Article Courtesy of The
By Alison Trinidad
Published September 9, 2007
Several
apartment-turned-condo complexes in the Jacksonville area are swimming in
lawsuits, with complaints filed against developers, against homeowners and
against condo associations.
At
the core are problems with aging buildings that were gussied
up with paint and fancy trimmings, but never truly
renovated, according to lawsuits. Most were sold as luxury
condominiums at discount prices, in deals that homeowners
say seemed too good to be true.
In
the madhouse that was the real estate market a few years
ago, thousands of apartments in Florida were converted into
condominiums, more than 150,000 between 2004 and 2006,
according to state records. With low interest rates and high
construction costs, so-called conversion projects were
quick, easy and profitable for investors: Renovating
apartments was cheaper and faster than building from the
ground up, and demand was so high that developers couldn't
churn them out fast enough. |
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Kim
Register (left), vice president of The Boxwood at Baymeadows board,
and Tina Flanagan, former secretary of the board, discuss the lawsuit
filed against the condo conversion developer. Flanagan, who paid
$93,000 for her two-bedroom unit in 2003, said old plumbing resulted
in a bathroom remodeling job.
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In
2005, one local company boasted that it sold an entire complex in Phoenix -
$90 million worth - in 91 minutes.
But because of various factors - the potential for
developers to cut corners to increase their profit margins, a lack of
oversight from the city and state, vague laws regarding conversions, a
throng of inexperienced buyers and buyers searching for a way out of an
investment that's gone south - it seems that, for some, conversions are
turning into lawsuits.
From 2003 to 2006, 40 apartment complexes in Duval,
Nassau and St. Johns counties were converted into condominiums, or nearly
7,000 individual units, state records show. Based on a Times-Union review of
Duval County court records from 2005 to August, there have been five
class-action lawsuits filed by homeowner associations of condominium
conversions, claiming construction defects and fraud. At least two
communities settled out of court, and homeowners from two others say they
are about to file suit.
Together, those claims
represent about 2,300 homes.
Buyers, many of them first-time
homeowners, now are being assessed thousands of dollars by
their condo associations to fix leaking roofs, faulty plumbing
and other structural problems that the owners had not expected
to occur so soon after purchase.
Legally, if the owners don't,
can't or won't pay the assessments, they face foreclosure.
Add
that to climbing property insurance premiums, sinking property
values and looming mortgage rate adjustments, and you get a
financial mess. |
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Kim
Register shows what she says is structural damage caused by water
inside the stripped bathroom of her condo unit at The Boxwood at
Baymeadows.
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Fingers
are being pointed every which way as to who is financially responsible for
the repairs: Is it the buyer who should have read all the fine print, the
condo owners association that is bound to maintain its respective community,
the developer who sold dud condos, the contractors who patched them up, the
engineers who signed off on their soundness or the government inspectors
that missed the problems altogether?
That said, finger pointing will be all that's
left if the real estate slump persists, says Gardner Davis, a corporate
lawyer at Foley & Lardner in Jacksonville.
"In a more normal real estate market,
the developers would have the financial resources and staying power to
provide warranty support," Davis wrote in an e-mail to the Times-Union.
"Unfortunately, at the present time, many condominium developers and
their contractors are in extreme financial difficulty because of the change
in the market and the change in the attitude of their construction lenders.
To be frank, many condominium developers have gone broke, or are in the
process of going broke."
The lawsuits begin
One of the first to file suit in Northeast
Florida was the homeowners association at The Boxwood at Baymeadows, a
100-unit apartment complex built in 1971 and turned into condos in 2003.
Looking at the condos' brick facade, the holes in the roof and the rats
scampering behind walls are not obvious. Neither are the 36-year-old copper
pipes that homeowners say were supposed to be replaced, but weren't, or the
rotting studs that support the two-story buildings.
"They were sold at a good price,"
said resident Tina Flanagan, who paid $93,600 for a two-bedroom unit in
2003. Flanagan said she had to have her bathroom completely remodeled
because of old plumbing.
"I guess you get what you pay for,"
she said.
To be sure, not all condo owners at The
Boxwood or any other conversion project in litigation have experienced
problems. But every owner in a condominium is liable for shared elements
like roofs and plumbing. And, now that the problems are known, by law, they
must be disclosed to any prospective buyer.
Boxwood's association, in a suit filed in
Circuit Court in May 2006, says that the condo developer lied about the
condition of the buildings and the improvements that were going to be done.
