Week in Review

Wow! Three publications in a three day week! It's always great to give a little more commentary since a news interview might last 30-45 minutes and consist of several emails, but all you see in print is 1 or 2 sentences....

Priced to sell: South Florida housing market shows signs of life - Business - MiamiHerald.com by Monica Hatcher

"The market for so-called jumbo loans, or those worth more than $423,750 in South Florida, dried up more than two years ago, said mortgage broker Grant Stern."

Absolutely, the return of the Miami housing market is helping spur sales, along with the Federal tax credit for first time buyers. What's really aiding in the process too is low interest rates combined with prices that are affordable. The median home is selling for around 3 times the median household income. This is a welcome improvement from the 6 times income pricing of just a few years ago...

However, the mid-market homes in the $400-1,000k price range are lagging on the market, well beyond marketing times for homes priced under $300,000. Part of this has to do with the income curve required to purchase more expensive homes - there are fewer people with the earning power to acquire larger homes in fancier locales.

But deeper down, the mid to high end market is truly paralyzed by the lack of financing opportunities when loan amounts grow north of $417,000 - which is the Fannie Mae national conforming limit. Fannie Mae is authorized to issue loans up to 125% of the median home price in 2007 - which means that in the Miami district, the maximum "Agency" loan is $423,750 - hardly a great improvement.

The secondary market to sell these "Jumbo" or "Non-Conforming" loans crashed horribly in the summer of 2007 along with the private secondary markets for "Alt-A" home loans and more exotic loan products. Without a market to sell these loans, banks who issue them are forced to keep the loans - possibly to maturity - and have become very circumspect about issuing credit to high net worth people. I know this may come as a shock, but the risk profile for "Jumbo" loans is actually very similar to Sub-Prime lending - because these loans are larger and therefore carry higher risk!!!

An Upturn in the Housing Market May Be Reversing - NYTimes.com

“They’re not buying as investors, they’re buying as homeowners,” said Grant Stern of Morningside Mortgage Corporation in Bay Harbor Islands, Fla., near Miami Beach. “Nobody expects a 50 percent gain. Flat is the new up.”

Right now housing prices are flat, but with the bout of deflation we are fighting - this actually means that home prices are rising in real terms; ie. if you're earning 1% interest, but prices have fallen 2% during the course of a year, you have a 3% improvement in your spending power.

Edgewater Lofts condos sold in bulk deal - South Florida Business Journal:

Grant Stern, president of Miami-based Morningside Mortgage Corp., said there is a lot of interest in the area of Edgewater, which is north of the Adrienne Arsht Performing Arts Center. Renters, in particular, are looking to buy in nearby buildings because of the near market-bottom prices. Another reason for the interest is that some of the buildings have gotten FHA approval for loans.

He said future buyers have to be realistic about what they are getting when they buy in Edgewater Lofts.

“It’s not going to get exciting for you,” said Stern, about the unit’s prospective buyers and unit demand, which would normally drive pricing upward. “ Chances are that the minute it gets exciting, someone is going to come in and obstruct your view.”

This is a game that is going to go on for many years in the post-boom downtown environment. When it comes to views, there's un-obstruct-able and there's other. There are plans for projects throughout the Biscayne and Brickell corridor which have been approved and are simply waiting for the economic cycle to rise towards the skies!

Personally, I have a client who recently completed a land assembly in a Central Business District area - and got a Major Use Special Permit (MUSP) at a cost of nearly $500,000. They are long term players - and know that it will be 7-15 years before they can develop the 1,000 unit project they envision!

The Platinum Condo, is a developer client whose building is mentioned in the article - built a 22 story condo and got FHA approved with the help of Morningside Mortgage. They have a 2nd tower planned and permitted on the east side of their current project. However, they ensured that both towers would have outstanding views by planning the projects simultaneously. It's rare to see that kind of coordinated development in Miami - as it takes years to create major land assemblies. The Platinum developers spent nearly 2 decades.

Planning and zoning information is public domain. However, a good real estate brokerage should have extensive information available not only on current projects, but as well on the projects that are planned which may affect the view of a unit which any buyer is seeking to purchase.

Why Condominium Termination?

Condo termination has the potential to mitigate the damages caused by the condo market collapse and to distribute benefits to the distressed owners, lenders with impaired loans, local markets in general and entire communities at large.   There are four main players are suffering during this downturn: Unit Owners, Banks, Markets and Communities.   This article will seek to address specifically the difficulties faced by unit owners and mortgage holders.   Ultimately, condo market trouble affects all residents of a given area because a condo project is integrated into surrounding communities, even if the front door is gated.  

 The unit owner in a broken condo can be terribly burdened supporting a failing project, and the time, expense and headache of a short-sale may prevent orderly exit from their properties.  Most cannot afford the time off work, or attorney's fee to conduct a short sale.  Most are unaware of the option to give Deed in Lieu of foreclosure.   Condo Termination produces a mass short sale.  It doesn't require any individual to spend thousands of dollars on representation which will pit the individual owner's needs vs. the association's well being. 

  Most Unit Owners have limited real estate experience and are simply looking for a home as shelter and long term investment.  Few Unit Owners have experience as a licensed Community Association Manager or Condo Attorney which is needed to perform distressed servicing.   Many associations are falling out of compliance with State accounting requirements.  Even worse, many more associations are dropping insurance coverage, putting at risk the property improvements, compensation in the event of the worst and putting the Boards of Directors at risk for liability in the event of a catastrophe.  Condo Termination has mechanisms to transfer decision making authority into the hands of full time real estate professionals who act according to a pre-determined plan and stabilize the property improvements while winding down the condo's affairs. 

