Article Courtesy of The TCPalm
By Melissa E. Holsman, Nadia Vanderhoof
October 11, 2010
Most of the 14 Treasure Coast apartment complexes
converted into condominiums five years ago during the real estate boom are
now cash-strapped communities.
Some unit owners are grappling with their own
foreclosure. Other owners have a crippling number of foreclosures around
them. Many are dealing with a staggering amount of delinquent condominium
maintenance dues and a few converted complexes sit half empty because of
mounting bad debt.
Other overpriced, underwater units languish in a
The people who bought these converted units have
lost tens of thousands of dollars. Some condos purchased for nearly
$200,000 are now worth $25,000.
Hobe Sound resident Susan Ridlon who lost $131,500
on a unit at Fairway Palms II in Stuart she’d purchased for $169,000 in
2006, called the investment “one of the worst” she’d ever made.
Ridlon, 71, said she intended to make money off of
her former Fairway Gardens Apartments unit.
“I think I was just overcome by the greed of
trying to flip a property and make a quick $20,000,” she said.
Developers spent close to a total of a
quarter-billion dollars buying these former apartment complexes across the
Treasure Coast just five years ago.
Converting apartments to condo communities was a
growing trend a decade ago and peaked in 2006, but has since declined to
pre-2000 levels, said Michael Cochran, director of the state’s Division
of Condominiums, Timeshares and Mobile Homes.
Economics, he said, most likely fueled the spike in
the number of conversions that took place across Florida.
“The development cost for land and new
construction,” Cochran said, “is more expensive than the cost to
purchase and renovate existing buildings.”
But when the housing market began to crumble, the
problems at condos converted from apartment buildings began to escalate.
“Once (developers) realized there were no buyers
for their overpaid properties,” said Maria Wells, president of the
Realtor Association of St. Lucie County and broker-owner of Lifestyle
Realty Group in Stuart, “the trend began with speculators and investors
walking away from large deposits or selling them as short sales or
Struggling to keep afloat
In the past five years, 1,330 apartment communities
statewide were bought and turned into condominium communities, according
to Florida Department of Business and Professional Regulation officials.
During this period, developers across the Treasure
Coast collectively shelled out a whopping $272.3 million on 1,803
apartment units at 14 complexes.
After developers spent $119.52 million on 733 units
in Martin County, court records show 233 have received final foreclosure
judgments. In St. Lucie County, of 679 apartment units converted to condos
at a cost of $103.04 million, 166 have received a final judgment of
foreclosure. And after developers in Indian River County plunked down
$49.74 million on 391 units, an estimated 107 units have been subject to
Today, condominium associations at some of these
former rental communities are struggling to keep financially afloat.
And their problems could get worse.
Several leading real estate experts and analysts
indicate the tide of local condo foreclosures might be far from over.
“Some (developers) went bankrupt and some of them
are on the brink of it,” said Sean Snaith, director of the Institute for
Economic Competitiveness within the College of Business Administration at
the University of Central Florida.
“When you look at the prices (apartment complexes)
were purchased for,” Snaith said, “it would be difficult for any
developer, especially a smaller developer, to absorb those losses or be
able to fall back on a line of credit to help get them through.”
Developers, residents feel the sting
In November 2006, Dana Berman purchased the 164-unit
Pines of Vero Beach apartment complex on 16th Street for $9.25 million,
and quickly converted the units into condominiums, pricing them at
A year later, the Florida Office of Financial
Regulation filed a complaint against Berman and his companies alleging he
obtained about $192 million from more than 700 investors for real estate
projects that were either in default or incomplete.
All of Berman’s commercial projects were
transferred to a courts receiver to recover money investors lost. Mortgage
holder TransCapital Bank took back the Vero Beach property now called
Today, more than half of the community’s units sit
vacant; 10 are in foreclosure, and just a few are rented. Berman, who
declined interview requests, is now bankrupt, his attorney said.
West Palm Beach businessman John Naimi, who bought
123 units from TransCapital for $10.93 million, is struggling to sell the
units and rents what he can.
Speculators and investors aren’t the only people
burned by South Florida and out-of-state condo developers.
Kathy Lovering, who had rented at the Pines of Vero
Beach for three years before buying a unit in 2007, still regrets paying
Berman $129,900 for her unit.
“The bank foreclosed … when I couldn’t keep up
with the payments,” said Lovering, who now lives in Arizona.
She fears her credit could be damaged for a decade,
she said, after she lost her condo. One like it now sells for about
Condo foreclosures multiply
Veteran banker W.D. “Chic” Acosta, Seacoast
National Bank executive vice president for mortgage banking, said over his
three-decade-long career, he’s seen this apartment-to-condo conversion
trend come and go three times — in the 1970s, 80s, and in 2005 — and
only when the housing market is shooting sky high.
