Condo owners’ rights can be stripped in bulk sales

Imagine owning a unit in a South Florida condo tower only to have an investment group – which holds a supermajority of the association’s voting power – decide to strip away all individual property rights by converting the entire project into a rental complex to be placed under the exclusive control of a non-owner entity.

Now consider the additional challenges created for individual unit owners – even those opposed to converting from a condo association into a rental community – who had purchased their units at the peak of the real estate boom using traditional bank financing that typically requires borrowers to repay their mortgages or face foreclosure litigation for the outstanding balances.

This scenario – dubbed a “plan of termination” – is now occurring at a steady pace at troubled condominium projects throughout the South Florida region as bulk buyers attempt to consolidate control and reduce expenses in hopes of stabilizing a project and bolstering returns.

Since 2008, at least 51 condominium associations – including seven projects in the year 2011 – have been “terminated” in the tricounty South Florida region of Miami-Dade, Broward and Palm Beach counties under such a scenario, according to government records.

No project exemplifies this “plan of termination” scenario better than the new 16-story Jenny Tower condominium just west of Greater Downtown Miami near the future home of the Florida Marlins baseball team.

In August, a bulk buyer, Miami-based Somerset Tower Apartments LLC, which controls about 90 percent of the Jenny Tower units voted to terminate the association that governs the three-year-old project on Northwest 15th Street Road just west of the University of Miami / Jackson Memorial Hospital campus.

As the owner of more than 100 units out of a total of 115 residential units in the Jenny Tower, the bulk buyer – which obtained ownership through the purchase of a distressed loan and subsequent foreclosure auction – supported a “plan of termination” that transferred all ownership rights to a trustee empowered with complete control and “sole discretion” to operate the project.

Under the plan, all Jenny Tower unit owners were immediately converted into “beneficiaries” who are entitled to a stake in the rental project.

As part of the arrangement, a designated trustee has been directed to obtain an independent appraisal of “fair market value” of all units and common areas in the Jenny Tower.

The appraisal would establish a value – based on every unit in the tower plus the common areas – for the newly converted rental complex. Under the termination plan, the original bulk buyer would have the first option to purchase the entire complex at the appraisal value regardless of whether individual owners want to sell.

Under the approved termination plan, all owners are to be paid an amount that reflects their percentage stake – a combination of their individual units and their share of the common areas – of the appraised value of the former condo project, Jenny Tower.

The total dollar amount unit owners are entitled to does not factor in the original purchase price or any outstanding loan amounts of the respective condo units.

In fact, the termination plan anticipates that lenders who provided loans to individual unit owners in the Jenny Tower “will receive less than the amounts necessary to fully satisfy their mortgage liens,” according to the plan recorded in Miami-Dade County.

Despite the potential hardship individual unit owners could face from lenders going forward, the plan authorizes the designated trustee to proceed “as it sees fit, without requiring the consent of any units owners/ beneficiaries or lienors, inasmuch as the plan confers the trustee the authority to protect, conserve, manage, sell, or dispose of the condominium property,” according to the plan.

To assess the financial impact of the adoption of the “plan of termination” of the Jenny Tower, consider that individual buyers purchased 14 units in the project at an average price of nearly $345 per square foot between April and July of 2008, according to Miami-Dade County records.

As of 2011, these same 14 units have an assessed value of $91 per square foot, according to the Miami-Dade County Property Appraiser’s Office.

This constitutes a 74 percent swing from the original average purchase price in 2008 compared to the current assessed value in 2011.

Contributing to the challenges, the Jenny Tower is in a neighborhood where developers created a dozen condominium projects with more than 1,400 units since the South Florida real estate boom began in 2003.

At the end of 2010, developers still controlled a sizable chunk of unsold inventory between the new Florida Marlins baseball stadium and the University of Miami / Jackson Memorial Hospital campus.

As with the Jenny Tower, the longer the South Florida residential real estate market takes to correct, the greater the chances are that bulk buyers will consider “plans of termination” that strip away unit owner rights as a strategy to reorganize troubled condominium projects struggling to survive amid the downturn.