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Showing posts with label condo termination. Show all posts
Showing posts with label condo termination. Show all posts
Monday, June 21, 2010
Thursday, May 27, 2010
Today It Begins
The waiting period before a condo can ratify a Plan of Termination through a Special Meeting is two weeks. Our vote is going to be held at the Trustees office on June 9th at 9 am. After the Plan is ratified, and recorded, the Condo Association will continue to exist, but building will be deeded to a Condo Termination Trust managed as a special purpose entity by Condo Terminators and Howard W. Mazloff, Esq. an experienced real estate attorney.
Tuesday, October 20, 2009
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.
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.
Monday, October 19, 2009
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.
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.
Friday, October 16, 2009
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.
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.
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