Condo Terminations May Be Next Phase Of Real Estate Crash

Condo Vultures® Opinion Column

BY GRANT STERN

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.

Condo Terminators Appears on CNBC's Realty Check

Click Video to Play:

Condo Terminators Completes Florida’s First Mass Short Sale

FOR IMMEDIATE RELEASE

Grant Stern, founder of Condo Terminators in Bay Harbor Islands, Florida is pleased to announce Florida’s first Optional Condo Termination proceedings.

Miami - Condo Terminators, a specialty consulting group of Morningside Mortgage Corporation, in Bay Harbor Islands, Florida, has completed the filing process for Florida’s first mass short-sale of a failed condominium conversion on June 9 at the Sunset Lake Villas Condominium in Margate, Florida. 

This project is expected to lead a wave of Condominium Terminations, resulting in mass short-sales of failed condominium conversions, reversion to apartment buildings, and the debut of a new legal instrument, the Plan of Termination.

Sunset Lake Villas is majority owned by Anthony Galeotafiore, Managing Member of AJG Realty LLC development group of Bethpage, New York. Sree Reddy, Esq., LLM, of the Miami law firm Roth, Reddy PA, drafted the Plan of Termination and represented the Developer at today’s proceedings. 

Condo Termination was “the only way out” said Galeotafiore, “after all of the units we sold fell into foreclosure, all of the unit owners moved away or rented units without paying HOA dues.  Nobody is financing condos, but apartment buildings are bankable”

Condo Terminators provided specialty business advice to the Developer and transactional advisory services to his council and accepts projects for these services throughout the state of Florida.

“Condo Termination transactions are the only way to resolve Florida’s real-estate slump and protect the rights of home-owners, banks and the value of our tax base,” says Condo Terminators President, Grant Stern, “The Condo Termination law is meant to cut through the tangle of lawsuits and provide fair resolution to the parties of interest, outside of court.”

For questions and further information, please visit www.condoterminators.com or contact Grant Stern directly at 305.219.0326 or info@condoterminators.com or Anthony Gaelotafiore, President of AJG Capital of Bethpage, NY at 516-933-3507 or agallo@ajgcapitalresources.com

CondoTerminators.com Launches Today!

The CondoTerminators.com website is officially ready for prime time! 

It includes news articles from this blog and specific information for condo owners, renters and investors.  (free registration required, can use your GMAIL, AOL or YAHOO accounts)

South Florida Tax Base Absorbing 90% Drop in Condo Values

Condo Termination can remove the weakest sales from the condo market and restore value to our eroding tax base.  Failed condo conversions are seeing enormous drops in tax assessed values.  Today's Miami Herald article highlighting the property tax appraised value updates showed another mid-teens double digit percentage drop from the year prior for South Florida's market taxable assessments.  The new, larger homestead exemption passed when property values and taxes skyrocketed in the boom years is creating unintended consequences.   When combined with dirt cheap apartments in failed condos, these developments promise to create new problems and iniquities in the tax base if left unaddressed.

The Miami Herald reports that the Broward County tax base shrunk by 12.1% last year and Miami-Dade by 13.4%.  Some neighborhoods saw mild price increases or declines, while others dropped by up to 30%!  This shrinkage means that while values drop, millage rates will have to be raised to provide the same services as the prior year, services get cut or create some tough choices for local politicians.  Even worse, this could force tax bills to rise when homeowners were expecting tax relief in line with their new, lower property values.

Last week, CondoTerminators.com posted the Notice of Termination to the owners of a Margate, Fl. complex, which was tax assessed at $159,000 for 2009.  The owner of the majority of the units challenged the 2009 appraisal and had it dropped to $117,000 per unit, saving $298 per unit.  This week's released 2010 assessed values were for $15,500 per unit, an over 90% drop in valuation from one year to the next!  

Florida's Homestead Exemption provides strong protection for homeowners against their creditors, as well as a discount in the assessed value of the home for property tax determination.  In January 2008, it was sensible to extend tax exemptions to provide relief to new homebuyers whose value assessments were an order of magnitude higher than longtime owners who were capped at 3% annual increases with low purchase prices in the early 90s and prior.   

 The old inequalities where longtime homesteaders underpaid and new buyers overpaid will suddenly reverse, permanently if these failed condos are the basis for ongoing tax rates.  The $50,000 Homestead Tax exemption combined with the 3% cap on increases means that a $20,000 condo purchased today, and homesteaded will take approximately 36 years to return those units to the tax base! 

Non-Condo property owners are facing rising millage rates and tax bills.  Condo prices are depressed due to the complete lack of financing options.  Short of passing new legislation to force bankers to loan into condos, this will remain the norm for several years to come - and leave open a window of opportunity to permanently depress property tax bases.   Condo termination will remove these underpriced units from the market and return their taxable values to higher, commercial income values based on cash flows.

Fannie Mae Requires Pre-Closing Credit Checks

Home applicants must freeze credit activity or face scrutiny when they go to close on new home purchase loans.  These Gap reports will raise the cost of consumer credit, while ultimately not affecting consumers' need to increase credit lines after home buying.  Traditionally, housing is the driver of American consumer activity, with new homes requiring furnishings, appliances and general improvements in re-sales of existing homes.

Second Credit Checks For Home Buyers: Be Prepared

Megan Mollman, HousingWatch Contributor

 (excerpted below)

Starting June 1, Fannie Mae has a new rule going into effect which requires the lender to check for additional lines of credit, such as a new credit card or a car lease, that a borrower may have obtained that have not been reflected on the credit report over the course of the loan process. 

Tip No. 1: Get the house before the car 

Across the board, mortgage brokers say that opening new lines of credit is the easiest thing to trigger the lender's attention, especially with the news of Fannie Mae's mandate. For example, this means opening up a store card at Lowe's to get a head start on buying some new appliances or paint or leasing a car to have something shiny to park in your new garage. 

Grant Stern, president of Morningside Mortgage Corporation in Miami, Fla., believes car loans are "the No. 1 culprit" in lenders turning down a prospective buyer's home loan. "We always tell people as mortgage brokers, 'Get the house first, then they will give you the car," he says.

Tip No. 2: Don't switch professions (or tax brackets)

Brokers say its not earth-shattering to change jobs in the same field, especially if you are making more money at the new place of employment, but it's complicated when a professional is moving job classifications, for instance, from employed to self-employed, or from a salaried-position to a commission job. "Moving from an employee to a contract basis is a dagger," says Stern, as two years of federal tax returns need to be included with a loan application. "[In this case], it could take three years to get approved for a mortgage."