Wednesday, May 19, 2010

Condo Termination Benefits Everyone

The Florida condominium statute provides an orderly process to terminate failed condos and revert them into apartment buildings with single owners. Condo Termination has the potential to produce positive outcomes for local governments and the Florida Condo market as a whole. Local governments are facing eroding tax bases due to mass cascading failure of the Florida condo market. The market for condominiums in Florida is oversupplied with liquidation priced condo units. Removal of failing condos from the housing stock will ultimately speed the recovery process in the Florida condominium market. Communities face a wave of decaying multi-family housing projects and "investor hotel" condos without adequate cash reserves and looming deferred maintenance. Condo associations all over the state lacking insurance, reserves with high levels of negative equity should be removed through Condo Termination, soon.

Local governments, school boards rely on property taxes for their operating budgets and to pay debt service. The Florida Constitution requires that this local tax money is set aside for the exclusive use of counties. With the implosion of thousands of condominium unit values, local tax bases are shrinking faster than budget predictions. When a few units inside the project sell at liquidation prices, and financing is frozen, local tax assessors have little choice but to write down values for the entire project. The net effect is raising property tax millage rates across the board. Single family homeowners with lower absolute value depreciation will feel the squeeze, while condo investors get the tax break from lower assessments. County governments will still be forced to cut back on services due tax base erosion, while homeowners will feel the squeeze of higher proportional taxation on their depreciated homes. Condo Termination will allow multi-family housing to be assessed at the leased income value, which is higher than market value where condo prices have crashed.

There's no mechanism to transfer distressed units to new end users without abundant financing. Agency and Government lending authorities place financing restrictions on projects that are largely investor held. Financing for fractured condos still poses tremendous challenges for developers with inventory and investors alike. Investors are weary of lending into or buying into condos due to the potential for sharply rising HOA dues or potential Special Assessments. Condo bulk buyers face the potential of developer's liability buying as few as 7 units. Condo Termination will reduce inventory quickly without requiring thousands of loan workouts and new loans in a tight credit market.

Local economies benefit by the maintenance and repair cycles in multi-family housing. The Florida condo market has a vast supply of Class B and C condominium units where rentals once existed. Healthy condo associations set aside hundreds of thousands of dollars over the course of years for the purpose of replacing roofs, aging plumbing, and improving electrical and/or fire systems. Like apartment buildings, condos require regular maintenance and periodic replacement of major components. Many projects near the end of their economically useful lives were sold to condominium converters and sold to end users with a few engineering reports, limited reserves and abundant financing. Lacking sufficient operating funds, these condos have limited or depleted reserves. Deferring maintenance will further reinforce the negative cycle condos are experiencing. Condo Termination will invite value seeking investors to purchase failed condos in need of repair, creating jobs and helping local economies.

Many new communities were launched with unsound footing and inadequate reserves during the recent real estate boom. Condo Termination will reverse eroding tax bases in the Florida condo market by removing liquidation priced units. It will reduce inventory quickly, without thousands of bank transactions when negative equity is drowning communities. The recovery process will accelerate with lower inventories and establishing criteria for communities that are failed. Apartment house maintenance will be performed by value seeking investors after Condo Termination, which will stimulate local economies and maintain high quality of housing stock. Ultimately, I believe that up to 15% of the post 2003 condominiums developed statewide in Florida could be legitimate candidates for Condo Termination in the course of the next 5 years.

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