Converting Apartment Buildings into Residential Condominiums

By Heather J. Roembke / Published June 2016

A condominium conversion is the process of transforming an existing rental building, usually apartments, into residential condominium units. When the economy booms, so does the trend of converting apartment buildings into residential condominiums. The market for residential condominium conversions usually arises when the price of single-family homes increases beyond the reach of a first-time home buyer, as converted condominiums are usually priced lower than single-family homes and/or new construction.

In 1980, Florida enacted the Roth Act (Part VI of the Condominium Act) to govern the process of forming residential condominiums by conversion. Since condominium conversions are previously- occupied structures, it is important to understand the building’s condition prior to purchasing. The Roth Act requires a condominium conversion report to be prepared by an architect or engineer. Contained within the report are detailed disclosures pertaining to the age of the specified components in a structure, the building’s existing condition, structural soundness, the remaining useful life of the specified building components, and the estimated cost of replacement of the specified components. The report is substantiated by attaching a copy of a certificate under the seal of an architect or engineer authorized to practice in Florida. Pursuant to Florida Statute, Section 718.616, each unit owner and the association are third-party beneficiaries of the report. Additionally, the developer must prepare a report disclosing whether there is termite damage or infestation and whether it has been properly treated. This statement must be substantiated by an inspection report by a certified pest control operator.

It is important to consider the condition of the property prior to purchasing a unit in a condominium conversion. Often, apartment buildings converted into residential condominiums are older, which can lead to a quicker deterioration of the property and/or need for proper maintenance. If the conversion report reveals that construction defects exist, it is important the association consult with a law firm that has experience in handling construction defect litigation and, in particular, conversion cases.   Legal counsel will review the conversion report and discuss with the association its legal rights and options. Legal counsel will usually go through a condominium conversion checklist with the association and review various items, including whether the developer prepared a report that discloses the condition of the improvements, the condition of certain components, and the current estimated replacement costs (as of date of the report). These components would include the roof, elevators, structure, electrical systems, pavement and concrete (including roadways, walkways, and parking areas), heating and cooling systems, swimming pool, drainage systems/irrigation systems, plumbing, seawalls, pilings, docks, and fire protection system.

Furthermore, a developer is required to provide one of three types of post-purchase protections for unit owners regarding the improvements and must also disclose which type of protection is being utilized. Under Florida Statute, Section 718.618, the developer has three options when existing improvements are converted to ownership as a residential condominium:

• Establish converter reserve accounts for capital expenditures and deferred maintenance;
• Grant to the purchaser of each unit an implied warranty of fitness and merchantability for the purposes or uses intended; or
• Post a surety bond equal to the total amount of all reserve accounts, which would otherwise be required.

A funded reserve account requires the developer to fund a reserve for air conditioning, plumbing, and roof replacement. The age of any component or structure which the developer is required to fund in a reserve account must be measured in years, rounding to the nearest whole year. The amount of reserves funded must be based on the age of the component as disclosed in the inspection report. Florida Statute, Section 718.616(3) goes into more specifics regarding how the reserve account must be funded. The developer must establish the reserve accounts in the name of the condominium association.

Another option is for the developer to post a surety bond. This requires the developer to obtain a surety bond that may be used to fund repairs and replacement of the covered items. The bond is issued in the name of the association by a company licensed in Florida.

If the developer fails to fund the converter reserves, the developer is deemed to have granted to the purchaser of each unit an implied warranty. Implied warranties require the developer to pay for repairs and replacement of improvements during the warranty period. According to Florida Statute, Section 718.618, if the developer is deemed to have provided implied warranties, the warranty period begins with the notice of intended conversion and continues for three years thereafter, or with the recording of the declaration to condominium and continuing for three years thereafter, or one year after owners other than the developer obtain control of the association, whichever occurs last, but in no event more than five years. For this reason, it is important for a homeowners association governing a conversion to consult with an experienced lawyer as soon as practical.

An association may challenge a limitation on warranties or establish other claims against a developer if any of these conditions exist:

• Converter reserve accounts were not properly established or funded;
• The developer failed to properly maintain the common elements during developer control of the association;
• The developer failed to disclose or remedy structural or maintenance defects he knew or should have known existed; or
• The developer failed to make appropriate disclosures under Florida Statute, Section 718.616.

Due to the amount of construction defects that are not corrected and are covered up in the conversion process, it is not uncommon for such statutory warranties to be the focus of litigation. If too much time passes and the association does not address these types of issues as well as construction defects mentioned in the conversion report, the association’s rights to pursue the developer for any remedy may become exhausted. It is important that associations seek the guidance of legal counsel experienced in the area of construction defects as soon as turnover occurs, so counsel may discuss with the association what remedies may be available. For further information on condominium conversions, please refer to Florida Statutes, Sections 718.616 (Disclosure of condition of building and estimated replacement costs and notification of municipalities) and 718.618 (Converter reserve accounts; warranties).

Heather J. Roembke

Angius & Terry

Heather J. Roembke is an attorney in the Sarasota, Florida office of Angius & Terry LLP. Her primary focus is representing community associations and homeowners in construction defect litigation. Roembke obtained her Bachelor of Science and Master’s Degree from East Carolina University. She attended law school at Barry University School of Law in Orlando, where she served on the nationally-ranked trial team and interned under the Honorable Anthony Johnson. Roembke is admitted to practice in all Florida State Courts and has been a member of the Florida Bar since 2007. For more information, e-mail hroembke@angius-terry.com or visit www.angius-terry.com.