Do Condominium Associations Remain Vulnerable to Hostile Takeover?

By Deborah Goonan, Independent American Communities Blog

 

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Recently, Florida’s Governor signed a Condo Reform Bill that was originally intended to reduce the amount of financial loss for condo owners forced to sell their units to investors following termination (dissolution) of the Condo Association corporation.

As I wrote in a previous post last year, tens of thousands of Florida condo owners have faced forced termination of their distressed condominium associations, with the result that most have been kicked to the curb, forced to sell their units for pennies, most losing all of their equity or left with outstanding mortgages.

While the new law does not prohibit optional terminations, under specific conditions, the new law requires investors to pay condo owners an amount equal to at least the original purchase price, in cases where the original purchase price exceeds fair market value.

News releases are touting the new condo law as a “step in the right direction.” If investors staging a takeover are required to pay at least the purchase price to unit owners, there could be less financial incentive for a termination and conversion. That could stave off some hostile takeovers, and allow condo owners to keep their units, in hopes that remaining units in the association will be sold and improve the long-term viability of the community.

But, what’s the catch?

Although the new law gives the illusion of protecting condo owners, there are many loopholes. For one thing, following a forced termination, the requirement to pay at least the original purchase price only applies to homestead owners – those that live in their condo units more than half of the year. The protections of this new law do not apply to Florida’s many owners of seasonal or vacation properties.

If most of a condo project’s owners that object to the termination happen to be homestead owners, that might help delay or prevent dissolution, thereby indirectly helping non-homestead owners. The law as currently written might prove less helpful in condo projects with few homestead owners.

The issue of excluding non-homestead owners from protection was not part of the originally filed bill, and the fight over this amended exclusion was a contentious one. The issue is likely to be revisited in the next Legislative session.

Other loopholes that need to be closed

What else could increase protection for condominium owner rights?

In addition to the condition for homestead ownership, several other conditions still exist for condo owners to receive at least the original purchase price of their condo units. If those conditions are not met, the condo owner is not likely to benefit by being “made whole” on the transaction.

Those conditions include:

  1. The original purchase has to be made from the condo developer – resale purchases do not qualify for full reimbursement of purchase price when that exceeds current market value;
  2. The owner must have absolutely no financial obligation to the lender or the condo association. This could prove problematic, if the new investor group has issued an exorbitant special assessment and/or questionable fine, a common tactic used in order to “break” owners and pressure them into selling at a loss.
  3. The “full purchase price” concession only applies if bulk owners represent at least 80% of voting interests approving a plan of termination. What if the bulk buyer investors control only 75% of voting interests? That does not necessarily prevent a termination. Once investors take control of the board, and hold sufficient voting interests to amend the governing documents, they can then reduce the percentage of voting interests required for termination, as is permitted by FL Statute. There’s also nothing to prohibit the new board from amending documents to allow for first right of refusal. That could give investors the power to approve sales to straw buyers that will vote in favor of termination. But remember, unless the investor group represents at least 80% of voting interests, they are exempt from the requirement to reimburse remaining condo owners their full purchase price (when that exceeds current fair market value). And as written, the law does not require disclosure of buyers that acquire less than 50% of the condominium association.

As condo prices in Florida rise to new heights, the number of distressed projects and forced terminations are likely to decrease. That might take this issue temporarily out of the spotlight. But in the Sunshine State’s notorious boom and bust real estate market,  if the loopholes aren’t closed now, will we see a repeat of hostile takeovers when investors snap up distressed condominiums in the next bust cycle?

By the way, hostile takeovers of distressed condominiums are not unique to Florida. It is happening in other states as well (see Related Reading below). It’s just that Florida has the largest number of condos in the nation, and has received the lion’s share of media attention on the issue. Concerned citizens of other states need to pay attention to what happens in Florida, because what succeeds or fails in the Sunshine State is likely to spread to other states.

References:

South FL Business Journal news release on HB 643

FL Statute 718.117 as amended

Condo reform does not help all owners (Orlando Sentinel)

FL condo owners forced to sell at a loss in hostile investor takeover

Related Reading – condo takeovers in other states

Why a Chicago developer may be coveting your condo (Alby Gallun, Crain’s)

HOAs often pit Investors vs. Homeowners, and homeowners usually lose

Takeover Schemes’ Can Pose New Foreclosure Threat (NBC News)

(originally published Do Condominium Associations Remain Vulnerable to Hostile Takeover? on LinkedIn)


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