CONDO CONVERSIONS GONE BAD

Hundreds of home- owners on the First Coast have found their apartment-turned-condo units have hidden and costly problems

Article Courtesy of The 

By Alison Trinidad

Published September 9, 2007 

 

Several apartment-turned-condo complexes in the Jacksonville area are swimming in lawsuits, with complaints filed against developers, against homeowners and against condo associations.

 

At the core are problems with aging buildings that were gussied up with paint and fancy trimmings, but never truly renovated, according to lawsuits. Most were sold as luxury condominiums at discount prices, in deals that homeowners say seemed too good to be true.

   

In the madhouse that was the real estate market a few years ago, thousands of apartments in Florida were converted into condominiums, more than 150,000 between 2004 and 2006, according to state records. With low interest rates and high construction costs, so-called conversion projects were quick, easy and profitable for investors: Renovating apartments was cheaper and faster than building from the ground up, and demand was so high that developers couldn't churn them out fast enough.

Kim Register (left), vice president of The Boxwood at Baymeadows board, and Tina Flanagan, former secretary of the board, discuss the lawsuit filed against the condo conversion developer. Flanagan, who paid $93,000 for her two-bedroom unit in 2003, said old plumbing resulted in a bathroom remodeling job.


In 2005, one local company boasted that it sold an entire complex in Phoenix - $90 million worth - in 91 minutes.

But because of various factors - the potential for developers to cut corners to increase their profit margins, a lack of oversight from the city and state, vague laws regarding conversions, a throng of inexperienced buyers and buyers searching for a way out of an investment that's gone south - it seems that, for some, conversions are turning into lawsuits.

From 2003 to 2006, 40 apartment complexes in Duval, Nassau and St. Johns counties were converted into condominiums, or nearly 7,000 individual units, state records show. Based on a Times-Union review of Duval County court records from 2005 to August, there have been five class-action lawsuits filed by homeowner associations of condominium conversions, claiming construction defects and fraud. At least two communities settled out of court, and homeowners from two others say they are about to file suit.

Together, those claims represent about 2,300 homes.

Buyers, many of them first-time homeowners, now are being assessed thousands of dollars by their condo associations to fix leaking roofs, faulty plumbing and other structural problems that the owners had not expected to occur so soon after purchase.

Legally, if the owners don't, can't or won't pay the assessments, they face foreclosure.

Add that to climbing property insurance premiums, sinking property values and looming mortgage rate adjustments, and you get a financial mess.

Kim Register shows what she says is structural damage caused by water inside the stripped bathroom of her condo unit at The Boxwood at Baymeadows.


Fingers are being pointed every which way as to who is financially responsible for the repairs: Is it the buyer who should have read all the fine print, the condo owners association that is bound to maintain its respective community, the developer who sold dud condos, the contractors who patched them up, the engineers who signed off on their soundness or the government inspectors that missed the problems altogether?

That said, finger pointing will be all that's left if the real estate slump persists, says Gardner Davis, a corporate lawyer at Foley & Lardner in Jacksonville.

"In a more normal real estate market, the developers would have the financial resources and staying power to provide warranty support," Davis wrote in an e-mail to the Times-Union. "Unfortunately, at the present time, many condominium developers and their contractors are in extreme financial difficulty because of the change in the market and the change in the attitude of their construction lenders. To be frank, many condominium developers have gone broke, or are in the process of going broke."

The lawsuits begin

One of the first to file suit in Northeast Florida was the homeowners association at The Boxwood at Baymeadows, a 100-unit apartment complex built in 1971 and turned into condos in 2003. Looking at the condos' brick facade, the holes in the roof and the rats scampering behind walls are not obvious. Neither are the 36-year-old copper pipes that homeowners say were supposed to be replaced, but weren't, or the rotting studs that support the two-story buildings.

"They were sold at a good price," said resident Tina Flanagan, who paid $93,600 for a two-bedroom unit in 2003. Flanagan said she had to have her bathroom completely remodeled because of old plumbing.

"I guess you get what you pay for," she said.

To be sure, not all condo owners at The Boxwood or any other conversion project in litigation have experienced problems. But every owner in a condominium is liable for shared elements like roofs and plumbing. And, now that the problems are known, by law, they must be disclosed to any prospective buyer.

