment defaults, budget shortfalls, and building violations for unfinished repairs.
But what happens when the condo owners don’t all agree on a group sell and some refuse to budge? What happens during a forced termination? Prior to 2007, unless otherwise stated, the primary way one could terminate a condo was to obtain agreements from 100% of the unit owners, which you can imagine was oftentimes impossible. However in 2007, the Florida legislature authorized an amendment to Florida Statute §718.117 (the Condominium Act termination statute), essentially allowing terminations of condos by 80% of the owners if more than 10% of the owners did not object.
Many people tend to object to the forced termination process because it not only forces unit owners from their home, but it can leave them in a serious financial bind. Owners in a forced termination might receive a purchase payment for their units, even if its market value, that is still less than the amount of their outstanding mortgage debt—especially considering this perfect storm occurred after years and years of cheap mortgage loans, over inflated real estate values, and the subsequent crash in 2008.
Following the post 2007 wave of forced terminations and related financial hardship on many underwater owners, the Florida legislature amended the termination statute in 2015. The new law included a number of new protections for owners, restrictions on terminations, amongst other changes that we will cover in part two of this blog post.
Needless to say, condo terminations are a complicated process with many moving parts. We strongly recommend you consult an experienced Florida condo attorney if you are planning a new transaction that requires a condo termination or if you are facing a forced termination situation.