Typically, these conversions create an inflated but
“false market” when pricing condo units for sale, Acosta said. The
false market spurs a huge drop in property values later, prompting the
mostly speculator-owners to abandon their investments.
“In this last bubble speculators ... intended to
quickly sell or ‘flip’ the unit,” Acosta said, “just as the
developer intended to flip the project.”
The highest priced apartment complex sold on the
Treasure Coast and converted to condos was the 384-unit Portofino at
Jensen Beach purchased by Montecito Property Company Inc., for $61.8
million in May 2005. Since then, court records show Dizengoff-Portofino
LLC owns 74 units, another 122 units are facing foreclosure, and 126 liens
have been recorded against unit owners to recoup unpaid maintenance dues.
The Club at St. Lucie West, a sprawling 380-unit
community off St. Lucie West Boulevard in Port St. Lucie, sold for $51.4
million in 2005, coming in as the second highest condo conversion sale in
the region. The units sold for as high as $302,000 for a three-bedroom,
and one-bedrooms were fetching $198,000 after the conversion. Today, Boca
Executive Realty has 11 units listed for sale, mostly short sales, ranging
from $47,000 to $87,900, according to its website.
The Palm Estates at Vero Beach, off 58th Avenue
north of State Road 60, purchased by Cervera-Bankers Holdings LLC, sold
for $31.66 million in 2006, one of the highest real estate transactions
recorded in Indian River County.
Since then, the 153-unit complex has had 89
foreclosures and four liens, with Cervera-Bankers receiving final
foreclosure notices on 54 of those units.
Miami real estate investor Javier Cervera Jr, 42,
who with a partner converted several apartment complexes, including Palm
Estates and Fairway Palms II in Stuart, said initially his goal was to buy
and manage rental buildings.
But apartment-to-condo conversions were all the
rage, and appeared to be a profitable business model, he said.
And while some conversions proved profitable,
Cervera said when the market crashed, he and developers like him were left
with entire apartment buildings full of units they couldn’t sell.
“In Vero Beach and in West Palm Beach, I had a
significant amount of my own personal money in there, which was lost,
unfortunately,” said Cervera, a business veteran whose Miami-based
family has spent 25 years in the real estate industry. “What happened
sucks on many levels for a lot of different people. There were no villains
here, we didn’t do anything wrong.”
Cervera insisted his company sold condo units based
on the market, and that people willingly paid. He blamed people too
willing to overextend themselves for skyrocketing foreclosure rates that
have swept the nation since 2006.
“When you talk to people who bought an apartment
and they’re looking for a villain, sometimes they just have to look at
themselves and say, ‘Did I over-leverage myself? Did I have an
expectation that was unrealistic?’” Cervera said. “A lot of times
people don’t want to look at themselves and they want to blame somebody
“They want to blame the appraiser, the bank and
they want to blame the developer,” he added. “They want to blame their
friend who did the deal and made money on the deal and they didn’t.”
Some success amidst devastation
But not all Treasure Coast apartment-to-condo
conversions have done poorly.
Weatherbee Villas, a 12-unit condo complex in Fort
Pierce, has no foreclosures, and court records show only one lien has been
filed against a unit owner since being converted in 2005. Likewise, the
17-unit Vero Beach community 1727 A1A Condominium has not recorded any
liens, foreclosures or evictions since converting in 2005.
Condo communities that are largely owner-occupied
generally do better financially, said Kevin Payne, a certified public
accountant and shareholder in the Stuart-based Proctor, Crook, Crowder
“The higher the percentage of units being used as
primarily residence,” he said, “decreases significantly the risk that
someone is going to go into default on their maintenance fees and
ultimately get foreclosed on by their bank.”
Owners who are paying their monthly dues can get
stuck paying more through special assessments to cover for unit owners who
Frank Rathbun, spokesman for the Community
Associations Institute, a Virginia-based organization that advocates on
behalf of homeowner associations, said a significant amount of delinquent
dues can lead to a decline in services at local condo conversion
Associations can suffer delays in needed capital
improvements, and experience a drop in reserve funds that are set aside
for emergency situations, such as repairs in the aftermath of a hurricane.
“When a homeowner, or a developer or a bank
lender, do not pay their fair share of the monthly assessments, something
has to be done because the people in the community and the board are the
ones left holding the bag,” Rathbun said. “Ultimately, associations
are a business, so they have to be run like a business, otherwise they go
out of business.”