Just this past week, I spoke with a condo owner who wiped out her savings trying to support a terribly failed condo project with mass delinquency.   Her story to me was that her 1000 sq. ft. apartment's monthly maintenance assessments skyrocketed from $800 a month (a high figure for a non-luxury property) all the way up to over $2000 monthly!  She says that currently, the project is still charging over $1300 monthly and that the unit owners are close to 100% underwater on a valuation basis.  However, she and her peers have no clue of a way out of their situation . . . Condo termination provides an alternative to bankruptcy courts for failing projects where creditors may get a terrible haircut, but ultimately, shareholders will be stuck paying attorney's fees, trustee's fees, and as much as the property can generate to repay the other stakeholders, while lasting for many years. 

I also encountered a Condo Association President this week, who presides over a failing "investor hotel" condominium over 100 miles from his home address.  An "investor hotel" is a mortgage industry term for a condominium which is primarily consistent of individual landlords, with an attendant negative connotation.   This President assured me that dropping insurance for casualty was a necessity due to the terrible expense.  

I advised this President that it would be possible he could be held personally liable if there's a major casualty and that he would be wise to issue an emergency assessment of the membership to immediately resume coverage.   The President actually said that "the Board wasn't interested" in this type of action because "nobody would pay anyhow"!!  Condo Termination can reduce or eliminate poor decision-making by interested parties; to protect first, the rights of the inhabitants, and preserve the property improvements' value.

Lenders hold a tremendous amount of loans which are under water just waiting for the expense and loss of the foreclosure to REO sale process.   A typical foreclosure can cost the bank up to 25% of the collateral property's market value between attorney's costs, filing fees, lost revenue, sales commissions, taxes, back assessments and carry costs in inventory.   Lenders are too short on staff to process the multiple short sales, modifications, foreclosures, deed returns and other distressed loan resolutions.  

Loan workouts also require expensive lender reports on value, title searches and staff time.   The short sale process, where a bank cuts its losses early, is difficult for banks to execute case by case, as they are attempting to get the best price, while eliminate Non-Arm's Length sales to relations whereby the borrower benefits from the debt relief.   Condo Termination provides an Arm's Length method to sell condominium property, while lowering the administrative costs and satisfying risk management requirements.  Additionally, lien holders can liquidate holdings knowing that they will never have to pay carrying costs or posses the units - unlike individual workouts which may simply time shift the inevitable.  

    The next article in this series will address the benefits of Condo Termination to housing markets and how that translates into community support.   There are myriad benefits to Condo Termination, which, if realized, will create a positive feedback loop and arrest the erosion of communities with high concentrations of single family homes in multifamily housing projects.

FHA remodels condo lending guidelines

Reprinted from: Condo Vultures® Opinion Column  Thursday, 19 November 2009 09:47

The Federal Housing Administration recently released its new condominium lending guidelines, and with the stroke of a pen wiped 29 years worth of dust off of the most sought after lending certification in the country. The new guidelines include a major overhaul to the process by which lenders approve projects and modern requirements, increasing discretion in some areas while providing strong guidance in others. The changes were mandated in HERA Act of 2008 , which moved the statutory source of funding from a condominium only pool into the general housing pool. More importantly, FHA is using this guidelines change to simultaneously improve their standards and process, while eliminating cumbersome red tape that will reward condominiums in good standing that were previously locked out of the pool. The FHA was wise enough to issue temporary guidance simultaneously, allowing new buildings that qualify to sell out their remaining inventory in 2010 and support distressed markets in a responsible way. I believe that this FHA condo program renovation is a great first step in laying a long-term foundation for a recovery of the condominium housing markets. A quick backgrounder on the Department of Housing and Urban Development (HUD) could help clarify the workings of the FHA. The National Housing Act (NHA) of 1934 established the FHA to stem the tide of foreclosures during the Great Depression; prior to the NHA typical home loans were 5 year term loans (interest only) after which the entire principal balance was due in full. The FHA insured loans for up to 30 years, in essence creating the 30 year fixed rate mortgage - the standard loan issued today. The FHA's activities are spelled out (in detail) in the NHA and any activity it undertakes is authorized by that statute. The FHA's revisions are a concrete result of the HERA Act of 2008 enacted by the Democratic Congress and signed into law by President Bush. Back when Section 234 of the NHA was authorized, the condominium was still a novel new method of shared ownership, and Cooperative Housing Corporations were the mature way to distribute ownership in multi-family housing projects. Prior to HERA, the FHA issued condominium loans exclusively under Section 234 of the NHA and single family home loans under Section 203. This entailed different pools of funds, and when sold to investors, different pools of loans, some with condos, some with detached single-family homes. Once the new guidelines are fully implemented, this division will cease entirely, and the FHA will recognize condominiums in a formal way as legitimate single-family residences contained within a multi-family dwelling. The installation of a single approval standard, coupled with modern standards is a boon for all condominium owners. The Full and Spot system confused all parties as to the approval requirements for any particular project. Using the Spot Approval system, buyers had to pay for certifications each time a loan was to be issued, and go through the process as if it was the first time. Even worse, half the questions on the Spot checklist were boilerplate requirements which provided little useful underwriting information. The Full approval process contained major gray areas in important matters such as budgeting and insurance requirements, which had a chilling effect on applications due to the expense and complication applying. The most significant individual guidelines change was the allowance of the Right of First Refusal in condominium documents - so long as this Right does not conflict with the Fair Housing Act. The FHA’s rationale was that violations of the Act are criminal anyhow and many associations have the Right - while few are prosecuted for non-compliance. There are new caps on HOA dues delinquency percentages; however, the prior rules eliminated all buildings with special assessments under Spot Approval. The new Budget review guidelines adopt a Fannie Mae form which can now become the standard for lender communications in the area and only lead to more clarity for all parties. When it comes to matters of process, the removal of the legal certification requirements is quite possibly FHA's greatest slice into housing red tape since 1934. Under the prior rules, a condominium had to hire an attorney to review the Condominium Documents and certify to the FHA that they met a 37-page legal standard, which was drafted in December of 1980 during the waning days of the Carter Administration. Every time I encountered a building with fewer than 100 units and had to inform them that the certification costs alone would run $2,000, it pretty much killed their interest in FHA approval. However, that was after a 6 month-long search to find a practitioner willing to create a specialty in those types of reviews. Lastly, the FHA issued temporary guidelines, which are in effect for the coming year that should help local developers sell units to local buyers in South Florida with financing. Chief among these is the reduced pre-sales requirement in new projects which allows projects with 30 percent pre-sales to earn approval and sell up to 30 percent of their units to financed buyers with FHA loans. Two weeks ago, I visited the HUD Headquarters building on L'Enfant Plaza in Washington, DC to meet with their Condo Standards staff and learn the rationale behind their revisions and presented specific case studies of projects in our approval pipeline - as well as statistics generated by Condo Vultures®. The main topic of conversation was the stigma placed on loans into projects approved with Fannie Mae’s new process. The FHA wisely looked for guidance in the core logic of Fannie Mae's guidelines intended to protect the institutions that back these loans. However, Fannie’s initially stiff guidelines, rapid implementation with little input and then relaxation of the rules created the impression that the whole process was a sham. Now that there is discretion in the standards, the staffers were sensitive to the reality of the situation; that their decisions today will effectively pick winners and losers in the condo market. By issuing temporary rules alongside the new program, it sends a strong signal that the FHA understands the market, and that this is a process with real standards, but open to buildings experiencing temporary dislocations in this market. The FHA was originally created to backstop the national housing market and is visibly providing much needed support to the market, in a responsible fashion. FHA’s handling of the new shift from a rules based statutory condo approval process to a guidelines based process is providing much needed modernization to their programs and leadership to the market as a whole. The updates are modern, well considered and should promote condo lending, while simultaneously protecting the insurance pool from damaging claims in excess of premiums. The improvements to process should result more condominium approvals with lower costs to consumers as well as developers. It’s a credit to the Obama administration that his political appointees and career staff at HUD truly learned the lessons of Fannie Mae's disastrously erratic implementation of the condominium guidelines. These FHA condo updates will really gain traction in the 3rd and 4th quarters of 2010. For the buildings that qualify, they are the light at the end of the longest tunnel.

