Colliers Arnold leads forum on failed condos

CLEARWATER - Failed condominium developments offer both challenges and opportunity to all parties involved, according to a recent forum on the topic held in the Clearwater office of Colliers Arnold.

From the lender’s perspective, this is a small group of troubled loans and yet is among the most challenging and expensive to resolve. There are complex legal issues that surround taking possession of a failed condominium development - specifically whether the lender is considered to be the “successor developer” and/or face a loss of association control.

According to Mark Grant, attorney and partner with Ruden McClosky and recognized condo law expert, “Florida law stipulates that a person or entity becomes a successor developer if he or it sells or rents more than seven units in a project greater than 70 units, or sells or rents more than five units in projects smaller than 70 units.”

Since many failed developments, especially conversions, have a rental program, this could result in the owner of bulk units (i.e. the bank) being deemed a successor developer. Grant went on to say that, “Case law has provided lenders with some relief, as long as they take no action that triggers developer-like activity.”

Losing control of the condominium association is another pitfall challenging the new bulk owner. Grant outlined seven “triggering events,” any one of which could result in a turnover of the association to individual unit owners, even if there is only one other. Most forum attendees agreed the current laws must change to permit an orderly recovery to this form of ownership.

Property management is no walk in the park. Shelley Chew, president of Continental Commercial Property Management, and Sean Galaris, president of Sterling Management, provided insights to the challenges they face when dealing with a “fractured” condominium development. Galaris commented that, “It is highly recommended that one management company handle both the condominium association management as well as the rental management minimizing the challenges between two very different groups. Chew added, “It is imperative for the developer or ‘successor developer’ to fund the operating budgets so the property can be cared for properly.”

Valuation is challenging, even for the most experienced appraisers. During discussions of developer/bulk owner liability, Ron Sparks, president of Colliers Valuation Services, raised the question, “Can a lender master lease to a separate entity to mitigate developer risk?”

Grant responded, “On the surface, there should be no reason against it so long as it is properly setup and there are additional steps that can be taken to reduce the risk.”

New Fannie Mae guidelines are in place that substantially restrict the ability to finance individual units in fractured projects. Unreliable financing not only affects the bulk owner’s ability to liquidate, but diminishes the value of the units already owned by individual owners. Most agree that valuing bulk condominium units in a failed development is a daunting task.

Finding a buyer for bulk condominium units requires old time brokerage principals. Hosting this gathering on behalf of Colliers Arnold was John W. Stone, CCIM, and Jason T. Stanton, CCIM, who are both investment brokers specializing in multifamily and note acquisition investments.

“The reason for the forum was to help lenders better understand what they were dealing with,” according to Stone. He further pointed out that, “The lender’s primary goal is to liquidate these troubled assets for the highest price. Understanding the challenges involved in ownership, management and how that affects price is critical if they are to know when they have in fact found the right buyer.”

Added Stanton: “Less than six Tampa Bay purchases of bulk condominiums were consummated in the past 24 months, indicating that the buyer pool is shallow compared to traditional rental properties.”

The buyer for this type of investment is much more entrepreneurial than straight rental. Stanton noted: “In most acquisitions made to-date, the bulk buyer anticipated reverting the property back to 100% rental by buying back the sold units. Most of the recently acquired properties had sold less than 20% of the units to individual owners, which help support the economics behind buying back the sold units and reverting back to a rental.”

“Operating costs associated with renting a condominium are often 20% to 40% higher than traditional rental projects, and by reverting back to 100% rental, the costs savings can often make up the pricing difference required to purchase the outstanding individual units,” Stone added.

The buyer market narrows further when more than 20% of the units have sold. At this point, the cost to buy back individual sold units becomes prohibitive, virtually eliminating the ability to reduce costs during a rental holding period. This inability to reduce costs and having to deal with a condominium association in perpetuity has a diminishing affect on value, which is typically reflected in their offering price. Layer in the fact that traditional financing is all but non-existent for a bulk purchase, requiring a substantial equity position (40% to 50% or more) goes a long way in explaining pricing.