When Rasikaran and
Jhansi Boaz set out to buy a condo in 2008, they chose an
oceanfront Canyon Ranch-branded project in Miami Beach,
partly thanks to its amenities. The complex, now called
Carillon Miami Wellness Resort, has four pools, a spa and
restaurant.
“We liked that healthy living concept,” Rasikaran Boaz said.
But their dream, and that of other buyers, of a relaxing
lifestyle with regular spa visits and pool laps has turned
into a nightmare.
Carillon condo owners have been locked in a yearslong
lawsuit with an affiliate of Z Capital Group, which owns the
hotel and amenities. At condo-hotels, such portions are
collectively referred to as the commercial lot.
At issue is the degree of power Z Capital, a New York-based
private equity firm led by James Zenni Jr., has at the
Carillon. That includes over maintenance and assessments of
amenities and common areas, such as elevators and hallways.
In January, a Miami judge sided with condo owners and wrote
in his order that Z Capital’s level of control amounted to
“overreach” that reduced residents to “long-term hotel
guests.”
The order’s ramifications are expected to resonate across
the sector. If the ruling becomes precedent, it would strip
condo-hotels’ commercial lot owners from a level of control
they have enjoyed, and in turn, could have a chilling effect
on hotel buyers’ appetite to invest in projects altogether,
experts say.
“This ruling,” said Peter Zalewski, a South Florida real
estate analyst, “could be a watershed moment.”
Quid pro quo gone bad
The Carillon isn’t the only condo-hotel where the commercial
lot owner — rather than residents — has more authority.
Most condo-hotels vest maintenance and assessment control
over nearly the entirety of the properties with the
commercial lot owners. And unit buyers willingly give up
autonomy in exchange for living in a complex that feels and
looks like a resort.
“Since condo buyers are getting the benefit of, say, a St.
Regis, St. Regis has to have the ability to dictate what the
interior of those projects looks like,” said real estate
attorney Joe Hernandez. “There’s some quid pro quo there.”
Issues arise when residents feel commercial lot owners are
levying excessive assessments, but aren’t maintaining the
complexes.
The 580-unit Carillon, at 6801 Collins Avenue, has had
financial woes from the start. In 2008, Eric Sheppard of WSG
Development completed the North and South condo towers and
revamped the Central Tower, which has the hotel keys and
condo units that owners can rent out through the hotel.
After Sheppard lost the project to lender Lehman Brothers in
2009, Z Capital bought it out of bankruptcy in 2015.
Some residents The Real Deal spoke with recalled high
assessment hikes that started before the bankruptcy sale.
Most recently, they are taking issue with the condition of
amenities and an April letter informing them of monthly
assessments of $1,800 to $7,700 per unit this year for
improvements.
Regardless of whether condo-hotels are well run and
assessments are fair, declarations that give commercial lot
owners “unilateral” control are illegal, said Eugene
Stearns, an attorney representing Carillon condo owners.
“A good autocracy might be acceptable,” he said. “If the
dictator is benevolent, people will accept it. Doesn’t make
it lawful, but people will accept it…. What we have here is
a non-benevolent dictator.”
The Florida Condominium Act applies to condo-hotels, meaning
that after a certain number of units are sold, residents
take control of the property. “They are a condominium,”
Stearns said. “It looks like a duck, walks like a duck and
quacks like a duck.”
Not so fast, says Brian Dervishi, an attorney for Z
Capital’s affiliate.
He said the Carillon has been well-kept, winning accolades
and experiencing a nearly $500 million increase in value
since Z Capital bought it. Condo owners have powers,
including to inspect financials, and the governing structure
is perfectly legal, Dervishi argues.
”You take a parcel of land and you can divide it up and say,
‘This half is condo subject to [the condo act], and the
other half is not condo and that’s not subject to’” the act,
he said. “That’s recognized, and that’s the basis of all
these developments over the last 30 [to] 40 years.”
The Carillon ruling is good news for residents at other
condo-hotels who are unhappy with the commercial lot owners’
management. It gives them ammunition to file their own
suits.
The order “provides clarity in similar situations,” said
attorney Lauren Fallick. “This ruling also will provide some
guidance to drafters of master declarations … especially to
avoid an outcome that might be detrimental to the developer
or commercial operator looking for profit, as well as to
protect the condo unit owners.”
But if the Carillon case truly sets off a chain reaction
where the balance of power at condo-hotels tips in favor of
residents, then not only would investment in the commercial
lots dry up, but hospitality brands such as Ritz-Carlton and
St. Regis may steer clear from this market.
South Florida is home to many condo-hotels consisting of one or multiple buildings with condo units for sale, hotel keys and condos that owners can rent out through the hotel operator. The entirety of the developments is branded by the hotel operator.
“If the hotel sees its power stripped
away to control the common areas, the look of the buildings,
maintenance fees,” said Zalewski, “you would probably see
these name brand hotels disappear because there wouldn’t be
a financial incentive to play ball.”
Careful what you wish for
The power struggle between residents and commercial lot
owners at condo-hotels goes beyond the Carillon.
A lawsuit filed by a unit owner at Icon Brickell is largely
considered to have opened the door to similar litigation.
The project includes a pair of condo towers and a third
tower with both condos and the W Hotel in Miami’s financial
district. In 2018, a resident at Tower 3 sued the
association, arguing that the declaration violated the state
condo act. It gives the W Hotel ownership and control of
facilities such as pipes and ducts, but leaves residents
with the tab for these areas, the lawsuit said. The unit
owner won the case.
But the Carillon order takes things further, potentially
giving residents much more power than the Icon Brickell
order did.
While the court is yet to specify the portions of the
Carillon that unit owners can control, the condo
associations are seeking a ruling allowing them to cancel
spa fees if 75 percent of unit owners agree. They are also
seeking to purchase the North Tower’s pools for market
value, according to Stearns.
Yet Dervishi counters that taking over amenities could spell
financial trouble for condo-hotels. Commercial lot owners
often have mortgages on facilities such as pools and spas.
If they lose those properties to the condo associations,
it’s not as simple as substituting the name of the borrower
on loan documents.
“To have a massive transfer of title of property not by
consent or agreement, but by a court, would have a
tremendous adverse impact, and the residents would also
suffer,” Dervishi said.
In the very least, it could mean residents would become
business operators at condo-hotels, Zalewski said.
“I would tell the owners of the Carillon they better be
careful what they wish for,” he said, “because they have to
figure out how the hell to manage a hotel.”
Coexisting
Unit owners merely want a say over maintenance and
assessments alongside Z Capital, Stearns said.
“The critical issue in the future is changing the statute to
figure out a way in which the commercial interest could have
a seat at the table, reflective of their shared value of
their interest, along with the owners,” he said.
Attorney Josh Migdal doesn’t believe that condo-hotels will
be able to run appropriately if the courts essentially make
residents partners in management decisions.
“Imagine a scenario where you are running a five-star luxury
hotel, and you are redoing the tiling of the pool every few
years, and you are making sure the lounge chairs have
appropriate towels,” he said. “All of the sudden, every time
you wanted to do something to the pool or to the lobby, you
had to ask permission of the unit owners. And if you didn’t
get the approval, you couldn’t do it.”