Article Courtesy of The Wall Street Journal

By Kris Hudson and Arian Campo-Flores

Published August 13, 2014  

The drama of Florida's boom-then-bust real estate market is now playing out in the courts as condominium owners and developers square off over forced sales under a law initially intended to allow for hurricane-damaged condo complexes to be rebuilt quickly.

The battle has percolated since the market collapsed in 2007-'08 — which left both developers and condo owners facing steep losses — and now various developers want to reverse past efforts to convert rental-apartment complexes into for-sale condos.

The problem is that, after a decline in condo values during the downturn halted sales, these developers are finding themselves with buildings that are composed mostly of apartments they still own and partly of condos owned by individuals. That mix is unworkable for several reasons. Foremost, it impairs developers' ability to make changes to the complexes' common areas, like pools or roofs, because such changes require approval and capital from all condo owners in the complex. 

All told, 163 complexes in South Florida languish today as part condo and part rental after their conversions failed in the downturn, according to Jack McCabe, CEO of McCabe Research & Consulting LLC, a research firm in Deerfield Beach, Fla. On a statewide level, the number is "probably close to 400," he said.

Now, some developers have found a solution in Florida's 2007 amendment to its condo statutes, which streamlines the process for terminating complexes' condo statuses, though it is a fix that leaves some individual condo owners faced with selling their units to developers at big losses. That drawback has resulted in holdout condo owners across the state suing the developers and investors buying up their complexes.
That situation is playing out at the 364-unit Via Lugano condominium complex in Boynton Beach, where real-estate investor Northland Investment Corp. has acquired 90 percent of the units since 2008 in a bid to capitalize on the 2007 amendment.

But the effort has vexed 27-year-old Ileana Paan, a college student and business owner, who with her family's help paid $309,900 for a two-bedroom Via Lugano unit in 2006. Late last year, Northland offered less than half of that. The condo's most recent appraised value was $74,000. 

In June, Paan and 12 other Via Lugano owners sued to block the termination. "This is a nightmare," Paan said. "It has emotionally debilitated me. I get so angry. How could I lose this place? It's mine, for crying out loud."

After being contacted for this article, Northland withdrew its termination application. "We believe the Florida statute governing condominium termination presents issues of fairness," the company said in a statement.

Michael Mayer, the plaintiffs' attorney, said he won't withdraw the lawsuit because "our clients' constitutional rights remain in jeopardy."

Shirley Lofgren, who paid $217,500 in 2007 for her condo at the 368-unit Serenity at Tuskawilla complex near Orlando, is going through a similar dispute. Real-estate investor Prestwick Partners LLC of Miami, which owns more than 80 percent of the units in her complex, is trying to remove the remaining condo owners so it can revert the complex to rentals.

In June, Prestwick offered the 84-year-old Lofgren $45,356 for her unit, said her son-in-law, Bob Mattis. She doesn't want to sell. "It is totally infuriating," he said. "That [condo] is all she has to her name."

Representatives of Prestwick didn't return messages seeking comment. Another owner at the complex sued in state court in July to block Prestwick; the case is pending.

Returning failed conversion projects back to rentals is a common use of the condo-termination law these days. "It is a classic case of unintended consequences" of the 2007 amendment, said Michael Gelfand, a West Palm Beach condo-association attorney who helped draft the legislation.

The current law came about in 2007, when lawmakers amended Florida's condo statutes to lower the thresholds for terminating complexes' condo status — changes inspired by several storms in 2004 and 2005 that left complexes so damaged that many owners couldn't afford nor agree upon repairs. An ideal way to rebuild such a complex is for the owners to sell it to a developer with the capital to make the repairs and reopen it, often as rentals. But, first, its condo status must be removed.

The 2007 amendment established that, to terminate a condo designation, at least 80 percent of a complex's owners must approve. Second, to block a termination, 10 percent or more of the complex's owners must object. Any holdouts on the losing end of a vote must be paid fair-market value for their units by the complex's buyer. The 10 percent-objection threshold was aimed at allowing the majority's will to prevail.

Before 2007, the requirement in most cases for termination was unanimous approval of owners involved. But the process could be blocked by a lone holdout owner, stymieing rehabilitation efforts.

Lawmakers also extended the termination guidelines to undamaged complexes, mostly to accommodate efforts to redevelop aged, obsolete complexes. That opened the door for the guidelines to be applied to failed condo conversions to revert them entirely to rentals. In many cases, the developers applying to terminate a complex's condo designation already own 80 percent or more of its units because they never succeeded in selling the units as condos in the first place. Some 235 Florida complexes, about 1 percent, have ended their condo status since 2007. The state doesn't track whether terminations are contested.

Legal experts say the Florida condo-termination law can be seen as a "functional equivalent" of eminent domain, the process in which a government entity compels the sale of private property at fair-market value, sometimes on behalf of a private party, for economic development. "It appears to be pretty much the same thing," said Robert Hockett, a law professor at Cornell University.

Now, Florida lawmakers are pondering tweaking the law further. "I think something has to be done for the [condo owners] who must leave their property involuntarily but owe more than it is worth," said George Moraitis Jr., a state representative from Fort Lauderdale. "But it's hard when you start trying to mitigate the market" by trying to account for changing property values.