FHA Modernizes Condominium Lending

The Federal Housing Administration released their new Condominium lending guidelines this past Friday and with the stroke of a pen wiped 29 years worth of dust off of the most sought after lending certification in the country. The new guidelines include a major overhaul to the process by which lenders approve projects and modern requirements, which increase discretion in some areas while providing strong guidance in others. The changes were mandated in HERA Act of 2008 (link: http://www.gpo.gov/fdsys/pkg/PLAW-110publ289/content-detail.html), which moved the statutory source of funding from a condominium only pool into the general housing pool. More importantly, FHA is using this guidelines change to simultaneously improve their standards and process, while eliminating cumbersome red tape that will reward condominiums in good standing that were previously locked out of the pool. The FHA was wise enough to issue Temporary Guidance simultaneously, which will allow new buildings that qualify to sellout their remaining inventory in 2010 and support distressed markets in a responsible way. I believe that this FHA condo program renovation is a great first step in laying a long-term foundation in the recovery of the condominium housing markets.

A little background information (link http://www.hud.gov/offices/adm/about/admguide/history.cfm) on the Department of Housing and Urban Development aka HUD (link hud.gov) is in order to understand the workings of the FHA. The National Housing Act (NHA) of 1934 established the FHA to stem the tide of foreclosures during the Great Depression; prior to the NHA typical home loans were 5 year term loans (interest only) after which the entire principal balance was due in full - the FHA insured loans for up to 30 years, in essence creating the 30 year fixed rate mortgage which is the standard loan issued today. The FHA's activities are spelled out (in detail) in the NHA and any activity it undertakes is authorized by that statute.

The FHA's revisions are a concrete result of the HERA Act of 2008 enacted by the Democratic Congress and signed into law by President Bush. Back when Section 234 of the NHA was authorized, the condominium was still a novel new method of shared ownership, and Cooperative Housing Corporations were the mature way to distribute ownership in multi-family housing projects. Prior to HERA, the FHA issued condominium loans exclusively under Section 234 of the NHA and single family home loans under Section 203. This entailed different pools of funds, and when sold to investors, different pools of loans, some with condos, some with detached single-family homes. Once the new guidelines are fully implemented, this division will cease entirely, and the FHA will recognize condominiums in a formal way as legitimate single-family residences contained within a multi-family dwelling.

The installation of a single approval standard, coupled with modern standards is a boon for all condominium owners. The Full and Spot system confused all parties as to the approval requirements for any particular project. Using the Spot Approval system, buyers had to pay for certifications each time a loan was to be issued, and go through the process as if it was the first time. Even worse, half the questions on the Spot checklist were boilerplate requirements which provided little useful underwriting information. The Full approval process contained major gray areas in important matters such as budgeting and insurance requirements, which had a chilling effect on applications due to the expense and complication applying.

The most significant individual guidelines change was the allowance of the Right of First Refusal in condominium documents - so long as this Right does not conflict with the Fair Housing Act. The FHA’s rationale was that violations of the Act are criminal anyhow and many associations have the Right - while few are prosecuted for non-compliance. There are new caps on HOA dues delinquency percentages; however, the prior rules eliminated all buildings with special assessments under Spot Approval. The new Budget review guidelines adopt a Fannie Mae form which can now become the standard for lender communications in the area and only lead to more clarity for all parties.

When it comes to matters of process, the removal of the legal certification requirements is quite possibly FHA's greatest slice into housing red tape since 1934! Under the prior rules, a condominium had to hire an attorney to review the Condominium Documents and certify to the FHA that they met a 37 page legal standard, which was drafted in December of 1980 during the waning days of the Carter Administration. Every time I encountered a building with fewer than 100 units and had to inform them that the certification costs alone would run $2000 it pretty much killed their interest in FHA approval. However, that was after a 6 months long search to find a practitioner willing to create a specialty in those types of reviews. The first building, which I processed for approval, the Bank Lofts Condominium, is a gut condo conversion project, and was certified by Andrew Fritsch from the West Palm Beach office of Broad & Cassel. He drafted the condo documents and issued a certification, but balked on certifying projects to which he had not been the original author. "The rules require you to flyspeck someone else's documents", Fritsch said, "and the risk to reward ratio is terrible."

