Reverse Conversion

STATUTORY CHANGE BEING MISUSED BY DEVELOPERS TO HARM HOMEOWNERS

by Scott M. Gross, ESQ./ Published March 2015

Recently, shrewd developers have started taking advantage of a seldom utilized part of the Florida Condominium Act—forcing homeowners to sell their property for a fraction of what they paid. Navigating the Florida real estate market has been a daunting task for homeowners since the early-to-mid 2000s. Home values soared to stratospheric heights, and then burnt out in spectacular fashion. Florida condominium owners, especially, have seen their property values fluctuate in a manner usually reserved for amusement park rides—peaking at a median sales price of more than $211,000 in 2006 and bottoming out at just over $88,000 in 2011. 

In an attempt to capitalize on the rapidly inflating housing market, condominium conversions became a hot commodity in the months and years leading up to the 2008 financial crisis. Investors and developers would routinely purchase entire apartment projects and convert them into condominium projects—reaping massive profits as they sold off individual units. According to the Florida Department of Business and Professional Regulation, there have been nearly 3,400 condominium conversions in Florida. As the bubble began to burst, however, developers found themselves with a glut of inventory and buyers who were no longer interested in the condominium product the developers were selling. 

In 2004 and 2005, Florida was hit by several major storms, which caused widespread damage to many condominium communities. In many cases, the extent of the damage was so substantial that the unit owners could not afford the special assessments required to make necessary repairs or even agree on which repairs were necessary. Investors willing to purchase the entire condominium project and perform repairs were not willing to do so if the property remained a condominium subject to the restrictions in Florida Statute Chapter 718.

In response to these issues, Florida Statute §718.117 received a major overhaul in 2007. Significantly, procedures were enacted so that a condominium association could be quickly and easily terminated by a vote of 80 percent of the members, so long as there were no more than 10 percent of members objecting to the termination. The stated legislative intent behind the change was to prevent “economic waste, areas of disrepair, or obsolescence of a condominium property for its intended use.” Voter apathy, an un-avoidable part of contemporary democratic processes, also likely played a part in the rule change. 

The pre-2007 version of Florida Statute §718.117 called for unanimous consent of all of the unit owners in order to terminate the association—one adverse vote could stall efforts to sell the project to a developer willing to invest in making the repairs. The Florida legislature recognized that unanimous consent was nearly impossible, but they wanted the will of the people to control the ultimate outcome of the termination proceedings. By instituting the 80 percent approval/10 percent objection rule, the legislature attempted to ensure that if there were a substantial number of owners objecting to the plan of termination, the plan would ultimately fail. Once the 80 percent vote was reached, a buyer could force the remaining homeowners to sell their units to the buyer at fair market value. Generally, it was thought that the amendment would help to alleviate some of the inherent red tape that slowed the dissolution of associations after a property was destroyed, thus making it a more attractive property for investors; however, it’s clear that the change has had other unintended consequences. 

Developers have since realized that they could take advantage of the statutory amendment for a wholly different purpose. By buying up, or failing to sell in the first place, 80 percent of the units in a condominium project and then voting to terminate the condominium, developers can force the remaining homeowners to sell their units to the developer. With the decline in the housing market, purchasing property at foreclosure sales and via short sales became an easy method for developers to acquire condominium units in bulk at bargain basement prices. 

As the law is currently written, once the unit owners (i.e., developer) have voted to terminate the condominium, the developer is only required to pay fair market value for the units that were individually owned. Given the massive drop in property values, these homeowners are being forced to sell their homes at a loss without any real recourse. This “reverse conversion” utilizes a statute that was, ironically, intended to help consumers but has instead created a nightmare scenario for some homeowners. 

Members from both the Florida House of Repre-sentatives and the Florida Senate have recognized the issue and have attempted to pass legislation aimed at correcting the perceived injustice. Representative Carl Zimmerman, a Democrat from Palm Harbor, sponsored House Bill 1061 and Senator Jack Latvala, a Republican from Northern Pinellas County, sponsored Senate Bill 1546. Both bills took up the termination issue. Unfortunately, both bills died in committee. It appears as though our representatives in Tallahassee recognize that there is an issue with §718.117 in its current form, but they are reluctant to involve themselves in mitigating the homeowners’ plight. A number of homeowners have filed lawsuits challenging the statute and the reverse conversion practice. For now, however, homeowners are stuck in limbo while the battle plays out in the court system.