At the 153-unit Palm Estates at Vero Beach,
association dues are collected from the rentals at the complex — before
unit owners get their own cut of the rent, said Michelle Aslin, who
manages rentals, sales and the complex’s condominium association.
“Our fees get paid here,” Aslin said.
“There’s no way around that.”
If a unit-controlled condominium association is
grappling with unpaid bills or depleted reserves, then, as a corporation
operating as a business, the association’s board “has the power to
assess, borrow funds, develop spending priorities and otherwise manage the
affairs of the condo,” said Michael Cochran, director of the division of
condominiums, timeshares and mobile homes.
There are no state programs available to guide
associations facing financial difficulties, Cochran said. And he agreed if
an association’s financial situation is unsalvageable through normal
management and business practices, the only other solution is to terminate
the condo form of ownership.
“If an association is unable to pay its bills,”
Cochran said, “it may end up in a bankruptcy.”
Ready to swoop in
Peter Zalewski, president of Miami-based Condo
Vultures Realty, a firm that represents investors looking to buy large
blocks of foreclosed condos to rent them until the market recovers enough
to sell units at a profit, predicts he will be scoping out condo
conversions on the Treasure Coast within 12 to 18 months.
That’s after conversion projects in Miami-Dade,
Broward and Palm Beach counties are sold to investors and private equity
groups, he said.
Since July 2008, in Dade, Broward and Palm Beach
counties there were 50 transactions of bulk deals, with 4,800 units
selling for $1.1 billion in cash, he said.
“The natural progression is to move (north) from
there because it just makes sense, financially,” Zalewski said. “The
vultures aren’t circling the Treasure Coast yet, but talk to me in a
year and we will be.”
Foreclosed bulk units at troubled condo conversions
on the Treasure Coast could sell for 25 or 30 cents on the dollar, he
Meanwhile, Grant Stern, president of Condo
Terminators, a specialty consulting group of Morningside Mortgage Corp. in
Bay Harbor Islands, is marketing a new legal instrument locally and in
South Florida. It’s called the “Plan of Termination,” which can
assist in reverting failed condos back into apartment buildings with
Stern said he has already completed the legal filing
process for the first such project in Florida, the Sunset Lake Villas
Condominium in Margate.
Stern explained reconfiguration as a process where
there is a legal separation of rental and condominium units within the
same complex. Stern advised associations with substantial negative equity
— those who lack adequate cash reserves and insurance — to examine
their legal options before just giving up on the property.
“There is a viable process for every
association,” Stern said. “Condo associations looking to relieve
themselves of a headache can use these legal mechanisms to their
IF YOU’RE LOOKING TO BUY
If shopping for a condo in a converted community:
Obtain a copy of the latest financial statements,
budget and a certificate from the association stating the amount of all
assessments and other money due to the association from the unit that is
If the association has had a reserve study done, the
buyer should request a copy, if not from the association then from the
A reserve study is usually created by an expert
qualified to do building inspections and assess estimates for repair and
replacement costs for all components covered by the association, including
roofs, driveways and clubhouses. The analysis enables board members to set
a minimum level of annual reserve contributions made by the condo
The most important document to review is the
“conversion inspection report.” Florida condo law requires that a
developer prepare this report showing the condition of any improvements,
their condition and replacement costs.
IF YOU’RE A CONDO ASSOCIATION
As a corporation under Florida law, a condo
association operates as a business and has the power to assess, borrow
funds, develop spending priorities and otherwise manage the affairs of the
condo, including hiring an attorney.
If a condominium’s financial situation is so dire
as to be unsalvageable through normal management and business practices,
the only other solution is to terminate the condo form of ownership.
If an association is unable to pay its bills it
might end up in a bankruptcy, and like any other business it would proceed
through the judicial bankruptcy process.
Condo complexes doing the best are proactive.
Association boards at some distressed complexes have built into their
annual budget an allowance for bad debt. Experts say it could force an
increase in dues for those who are paying, but the move can help avoid
slapping owners with a large special assessment.
Condo boards can save money by cutting back on
services such as landscaping, or delay repairs. And they can try to
renegotiate outstanding debts with utility companies, vendors and cable
In order to maintain financial viability,
association board members need to be aggressive in asserting their rights
to receive back assessments from foreclosing banks and from non-paying
owners. Members should be aware of new legislation (Florida Chapter
2010-174) that went into effective in July that permits associations to
collect assessments directly from a tenant where the unit owner fails to
pay assessments. The new legislation also increased the amount of unpaid
back assessments that a foreclosing bank must pay to an association from 6
months to 12 months.