Tuesday, June 22, 2010

Condo Terminations May Be Next Phase Of Real Estate Crash

Condo Vultures® Opinion Column


Nearly 18 months after beginning the lengthy and uncommon process, Condo Terminators has successfully unwound a 44-unit association in South Florida. 
Think of it as a administrative do-over of a troubled condo complex that probably never should have ever been converted.
By our estimates, as many as 15 percent of the existing condos in Florida are legitimate targets for termination due to plummeting values caused by high foreclosure rates, unpaid maintenance fees, expired insurance, and serious code violations that jeopardize a project.   
In terminating the Sunset Lake Villas condominium in suburban Fort Lauderdale, we are providing a much needed relief for a project where prices of individual units have plummeted to 10 cents on the dollar from the original boom time values.   
Our plan of termination was recorded in the Broward County Public Records on June 11, clearing the way for the failed Sunset Lake Villas to revert back into a single-title apartment building. 
The idea of terminating a failed condominium started with a hunch: while condo conversions had been the boom transaction, the mass short sale of a condo project had to be the child of the real estate bust.
Corporations are often viewed as entities with unlimited life. I knew that each and every building is required to have a clause allowing the dissolution, having drawn my own condo documents in my own projects. 
At the time, I speculated that the same market forces, which so mispriced multifamily dwelling assets in the boom, would reverse themselves horribly during the bust.
This month, the idea became reality when my consulting group, Condo Terminators, announced we had successfully turned back the clock, offering another way for faster resolution of the foreclosure crisis.
Developer Anthony Galeotafiore of AJG Capital LLC in Bethpage, N.Y., assisted in bringing the transaction to fruition along with his counsel Sree Reddy of Roth Reddy & Associates in Miami Beach, who drafted the instrument of termination.
Pursuant to this plan of termination, a special purpose trust company managed by Condo Terminators took possession of the apartments. 
This trust company is instructed to proceed with the orderly wind-down of affairs for the Homeowner’s Association by the plan.
The main purpose is to prepare the project for sale to AJG Capital, which intends to operate it as a rental apartment building.
Once the plan of termination was approved and filed, the building's title was transferred to the Termination Trust. 
This transfer stripped the existing mortgage liens - all currently in foreclosure - from the individual units.
The mortgages are still valid and attach to each unit owner’s share of the proceeds of sale of the property - even if these proceeds are insufficient to cover the whole amount owed.
A real estate appraiser visited the property to determine market value for all units, as per the plan.
The Sunset Lake Villas project is being liquidated for its current fair market value estimated at around $18,000 to $22,000 per unit. The condo units had depreciated 91 percent from the sales prices in 2008.  
Based on mortgage documents in the public records, the terminated units had a present loan-to-value in the 700 percent to 1,000 percent range.
In 2007, the Florida condo statute’s termination section was revised to provide an orderly process to wind down and terminate failed condos. 
It allows these properties’ legal agreements to be dissolved, and for the properties to be reconfigured or sold to investors as multifamily commercial property.
Condo termination could potentially produce positive outcomes for local governments, banks, and the market as a whole in addition to savvy investors looking to profit from the bust.
Ultimately, I estimate that up to 15 percent of the post 2003 condominiums developed statewide in Florida could be legitimate targets for condo terminations in the course of the next five years.
Grant Stern is the owner of Morningside Mortgage Corp. in Miami. He can be reached at 786-220-0117.

1 comment:

  1. Grant,

    This is fantastic! Congratulations! Looking forward to seeing what comes next!