What's HOT in Florida Condominium Conversions
December 17, 2002
Robbin Newman - Ft Lauderdale
With interest rates low and home ownership on
the rise, condominium conversions are “hot.” What does a developer need to know
before embarking upon a condominium conversion? Developers need to be aware of
notice and sale requirements that pertain to existing tenants, as well as the
financial obligations resulting from the conversion of an existing building into
a condominium. This article, although based on Florida statutes, is
illustrative of the types of issues arising generally with residential
condominium conversions. Although the laws vary significantly between states,
and there is always a need to review the applicable statutes in the state where
a project is located, the same issues often arise.
Under Florida law, Sections 718.604 through
718.622 of the Florida Statutes (the Roth Act) address the provisions and
requirements applicable to residential condominium conversions in Florida. The
developer who is thinking about a condominium conversion of an existing
residential apartment building needs to be concerned about notice requirements
to existing tenants, tenants' rights to extend their lease terms, tenant
relocation provisions, tenant rights of first refusal and developer disclosure
requirements. Each of these issues is specifically addressed in the Roth Act,
and is briefly summarized here.
Notice of Intent
A notice of intent to convert, in compliance
with the statutory requirements (notice), must be delivered to each existing
tenant of the rental building that will be converted to condominium units. The
form of the notice also requires approval of the Division of Florida Land Sales,
Condominiums and Mobile Homes (Division) before the notice is delivered to any
tenant. This notice is to be delivered to all tenants no later than the date
that the first offering of individual condominium units for sale is delivered to
any person.
Once the notice has been delivered, each tenant
who resides in the building has certain lease extension rights in accordance
with the specific extension rights and term requirements as set forth in the
Roth Act. For example, a tenant who has been residing within the building for
any period of time less than 180 days prior to the date of the notice has the
right to extend an expiring lease upon the same lease terms for a rental period
that will expire no later than 180 days after the date of the notice.
Consequently, even a tenant who has been residing at the building for only 30
days would have this same extension right.
Every tenant has 45 days after the notice is delivered to
make its election in writing with respect to the statutory rental extension; and
a tenant may elect to extend for all or any part of the extension period
available. In addition, a tenant may terminate its lease either under its
existing rental term or if there is an unexpired extension term of 180 days or
less after the delivery date of the notice upon written notice to the developer
as provided in the Roth Act.
Under certain circumstances the developer has
the option to make a cash payment to induce a tenant to relocate from the rental
premises instead of extending the tenant's lease for the applicable lease
extension term as described above. This is not applicable to every tenant, and
is dependent upon the tenant's lease term; therefore, the Roth Act must be
carefully reviewed for compliance with these requirements.
Tenant's Right of First Refusal
The developer also needs to be aware of a
tenant's right of first refusal to purchase the unit in which the tenant resides
as of the delivery date of the notice. Under the Roth Act, this applies only to
tenants who have resided in the building for at least 180 days prior to the date
of the notice. After the developer delivers the necessary disclosure materials
for the tenant to review in making this decision, the tenant will have 45 days
to exercise its right of first refusal.
New Rental Agreements
It is also possible that a developer may want
to enter into new rental agreements before the condominium conversion is
completed, perhaps because the building will be undergoing renovations for a
period of time. In this case, the developer may not want to lose rental income
for unoccupied units during this renovation period. However, the developer also
must be careful not to jeopardize its ability to meet all requirements of the
Roth Act in order to successfully accomplish the condominium conversion. It is
recommended that any leases entered into after the notice has been delivered to
all other existing tenants of the building include a termination right in favor
of the developer which, under the Roth Act, may be exercised upon 60-days',
prior, written notice. In order to be eligible for the developer termination
right, the new lease must be entered into after the date the notice is delivered
to the existing tenants, and the new lease must conspicuously state that the
building is going to be converted to condominium ownership. Note that tenants
who enter into leases after the delivery date of the notice do not have the
rental term extension rights described above. These tenants also will not have
the benefit of the right of first refusal described above as these tenants will
know in advance that the building is going to be converted to condominium
ownership and that formal notice of this conversion has already been delivered
to all tenants of the building.
Financial Obligations
In addition to the requirements outlined above,
there are other financial obligations to be borne by a developer who is
undertaking a condominium conversion in Florida. The Roth Act requires
compliance with at least one of three options:
- the granting by the developer to purchasers of the
condominium units of an implied warranty of fitness and merchantability as to
the roof and certain structural components of the improvements
- the developer's purchase of a surety bond payable to the
new condominium association, or
- the establishment of reserve accounts in the name of the
new condominium association for certain components of the improvements in an
amount based upon the formula set forth in the Roth Act.
The developer also must engage an architect or engineer to
review the condition of the building and prepare a report that the developer may
rely upon in making certain statutory disclosures under the Roth Act to
prospective buyers as to the condition of the building.
With the proper acquisition and renovation
financing in place, a developer who is acquiring a rental property with
desirable amenities such as a pool, clubhouse, tennis courts and adequate
parking facilities may find that the economics of the transaction will entice
most of the existing tenants to purchase their rental units, thereby expediting
the sales program of the units.
Other provisions of Chapter 718, Florida Statutes, govern
the requirements for the creation of the condominium and all filing
requirements including the role of the Division in regulating the process.
Chapter 718, Florida Statutes, also regulates ongoing operational requirements
of the condominium association. So long as the project financing has
appropriate partial release and prepayment provisions to allow the developer to
pay down and pay off the mortgage as condominium units are sold, and interest
rates are low, condominium conversion may continue to be a "hot" topic in the
Florida real estate market.
For more information, contact Robbin Newman, toll free, at
888-688-8500.