It says the developer did not accurately fund an account for capital
expenses and deferred maintenance, as is required by law. And it says it has
spent about $150,000 to fix recurring drainage and rodent problems in the
past two years, depleting the accounts set aside by the developer.
Still, there's more to be done - among other
things, the roofs and plumbing system need to be replaced, a project
expected to cost more than $1.2 million, according to the lawsuit.
Jim Dixon, vice president of development for
Boxwood's developer, Arlington Properties in Birmingham, Ala., said he could
not comment about the lawsuit. Arlington Properties has not filed with the
court a response to the condo association's complaints, but has requested
documents from the association.
Meanwhile, individual condo owners have
complained to the state and city that the condo association hasn't kept up
the community's landscaping or pool.
Kim Register, vice president of the
association, said they can't afford it.
Homeowners' monthly condo fees at The Boxwood
went from $174 to $270, mostly because of expensive property insurance (the
association's bill went from $16,000 a year to $92,000 after its insurance
company dropped the condo's policy two years ago, Register said).
If the association doesn't win in court,
monthly fees could reach up to $900 per homeowner, she said.
The repairs have to be done, and someone has
to pay.
"You're fighting all sides,"
Register said. "It wears you out."
Homeowners are
stuck
Some homeowners who spoke to the Times-Union
about conditions at their condos later withdrew their comments because they
feared that those comments would hurt negotiations with their developer. At
the time, they told the Times-Union that they wished they had never bought
their homes.
But, for all intents and purposes, they're
stuck.
As the national real estate market slowed,
many investors and developers slashed prices to dump their inventory,
affecting property values for everyone.
That poses a problem for homeowners who want
to sell or refinance, and now owe more than the home is worth.
"There's nothing you can do," said
Dondy Vane-Cooney, a mortgage broker in St. Augustine. "No lender is
going to give you more than the house is worth."
Tightening the laws
In Jacksonville, at least five more
conversion-related lawsuits are pending, voluminous folders of accusations
and denials filed at the Duval County Clerk of Courts' office.
Other than the two that settled out of court,
none of the filed complaints have been decided.
Matthew Breuer, a real estate lawyer at Foley
& Lardner in Jacksonville, said he is unaware of any condo conversion
case in the country that has gone all the way through the legal process.
Breuer's firm represents Montecito Property
Co. in cases outside of Jacksonville and was not involved in The Venetian, a
troubled multimillion-dollar conversion project of Montecito's that the
Times-Union wrote about in July 2006. That year, the association threatened
to sue the Jacksonville-based investment company unless it agreed to help
fix failing sewage systems and leaking roofs at the condo. Montecito - the
developer that sold out the Phoenix complex in 91 minutes - settled with the
condo association for an undisclosed amount.
Home-owners there say minor repairs are
wrapping up, while all major problems like roofing and plumbing have been
fixed.
Condo converters are required, by law, to
disclose building conditions and estimate the cost to replace certain
components, like plumbing, roofing and electrical systems. The report,
prepared by professional architects and engineers, also calculates how much
life is left in each individual system. It is not required to inspect behind
walls or beneath the foundation of the buildings.
The state, based on recommendations from a
condominium advisory council, tightened condo conversion laws in May. Before
then, there was leeway on what should be disclosed and when. For example,
the developer could file the required disclosure report before any
renovation was done and potential problems were uncovered. The report could
also include a list of promised renovations, without proof that the
improvements were completed.
New provisions call for updated reports if
changes are made after the original disclosure report is filed and prohibit
inclusion of future improvements or repairs. The new laws also put the
architect or engineer that prepares the report at fault if their
professional estimates are wrong.
Whether those revisions will matter in
lawsuits today is up in the air, said Peter Dunbar, a Tallahasse attorney
who chaired the condo advisory council in 2006.
"Who's liable?" Breuer said.
"That's the question that's going to have to be answered in courts here
and across the nation."
Newer, better
buildings
With more experienced developers, stricter
disclosure laws and newer buildings to convert, lawyers say the probability
of buying a dud condo is negligible.
Breuer said most conversion projects have
been and will be top-notch.
"Many of them are first-class
apartments. The majority of projects are going to be fine, but you'll always
have exceptions," he said.
While developers are unlikely to convert many
more rentals into condos anytime soon (as of August, only one notice for
Northeast Florida has been filed with the state, down from a high of 18 in
2005), lawyers say it won't be long before it becomes profitable again.
"All of those apartments on Gate Parkway
are going to be condos in five years," said Troy Smith, the Rogers
Towers attorney representing The Boxwood condo association. "There's
less cost [to convert as opposed to build new]. That's why people do this -
they can make money off of them."
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