Lastly, the FHA issued temporary guidelines, which are in effect for the coming year that should help local developers sell units to local buyers in South Florida with financing. Chief among these is the reduced pre-sales requirement in new projects which allows projects with 30% pre-sales to earn approval and sell up to 30% of their units to financed buyers with FHA loans. Two weeks ago, I visited the HUD Headquarters building on L'Enfant Plaza in Washington, DC to meet with their Condo Standards staff and learn the rationale behind their revisions and presented specific case studies in projects in our approval pipeline as well as statistics generated by Condo VulturesTM. The main topic of conversation was the stigma placed on loans into projects approved with Fannie Mae’s new process. The FHA wisely looked for guidance in the core logic of Fannie Mae's guidelines intended to protect the institutions that back these loans. However, Fannie’s initially stiff guidelines, rapid implementation with little input and then relaxation of the rules created the impression that the whole process was a sham. Now that there is discretion in the standards, the staffers were sensitive to the reality of the situation; that their decisions today will effectively pick winners and losers in the condo market. By issuing temporary rules alongside the new program, it sends a strong signal that the FHA understands the market, and that this is a process with real standards, but open to buildings experiencing temporary dislocations in this market.


The FHA was originally created to backstop the national housing market and is visibly providing much needed support to the market, in a responsible fashion. FHA’s handling new shift from a rules based statutory condo approval process to a guidelines based process is providing much needed modernization to their programs and leadership to the market as a whole. The updates are modern, well considered and should promote condo lending, while simultaneously protecting the insurance pool from damaging claims in excess of premiums. The improvements to process should result more condominium approvals with lower costs to consumers as well as developers. It’s a credit to the Obama administration that his political appointees and career staff at HUD truly learned the lessons of Fannie Mae's disastrously erratic implementation of the condominium guidelines. These FHA condo updates will really gain traction in the 3rd and 4th quarters of 2010, for the buildings that qualify they are the light at the end of the longest tunnel.

Followup to Anatomy of a Struggling Condo - interview with an innocent bystander

A local saying goes: "It's a small Miami". When I picked Unit 3911 in Jade at Brickell - it was random through a search of the Miami-Dade Property Tax Appraiser's office where I merely wished to find a unit sold in both 2006 and 2008 to illustrate a unit with an inflated sale and a short sale.. One of my readers introduced me to a local gentleman who actually spent a substantial amount of time inside of the unit itself as a guest of his boss in a local hedge fund who lived in the unit as a tenant!

My source no longer works for the same hedge fund, and for purposes of obscuring his identity, we'll call him Sam, and his boss, the tenant, Frank. Sam explained that the 3400 sq. ft. apartment was truly stunning, with a balcony wrapping around the southern face of the building offering city and ocean views. Its flow-through floor plan is covered wall to wall in white marble. This single family home replacement in the sky rented for a mere $8000 per month to Frank, the fund manager, after the sale from Nueva Dia, Inc. to Cellini, LLC to Gilberto Lopez.

According to public records, Frank got one heck of a deal on his rent payments. The monthly interest payments to WaMu totaled over $28,000 a month. However, Gilberto’s mortgage was one of the infamous Pay Option ARM loans which only required a monthly payment of $10,157 monthly for the first year. The total cost of ownership, with interest, tax and maintenance payments was likely in excess of $38,000 and Gilberto was losing $30,000 monthly waiting for his apartment to appreciate. Odd, right? Even for the boom times, that’s a pretty steep operating loss . . .

Frank apparently conducted quite a lot of his business from the apartment as it was in close proximity to his office and offered a spectacular view of Miami. Sam spent quite a lot of time in the unit too. As noted in the last column, the unit slid into foreclosure, and he was served with legal paperwork as the tenant.

At that point, Frank tried to contact Gilberto, in Colombia, and find out why he was not paying the maintenance. The voice on the other end of the cellphone was in the city of Cali, and sounded young and spoke limited, but passable english. . .

What Sam found unusual, was that letters started to appear which were addressed to Julian, the manager. Even more strange some letters arrived addressed to Victor Patiño, who they suspected may be a notorious trafficker with the same name who can even be found in Wikipedia. However, they never met Victor, though according to Sam – the property manager Julian bore a striking resemblance to the gentleman in Wikipedia with the same surname.

According to Sam, though the owner/landlord was Gilberto Lopez, his property manager and rent collector was in fact Julian Patiño, the Manager of Cellini, LLC. Cellini LLC bought and sold the apartment within a 3 day period at the end of November 2006 . . . This certainly could be a tipoff to a potential Straw Buyer scheme. It is highly unusual to see the seller managing property for his buyer through the years - especially when the seller only owned the property for 3 days.

Eventually, Frank grew frustrated with the uncertainty of living in an apartment with potentially unstable leasing terms and requested a personal meeting with Gilberto. According to Sam, a frail older gentleman, who spoke little English and Gilberto’s son who was a non-english speaker.

Presumably, this last meeting with Gilberto was with the actual gentleman owner. In these situations, it’s not exactly polite to ask for identification – so Sam wouldn’t say that this was certainly THE Gilberto Lopez – but he did report that this gentleman really had little clue even with the help of translation, about the apartment or it’s issues. He did however agree to a reduction in Frank’s rents to $6,000 per month... whereupon Frank found a new home fairly quickly.

None of this is material, which a court would admit, but undoubtedly, the pool table doesn’t seem to have an even roll. A semi-intelligent bank should be flying red flags any time there’s a transaction with multiple sales in a 1 week. At the end of the day, this kind of transaction was a needless loss of WaMu’s equity and debt holders who were wiped out in the collapse, and potentially a crime committed against other unit owners and lien-holders who lost dues, property values and shouldered the burden of carrying this unit without dues paid for an extended period.

