Taking over development projects includes obligations
Tight credit, high unemployment and consumer bankruptcies have stalled new home development throughout Florida.
The number of housing starts plunged to less than 3,000 per month in 2011 from nearly 19,000 per month in early 2006.
With too few buyers, many developers are selling uncompleted units in bulk or losing entire properties through foreclosure. Lenders often take title so that they can resell and permit another developer to finish a project. Investors and developers can purchase failed or failing residential communities at relatively low cost.
But taking over a distressed development poses costs and risks that must first be investigated and mitigated.
A prospective buyer or foreclosing lender of bulk condominium units needs to structure the acquisition so as to avoid the difficulties associated with becoming a successor developer — unless that is the intention. And unless proper steps are taken in advance, a new owner can face unexpected expenses and lawsuits.
Under state laws governing condominium and home development, a successor developer generally assumes many of the original developer’s obligations. These include operating the condominium association, including the hiring of employees and contractors and funding of maintenance budgets and reserves, repairing properties damaged due to poor design, construction or to exposure to the elements while the project sat idle, making proper representations to prior purchasers, constructing improvements and amenities called for in the project’s plan, even if they are economically unfeasible, honoring warranties, whose costs likely are not recoverable from the original developer’s insurers, maintaining proper building permits, some of which may have expired if the project sat dormant for a long time, and bringing the property up to environmental and building code standards that were not met while the property was sitting undeveloped or under a foreclosure action.
A successor developer may be able to make some changes to the original development plan, but not necessarily to covenants and restrictions that the original developer recorded (i.e., the Declaration of Condominium). Likewise, a court can sometimes find a successor developer liable for the wrongful conduct of the original developer, including violations of the Interstate Land Sales Full Disclosure Act.
And assuming the original developers’ obligations can lead to legal liabilities, individuals and companies that had claims against the original developer can often assert them against the successor developer. If successful in pressing those claims, the successor developer may have to make payments for damages incurred by the original developer, assume liabilities that the foreclosing lender transferred with development rights to the property, take back lots or condominium units and refund deposit monies, and defend itself against class action lawsuits over irregularities committed by the original developer.
Even if there aren’t claims against the original developer, legal costs can arise from the actions necessary for operating the project and selling homes or condominium units. There may be past-due assessments on foreclosed condominiums. You may have to investigate the status and ownership of development rights, and clear up title issues.
Tiptoeing around the legal land mines is not easy. A lender seeking to foreclose on a residential development can instruct its attorney to formulate its complaint to exclude those interests the lender does not want to acquire. This strategy works best with land on which nothing has been built.
However, if a project is partially built, the developer rights may need to be included in the foreclosure action so that the lender can make them part of the sale to a successor developer that intends to complete the project. The successor developer may also want the rights in order to alter the project’s governing documents, to make use of exemptions or special rights, or to control the operating condominium association for a longer period of time.
Given the financial and legal exposure associated with becoming a successor developer, the plan for buying part or all of a project, or for taking title through foreclosure must be well thought out. The attorney assisting a lender or property buyer should review all documents and make special note of those that could build the case that the new owner is, in fact, a successor developer. Once identified, those liabilities should be discussed for the risks they pose.
The buyer’s legal counsel must also be cognizant of — and should attempt to favorable structure the acquisition — in accordance with the Distressed Condominium Relief Act, which was promulgated by the Florida Legislature in 2010 to provide guidance to buyers, foreclosing lenders and attorneys in connection with bulk condominium purchases.
With the advice of counsel, a buyer or foreclosing lender can determine which risks can be eliminated and reduced, and which risks are essential to moving forward with taking title to the property. A buyer should decide how to handle the risks before the contractual inspection period or title review period has concluded. Likewise, the foreclosing lender should do the same before putting the property up for sale.
Dennis J. Eisinger is the managing partner of Eisinger Brown Lewis Frankel & Chaiet. He represents developers, successor developers, and condominium and homeowner associations and is an adjunct professor at the University of Florida School of Law.