By: Tabitha S. Etlinger, Esq., Associate at Saxon Gilmore & Carraway, P.A.
Published in FAHROgram September/October 2015

TabithaEtlinger-cAlthough the real estate market is recovering, the recent crash left many Florida condominium units in the hands of investors who purchased through the foreclosure process. In some cases, a majority of the units in a condominium project are held by a single investor. These condominium properties may present a good prospect for conversion to affordable rental housing, but the remaining unit owners are often not willing to give up their units. Section 718.117, Florida Statutes, provides a procedure for conversion of condominium property into rental units without unanimous consent from the unit owners, but complaints from objecting owners spurred recent legislation (House Bill 643), which may substantially limit the economic feasibility of such conversions.[1]

Termination Prior to House Bill 643

Under § 718.117, the conversion process begins by proposing a plan for terminating the condominium to all of the current unit owners. The termination plan provides for sale of the entire condominium property including all individual units and common amenities, and allocating the proceeds of that sale to the individual owners. The condominium may be terminated if (i) the termination plan is approved by at least 80% of the voting interests, and (ii) no more than 10% of the voting interests affirmatively vote against the termination plan or object to it. Lienholders, as to the common property and as to individual units, do not have to approve the termination plan if the plan will result in full satisfaction of the liens.

Section 718.117 provides presumptively fair and reasonable methods for allocating the proceeds. Liens that encumber individual units are transferred, in their respective priorities, to any proceeds attributable to the individual unit. Prior to passage of House Bill 643, § 718.117 did not require that a termination plan provide for full payment of debt secured by individual units, potentially leaving underwater owners immediately liable for the difference, even when they were current on mortgage payments and condominium assessments.

Although there was a procedure for objecting to a plan prior to the new legislation, it provided limited recourse to an underwater objecting owner. An owner or lienholder could only contest a plan by filing a court proceeding on the limited basis that the allocation of proceeds among the various units was not fair and reasonable. Even if the objecting owner won on the issue of allocation, underwater unit owners could still be at a loss if the re-allocated sale proceeds simply were not high enough to cover individual liens.

Changes Under House Bill 643

If passed, House Bill 643 will significantly increase the burden on proponents of a termination plan when more than 80% of the units are owned by one entity and/or its affiliates (a “Bulk Owner”). Under House Bill 643, termination plans approved by Bulk Owners would be required to provide additional protections to objecting unit owners including availability of leases post-conversion, provision for a relocation fee to unit owners claiming their units as homestead, and provision for minimum sale proceeds to individual owners current on their assessments and mortgages. While these requirements provide substantial additional protections for underwater unit owners, they could present serious economic or practical obstacles to converting a failed condominium into affordable housing. Housing authorities considering conversion may need to take a second look at the economic viability of their plans with these new hurdles in mind.

[1] The pending legislation (House Bill 643) was approved by both houses of the legislature on April 27, 2015, and was signed by Governor Scott on June 18, 2015.

 

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