Anatomy of a Struggling Condominium

The condominium association that is the focus of the Oct. 22nd article Condo board tries new tactic to collect delinquent fees by Monica Hatcher is the Jade Brickell Condominium.  This project has been a poster child of the boom for many years.  For the sake of illustration, I have gone through Miami-Dade County Public Records to deconstruct just one of the many dubious chains of transactions that were the stock in trade for gaming the real estate bubble. 

In 2004 Nueva Dia Incorporated bought a developer unit $1,975,000 for Unit 3911 in the new construction Jade Brickell Condominium - 4/4 luxury condominium 3,415 square feet of living area - almost a house in the clouds . . . during the proceeding 2 years the apartment appreciated and was sold. 

Cellini, Limited Liability Company, purchased Unit 3911 for $2,200,000 on November 27th, 2006. This delivered a reasonable 5% compound rate of return to Nueva Dia Incorporated on its real estate investment. But Cellini, LLC - like the Renaissance sculptor of the same name - had plans in the works to sculpt a financial masterpiece. However, to put the finishings on this creation - a fool was required as the model, benefactor, buyer and borrower. Cellini LLC also had to add lender to their masterpiece - a fair and hearty soul, whose can do attitude would sweep away the stingy customs of conservative mortgage bankers.

Mr. Gilberto Lopez bought Unit 3911 of Jade Brickell Condominium from Cellini, LLC on November 30th, 2006 (just 3 days later for those who are counting) for a purchase price of: $3,350,000.  Mr. Lopez likely called his mortgage banker at (866) WAMU-YES and asked them to show him the "Power of Yes"- wherefore, he obtained a mortgage loan from Washington Mutual Bank, FA in the amount of $2,512,500 for his second home.   Perhaps he was a Mariachi Singer?   Alas, Mr. Lopez's motivations in delivering such solid returns to Cellini, LLC and/or any relations they may or may not have is not known, but the rest is public record.

The Management and Shareholders of Cellini, LLC must have rejoiced at their new masterpiece.  A 3 day gain of 35% on their investment filled their coffers with a 7 digit profit and for an annualized return on investment of 4265%!!  The masterpiece was complete!!  

Sadly, Mr. Lopez was unable to maintain his payments to the Jade Brickell Condominium Association and slightly 1 year after his purchase date, in December 2007, the HOA filed suit to foreclose on the Unit 3911 for unpaid dues.  Two months later, as the boom really lost steam, Washington Mutual also filed suit to reclaim Unit 3911 for unpaid mortgage payments as well.  Public record shows that in May of 2008, the Jade 3911, Incorporated company purchased the apartment for merely $1,600,000, likely a cash purchase, since there isn't a recorded mortgage. 

Winners: 

• Nueva Dia - a good buy and reasonable profit on sale
  
• Cellini, LLC - a million dollar gold plated statue by the original Cellini and no buyer's remorse
• Local Government - $55,000+ in transfer taxes, mortgage taxes, recording fees and higher property tax assessments throughout the building 
• Local Attorneys - they always win, huh?
• WaMu - someone got paid for making the loan, underwriting the loan, closing the loan, servicing, etc. then, when the going got tough, they were Out!

Losers:

• Gilberto Lopez - his credit, his down payment, maybe his reputation as a financial individual, hopefully nothing more.  Sadly, Gilberto was likely a victim in this transaction at best - at worst, who knows.
  
• Jade Brickell Condo - management expenses, attorneys fees, lost revenue, late bills, depreciated neighboring units, etc. etc. etc. 
• JPM Chase - $900,000+ but who knows how much was cushioned by the FDIC's sugar to get them to take the WaMu Medicine
• FDIC - probably holding the bag
• US Taxpayers - certainly holding the bag

Condo board tries new tactic to collect delinquent fees

As published in the Miami Herald yesterday, Oct. 22nd the article Condo board tries new tactic to collect delinquent fees by Monica Hatcher points out one of the latest "bleeding edge" tactics that condominium associations are using to try and collect enough dues to survive this crisis.   

The focus of Ms. Hatcher's article, the Jade Brickell Condo has been a poster child of the boom for many years.  These strong-arm tactics are turning Condo Associations into realty investors in a last ditch effort to stave off bankruptcy, receivership of the association or wholesale degradation of property improvements.   

Ironically, the new judicial decrees are allowing condominiums to do to delinquent owners what banks are being punished for doing to delinquent owners - to enforce court remedies on real property while avoiding due process in court.  As if the legal issues weren't difficult enough, there are State Sales Tax implications to weigh when Condo Associations become landlords.   

This leads me to imagine that perhaps condominiums should reserve a certain percentage of their units solely for rental purposes to benefit the association as a regular practice.  Ultimately, some associations will be declared unfit and terminated as a result of the success or failure of today's Hail Mary legal tactics.

Condominium associations are a not for profit entity created to maintain, operate and own common areas in shared living communities like apartment and town house developments.   They are not truly intended to be landlords, nor are they investors, nor are they designed to evaluate the market transactions that they facilitate.   If associations are unable to pay the bills, they may wind up taken over by their creditors in receivership - or forced to file bankruptcy to forestall the complete loss of control over the property by its owners.   Perhaps its time to re-evaluate this not-for-profit as standard practice in the hopes of making condominium associations more intelligent creatures.  

The real irony is that courts are allowing condominiums to do what banks may not - gain benefit from legal action through unorthodox tactics.  The goal of these blanket receiverships are to give income to the HOA while saving the costs associated with filing individual foreclosures on all units.  Meanwhile, banks are filing foreclosure, and in many instances, instructing their legal council to refrain from pursuing repossession actions further in hopes of avoiding monthly assessment payments.  Banks are avoiding full repossession, where they have to pay for contents insurance (known as the HO-6 contents policy), property management fees, bookkeeping fees and - in many cases - costs to rehabilitate foreclosed property.   Banks are attempting to raise the cost basis of their bad loans by racking up large default interest bills which will never be paid, so when they eventually satisfy their mortgages with short sales, they can reap  

Some condominium law firms have argued - successfully at times - that these delay tactics are not equitable in the eyes of the law and obtained court orders for banks to begin paying pre-foreclosure monthly assessments on property which they do not own in fact.    In this circumstance, the bank gets stuck with the continuing assessments while the association then attempts to place the rental income into receivership to satisfy as close to 100% of dues outstanding as possible.  