Boxwood's association, in a suit filed in Circuit Court in May 2006, says that the condo developer lied about the condition of the buildings and the improvements that were going to be done. It says the developer did not accurately fund an account for capital expenses and deferred maintenance, as is required by law. And it says it has spent about $150,000 to fix recurring drainage and rodent problems in the past two years, depleting the accounts set aside by the developer.

Still, there's more to be done - among other things, the roofs and plumbing system need to be replaced, a project expected to cost more than $1.2 million, according to the lawsuit.

Jim Dixon, vice president of development for Boxwood's developer, Arlington Properties in Birmingham, Ala., said he could not comment about the lawsuit. Arlington Properties has not filed with the court a response to the condo association's complaints, but has requested documents from the association.

Meanwhile, individual condo owners have complained to the state and city that the condo association hasn't kept up the community's landscaping or pool.

Kim Register, vice president of the association, said they can't afford it.

Homeowners' monthly condo fees at The Boxwood went from $174 to $270, mostly because of expensive property insurance (the association's bill went from $16,000 a year to $92,000 after its insurance company dropped the condo's policy two years ago, Register said).

If the association doesn't win in court, monthly fees could reach up to $900 per homeowner, she said.

The repairs have to be done, and someone has to pay.

"You're fighting all sides," Register said. "It wears you out."

Homeowners are stuck

Some homeowners who spoke to the Times-Union about conditions at their condos later withdrew their comments because they feared that those comments would hurt negotiations with their developer. At the time, they told the Times-Union that they wished they had never bought their homes.

But, for all intents and purposes, they're stuck.

As the national real estate market slowed, many investors and developers slashed prices to dump their inventory, affecting property values for everyone.

That poses a problem for homeowners who want to sell or refinance, and now owe more than the home is worth.

"There's nothing you can do," said Dondy Vane-Cooney, a mortgage broker in St. Augustine. "No lender is going to give you more than the house is worth."

Tightening the laws

In Jacksonville, at least five more conversion-related lawsuits are pending, voluminous folders of accusations and denials filed at the Duval County Clerk of Courts' office.

Other than the two that settled out of court, none of the filed complaints have been decided.

Matthew Breuer, a real estate lawyer at Foley & Lardner in Jacksonville, said he is unaware of any condo conversion case in the country that has gone all the way through the legal process.

Breuer's firm represents Montecito Property Co. in cases outside of Jacksonville and was not involved in The Venetian, a troubled multimillion-dollar conversion project of Montecito's that the Times-Union wrote about in July 2006. That year, the association threatened to sue the Jacksonville-based investment company unless it agreed to help fix failing sewage systems and leaking roofs at the condo. Montecito - the developer that sold out the Phoenix complex in 91 minutes - settled with the condo association for an undisclosed amount.

Home-owners there say minor repairs are wrapping up, while all major problems like roofing and plumbing have been fixed.

Condo converters are required, by law, to disclose building conditions and estimate the cost to replace certain components, like plumbing, roofing and electrical systems. The report, prepared by professional architects and engineers, also calculates how much life is left in each individual system. It is not required to inspect behind walls or beneath the foundation of the buildings.

The state, based on recommendations from a condominium advisory council, tightened condo conversion laws in May. Before then, there was leeway on what should be disclosed and when. For example, the developer could file the required disclosure report before any renovation was done and potential problems were uncovered. The report could also include a list of promised renovations, without proof that the improvements were completed.

New provisions call for updated reports if changes are made after the original disclosure report is filed and prohibit inclusion of future improvements or repairs. The new laws also put the architect or engineer that prepares the report at fault if their professional estimates are wrong.

Whether those revisions will matter in lawsuits today is up in the air, said Peter Dunbar, a Tallahasse attorney who chaired the condo advisory council in 2006.

"Who's liable?" Breuer said. "That's the question that's going to have to be answered in courts here and across the nation."

Newer, better buildings

With more experienced developers, stricter disclosure laws and newer buildings to convert, lawyers say the probability of buying a dud condo is negligible.

Breuer said most conversion projects have been and will be top-notch.

"Many of them are first-class apartments. The majority of projects are going to be fine, but you'll always have exceptions," he said.

While developers are unlikely to convert many more rentals into condos anytime soon (as of August, only one notice for Northeast Florida has been filed with the state, down from a high of 18 in 2005), lawyers say it won't be long before it becomes profitable again.

"All of those apartments on Gate Parkway are going to be condos in five years," said Troy Smith, the Rogers Towers attorney representing The Boxwood condo association. "There's less cost [to convert as opposed to build new]. That's why people do this - they can make money off of them."

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