Condominium associations may not be prepared for the tax implications of becoming a landlord. "Remember that leases with less than 6 months duration are subject to Florida sales tax, which associations may not be presently collecting," said Steven Price, a CPA with the local firm Goldstein, Schecter & Koch.  Associations should carefully review their leasing policies to ensure that they are registered with the Florida Department of Revenue if they are conducting short term leasing or face a tax levy in the future. 

Perhaps condo associations should be directed to spawn their own subsidiary, for-profit investment companies to buy up and lease out a reasonable percentage of their units as a matter of normal business.  An association owned, for-profit venture could provide an income for maintaining the property through good and bad times, Strict limits on leverage would have to be maintained for these controlled entities. However, in good times, this type of arrangement could be suitable to lower the monthly maintenance assessments and build replacement reserves for condo buildings. This practice could provide a safer, lower cost source of leverage in lieu of Special Assessments - by allowing banks to mortgage a small percentage of the property directly, rather than encumbering the entire association, which could then be reserved for emergency settings only.

The radical legal tactics and creative decisions issued by local judges can act as a band-aid for many struggling associations in Florida.  However, it only takes 1 successful challenge by a unit owner to unwind the judge's order.  The stakes in the event of a successful challenge could be high, a struggling association having to repay rents collected as well as the possibility that they may have to pay attorney's fees to the challenger.  If an association is challenged before something like this worst case scenario, it will be wiped out afterwards.  Unless there's an obvious benefit to these radical tactics, or the property's distress is largely past, we suggest evaluating Condominium Termination as an alternative to dubious practices.

FLORIDA CONDOS IN 'DOWNWARD SPIRAL' AS BANKS IGNORE LOSSES

As published in Condo Vultures on October 21st, 2009

Our condominium housing stock in Florida is stuck in quicksand.

While the sinking feeling is lightening up, most of the market is stuck at the bottom of the bust cycle where units are difficult to sell or finance and associations are struggling to afford basic services and there's no end in sight.

The main reason why condos are stuck in downward spirals is lien-holder and bank resistance to realizing losses. The micro-workout policies promoted by banks will prolong the pain indefinitely at current rates of progress, which may have been acceptable 20 years ago, but now threaten to sink any recovery's long-term prospects.


The lack of mortgage money is intensifying the pain by wrecking valuations across the board. Furthermore, these types of events create recognized paradoxes. Ultimately, removing some of the current condominiums - the uninsured, poorly managed, or flat out falling-apart projects - must be effected to restore equilibrium to the greater market as a whole.

Banks are attempting to spread their losses over many years rather than realizing them immediately, which is only causing broader losses as the market flags and more loans in neighboring associations slide away as foreclosures slowly sap the value from entire communities.

Banks want to avoid paying monthly maintenance and reserves - as well as the state's new mandate for condo contents insurance - landlord's insurance, management fees, repairs, etc. Many lenders are negotiating each loan individually based on borrower's income and solely looking to modify the terms rather than take write downs on principal balances - which is just another creative way to kick the can down the road and avoid realizing losses that are inevitable.

Without new mortgage money available, condominiums are dropping to all cash pricing throughout Florida. Condo valuations have been destroyed in the far more prevalent garden style apartments well beyond the depreciation seen in new construction high rise buildings. The current method of banks dealing with the issues is a recipe for endless distress. For many projects this could mean a decade of distress and low prices while lenders work things out in court, one unit at a time, project by project, until 100% of garden style apartments statewide have been turned over.

The condo law that "protects" banks from paying maintenance greater than 6 months condo dues or 1% of the loan amount is now providing a Perverse Incentive to delay foreclosures and losses. In essence, we are seeing play out a known phenomina - The Tragedy of the Commons - which is brought about by the management of a shared resources by a group of individuals all acting in rational self-interest. As individuals gain use from the commons, it is gradually destroyed for all until nothing remains. In many ways, it is a fractal microcosm of our current financial dilemmas.

A real recovery in the Florida market will require condominium stake holders (primarily lien-holding banks at this point) to recognize the destructive result of their self-interested actions and agree to collective solutions within individual projects. Florida's condominium law provides for methods to wind down condominium associations and satisfy stakeholders through the Condominium Termination process.

The market recovery will accelerate by providing benefits to all parties. For local governments there will be improvements to local tax bases and unjamming of our courthouses. For residents, better housing stock available for renters and a way out for thousands of homeowners who are paying loans that amount to debt slavery and cannot afford legal representation or have no hope of reducing balances without short payoff. For lenders, realizing savings through quicker, cheaper - most importantly - non-judicial resolutions which don't require direct investment for repairs or interim expenses or payment of ongoing assessments prior to sale of mortgaged property.

Broken Condominiums

Reprinted from Condo Vultures® Opinion Column, April 20, 2009

I just found out that the high rise tower I call home has 40 foreclosures out of 195 units, and 60 units owned by investors who are likely just pushing their foreclosures out over the horizon.

With the distress blanketing such a large portion of the property, even the building's management is wondering if the condominium association will survive the storm.

Fortunately, this is still a very well run project where tenants are screened, security and utilities are paid, and somehow management has kept the lights on without interruption.

So how can you restore order when an association's membership abandons the condominium and it's residents? Is there a way to fix what shared ownership and shared antipathy has brought in the wake of the worst hard asset devaluation in generations?

My recommendation for value investors who want maximum profits for minimum input is to engage in the practice of Condominium Termination.

In several high rise towers, residents have reported the interruption of cable and internet services, rampant squatting, thefts and other misadventures related to non-payment of association dues in the property and lack of proper security.

Residents of the Mirrasou condominium in Northwest Miami-Dade lost access to the most basic of utilities, drinking water, as reported by the Miami Herald on April 16th, 2009. According to the report, the association has a delinquent bill of over $124,000. In the end, it took the direct intervention of a city commissioner to get the water flowing to this 304-unit condominium development.

When the water is shut off in a multifamily building, residents have to watch out for hazards such as infection from unsanitary relief, dry traps in sinks and toilets that create stenches, and the possibility of sudden condemnation of premises leading to emergency evacuations of owners and tenants alike.

During the peak of the great housing boom, dozens if not hundreds of developers hurled themselves into apartment house to condominium conversion projects. These groups operated like miniature private equity hedge funds, buying what were then mispriced commercial real estate assets and converting them for residential use and sale to individual owners.

The dollars and sense of these projects seemed obvious at the time, with condominium prices crossing $300 per square foot for even the lowliest of dwelling houses. And appetites seemed never ending.

Buyers lined up for the opportunity to buy a corner unit because it had much better value than an interior unit. These speculators, for the most part, have been removed from the scene, banks are taking huge losses - often times as a direct result of ignoring their own rules for occupancy and use in lending - and buildings that sold substantial amounts of units have become "fractured".

A "fractured" condominium does not have a functioning homeowner's association and comes in two major varieties. The more benign flavor is the "developer held association" where the majority of the units conveyed to tenants are in various states of delinquency and foreclosure. However, these developers have a large percentage of units, mostly occupied for rental. The "zombie association" is one where the units have been anywhere from 75-100 percent conveyed to individual buyers and more than 50 percent of the units are under water, in foreclosure or delinquent in dues.

The "developer held association" is a stable entity, that will likely survive the market's downturns as the developer typically has a substantial equity in the project and the rental units are producing surplus income, which pays for the delinquent units and often leaves a small residual income with the developer. These entities even reserve for improvements and the condominium property is in a high state of repair.

The "zombie association" is a different animal altogether, and one with a different solution that value investors should employ to not only make a profit, but help repair the open wound to the market caused by oversupply, over leverage and poor quality.

The worst associations were sold out between 2004 and early 2007 before banks discovered lending standards. They were and often sold quickly, remortgaged often and are now bereft of stakeholders entirely--outside of institutional first mortgagees and junior lien holders.

Condominium Termination can provide a faster, cheaper solution to the problems posed by 100-300 foreclosure filings, liens, utility company losses, lawsuits and judgments by creditors, tenants and owners.

Often times, dwellings subject to legal/financial distress are repossessed with major damage to the physical location, which renders them untenable and lowers demand for bank resale. Condominium complexes all have procedures drawn into their legal Declaration of Condominium which allows the Homeowner's Association to voluntarily disband the fee simple rights of the owners and revoke the subdivision of airspace that demarcates condominium boundaries.

Some projects require as little as 70 percent of unit owners and institutional mortgagees to disband; others demand that 95 percent of stakeholders are in agreement.

Condo Termination buyers should command a significant discount to be priced into the purchase of units. The goal is to buy as many units as possible at a high Direct Capitalization Rate, insure one's self against developer's liability (there is commercial insurance available for this) and then use the powers of the association to demand compliance or title from any parties who refuse to sell at the price that the majority accepts.

Once the association is terminated, all rights in the property typically revert to a tenancy in common, though this may be specified otherwise in the documents. At that time, the condominium entity and it's obligations can be terminated, leaving the building in the state of a commercial multi-family dwelling.

The irony is that while the market was booming, condominium units were valued at double and triple their income values (if one existed, many had "negative carry"), while commercial properties maintained pricing in line with income. Now the reverse is true, and condominium units are selling at a discount rate compared to commercial property--even when a condominium may throw off a steady income stream in relation to the sales price.

Why are Condos stuck in the mud?

Yes, I said it, our condominium housing stock in Florida is stuck in quicksand! While the sinking feeling is lightening up, most of the market is stuck at the bottom of the bust cycle where units are difficult to sell or finance and associations are struggling to afford basic services and there's no end in sight. The main reason why condos are stuck in downward spirals is lien-holder and bank resistance to realizing losses. The micro-workout policies promoted by banks will prolong the pain indefinitely at current rates of progress, which may have been acceptable 20 years ago, but now threaten to sink any recovery's long term prospects. The lack of mortgage money is intensifying the pain by wrecking valuations across the board. Furthermore, these types of events create recognized paradoxes. Ultimately, removing some of the current condominiums - the uninsured, poorly managed, or flat out falling apart projects - must be effected to restore equilibrium to the greater market as a whole.

Banks are attempting to spread their losses over many years rather than realizing them immediately, which is only causing broader losses as the market flags and more loans in neighboring associations slide away as foreclosures slowly sap the value from entire communities. Banks want to avoid paying monthly maintenance and reserves - as well as the state's new mandate for condo contents insurance - landlord's insurance, management fees, repairs, etc. Many lenders are negotiating each loan individually based on borrower's income and solely looking to modify the terms rather than take write downs on principal balances - which is just another creative way to kick the can down the road and avoid realizing losses that are inevitable.

Without new mortgage money available, condominiums are dropping to all cash pricing throughout Florida. Condo valuations have been destroyed in the far more prevalent garden style apartments well beyond the depreciation seen in new construction high rise buildings. The current method of banks dealing with the issues is a recipe for endless distress. For many projects this could mean a decade of distress and low prices while lenders work things out in court, one unit at a time, project by project, until 100% of garden style apartments statewide have been turned over.

The condo law that "protects" banks from paying maintenance greater than 6 months condo dues or 1% of the loan amount is now providing a Perverse Incentive to delay foreclosures and losses. In essence, we are seeing play out a known phenomina - The Tragedy of the Commons - which is brought about by the management of a shared resources by a group of individuals all acting in rational self-interest. As individuals gain use from the commons, it is gradually destroyed for all until nothing remains. In many ways, it is a fractal microcosm of our current financial dilemmas.

A real recovery in the Florida market will require condominium stake holders (primarily lien-holding banks at this point) to recognize the destructive result of their self-interested actions and agree to collective solutions within individual projects. Florida's condominium law provides for methods to wind down condominium associations and satisfy stakeholders through the Condominium Termination process.

My company - The Condo Terminators - intends to evoke a culling of the herd. The market recovery will accelerate by providing benefits to all parties. For local governments there will be improvements to local tax bases and unjamming of our courthouses. For residents, better housing stock available for renters and a way out for thousands of homeowners who are paying loans that amount to debt slavery and cannot afford legal representation or have no hope of reducing balances without short payoff. For lenders, realizing savings through quicker, cheaper - most importantly - non-judicial resolutions which don't require direct investment for repairs or interim expenses or payment of ongoing assessments prior to sale of mortgaged property.

When Condos Go Bankrupt and Beyond

What happens when condominium towers go bankrupt? It's a looming question being asked by homeowners, investors and even many property management professionals. The primary forms of resolution for failing condominiums are bankruptcy and receivership which can be used separately or in combination. Thanks to recent court decisions, there is even a Blanket Receivership which is sweeping through condominium associations statewide to mitigate losses. There are different ramifications for developer controlled homeowner associations as opposed to associations in control of the individual members. Ultimately, the goal of the workout process is to return the association to its members, while ensuring that all of the creditors are paid, vital services are available and regular maintenance is performed or brought current.

Bankruptcy is a federal court filing in which a person requests protection from creditors and can be used to restructure agreements such as leases, loans and settle accrued payment obligations. Recently, the Maison Grande condominium's bankruptcy placed 500 beachfront apartments in Miami Beach, under the court's protection from their creditors legal actions. The association's 30% delinquency rate caused a downward spiral into bankruptcy. Unit owners were suffering from a long term obligation initiated by the developer over 30 years prior, which over the course of time damaged the association's finances until there was little other recourse to avoid a their creditor's receivership action.

Thus far, condo bankruptcy has mostly come in the form of Chapter 11 reorganization, however it remains to be seen if a Chapter 7 filing for liquidation will result from these court actions from established condos. The Maison Grande's Chapter 11 bankruptcy filing, and it is likely that the association will rid itself of their crushing liabilities. The Debtor-in-Possession (DIP) financing provisions of Chapter 11, will allow the condominium borrow new money for the purposes of continuing to function normally while in bankruptcy. They will use the filing to obtain a court order to service providers such as utilities and managers to honor agreements and collect payments on a deferred basis.

Receivership is a court mandated appointment of a 3rd party management company to pursue collections, rent condominium property and pay the bills. There are many circumstances when a receiver can be appointed to collect rents from tenants payable to parties who are not the owner of record on title. In the above example, a creditor was threatening an entire condominium with a receivership action to collect an outstanding debt from a struggling association. In mortgage loans where the condo property is purchased as investment, Fannie Mae's standard mortgage documents have a Rider or add-on which gives mortgage holders the right to place these investment properties into receivership and begin collecting rents prior to the completion of a foreclosure activity.

Condominiums can use Florida Statute 718 to open receivership to collect rents for units in foreclosure, which in itself is nothing new. When it comes to the condo receivership the real news is the Blanket Receivership. In the past, associations had to open a separate receivership for each property in distress. The legal fees and expenses of individual receivership were simply too burdensome to make it a worthwhile action. Enterprising condo litigants obtained judicial permission to establish a Single receivership action for all delinquent units in any given association. The recent 3rd District Court of appeals decision, where a developer who fell into HOA foreclosure challenged the blanked receivership and lost has had the effect of affirming the Blanket Receivership as the preeminent new tool in the arsenal of condo lawyers statewide.

There's a high rise, waterfront condo on South Beach, which shall remain nameless, whose developers went bankrupt twice. After much trepidation, the bankruptcy trustee only completed the sales process last month with the project having been since turned over to the unit owners several years ago. The risks of buying bankrupt condominium units are starkly illustrated by the difficulties this condo had in continuing operations, as well as the emptiness of the building since the building now had an expected cost; the bankruptcy attorneys and trustee. In addition to the weight of court costs, the developer's budget was underfunded, just as the developer, which led to a rapid spike in condo assessments. Many developers attempt to have a reduced initial budget because of the way that condo law gives developers incentive to have the lowest budgets possible.

This South Beach condo was one of the first condominiums to file a blanket receivership action. However, the building, through shrewd management by its Board and its management company, has managed to continue as a going concern, lower the monthly budget, improve and remodel the building and take a leading role in foreclosing against non-paying unit owners. According to a recent search of the MLX by Condo Vultures Realty and public records, the last sales closed in August of 2009 for $240 per square foot; this closeout is happening more than 8 years after construction began and 4 years after end sales started. This closure has come at an exacting price, as it took more than eight years after the Notice of Commencement and four years after the bankruptcy to get the building sold out and stabilized. It's important to note that the bankruptcy sales for this South Beach high rise came at the very robust top of the market, when there was no excess condo inventory.

When condominium towers go bankrupt, there are negative consequences for nearly all interest holders, but the balance of the law is actually in favor of preservation of the improvements for use of the occupants over the interests of equity holders, debt holders and creditors. Florida's condominium laws are easily amongst the most advanced of shared ownership in our country today and are showing that with strong remedies and flexible application, that it is possible to work out many situations where a condominium is unable to pay its bills.

Alternatively, there do exist, written into each condominium, provisions for termination of the subdivision agreement and these workout processes can be adapted to facilitate a Condominium Termination process as well. When looking to invest into a distressed condominium, knowing the potential pitfalls can help investors mitigate risk factors. Best practices include insuring the income streams through the use of landlord's insurance policies with rent loss coverage and maintaining capital reserves against potential rises in operating costs associated with owning distressed condominium property.