Developing strategies for distressed condominium projects.The business of rehabilitating distressed condominium condominium
In modern property law, individual ownership of one dwelling unit within a multidwelling building. Unit owners have undivided ownership interest in the land and those portions of the building shared in common. assets has changed dramatically this past year.
In the "good old days," projects were failing financially because they were encumbered Encumbered
A property owned by one party on which a second party reserves the right to make a valid claim, e.g., a bank's holding of a home mortgage encumbers property. by liens, complex legal issues, construction defects (or unfinished construction), poor design, bad marketing, or a combination of several factors pertaining per·tain
intr.v. per·tained, per·tain·ing, per·tains
1. To have reference; relate: evidence that pertains to the accident.
2. to the initial developer's inability to execute.
All too often, the developer's lack of probity PROBITY. Justice, honesty. A man of probity is one who loves justice and honesty, and who dislikes the contrary. Wolff, Dr. de la Nat. Sec. 772. added combustible com·bus·ti·ble
Capable of igniting and burning.
A substance that ignites and burns readily. fuel to the financial conflagration facing distressed projects.
I dealt with a project in Boston where the developer literally ran off with the insurance money from a tire (that some suspected he set himself) and another developer in Chicago who denuded nearly $4 million in earnest money from the escrow escrow
Instrument, such as a deed, money, or property, that constitutes evidence of obligations between two or more parties and is held by a third party. It is delivered by the third party only upon fulfillment of some condition. account holding buyers' deposits.
Today, we have more residential developers who are new to the business. Execution issues still abound, more so today because of the inexperience of many developers.
And because developers are human, many promoters still exhibit moral lapses.
However, what is truly different today is that in many areas of the country fixing execution, legal or physical problems or repositioning repositioning Laparoscopic surgery The changing of a Pt's position during a procedure to improve access or visualization of the operative field, which may be linked to complications, as it changes anatomic planes of operation. Cf Laparoscopic surgery. an asset alone cannot create a market for a development when it is the market itself that is in distress.
In order to assess and solve problems in failing developments, every issue must be addressed seamlessly. In a good market, you can off-times get away with mistakes. In a post bubble market, these mistakes take on a steroid quality and grow unhealthily--and can harm and even kill the best intended plans.
This change in market dynamics makes us pause now, even before we try to determine how to best restructure or reposition a distressed condominium development. Instead, we first need to determine whether the condominium process should proceed at all. Apartment rents are rising due to a variety of factors, but they are not yet high enough in some markets to justify new construction. Potential home or condominium buyers, no longer able to secure easy credit, are renting longer. So supply will keep tightening. Meanwhile, debt is aggressively pursing apartment product, as is mezzanine and institutional equity. All this has led to improved apartment performance coupled with cap rate compression, the recent hiccup hiccup or hiccough, involuntary spasmodic contraction of the diaphragm followed by a sharp intake of air, which is abruptly stopped by a sudden, involuntary closing of the glottis (opening between the vocal cords); the consequent blocking of air in the CMBS CMBS
See: Commercial Mortgage Backed Securities markets notwithstanding.
Consequently, a careful analysis needs to be undertaken as to whether leasing is a better alternative to the continuation of the condominium process. The decision is easier in a condominium that has yet to start its closings. It is a far harder decision when some units have already closed. A project that has started closing units is "fractured" until sold units can be repurchased or the condominium marketing is restarted.
It is the fractured deals that require considerable thought and pose the greatest risk, and some argue the best opportunity for "reward."
A developer who is looking at a fractured deal needs to study three things: What is the value of the property as a fee simple apartment? Can the remaining units be rented and the deal cash flow as a fractured condominium?
In doing so, should a developer accept the legal risk of managing this cash flow when time constraints In law, time constraints are placed on certain actions and filings in the interest of speedy justice, and additionally to prevent the evasion of the ends of justice by waiting until a matter is moot. on developer control imposed by the condominium documents may cause management issues and fiduciary liability in the future? All these questions must be weighted against the cost and difficulty to re-image a property in order to successfully conclude the sellout of the property as a condominium, as well as the costs and practical difficulties in buying back previously sold homes.
The strategy that one chooses to employ on a fractured development requires a different mindset mind·set or mind-set
1. A fixed mental attitude or disposition that predetermines a person's responses to and interpretations of situations.
2. An inclination or a habit. , and implementing a plan to reinstate To restore to a condition that has terminated or been lost; to reestablish.
To reinstate a case, for example, means to restore it to the same position it had before dismissal. the property as fee simple, or managing the deal as a fractured condominium is complex and fraught with practical and legal difficulties.
Continuing with a condominium sales regime also needs more thought, finesse and excellent execution in a slowing marketplace.
David Tufts, one of the best condominium marketing experts I know, has said that if a new marketing campaign is undertaken in this environment, it is incumbent for a developer to "fake it till he makes it."
Projecting a positive outlook in this market is a priority, and it is more difficult to do with a cynical public and media searching for bad news.
No matter what strategy the developer employs to continue with a sellout of a fractured condominium it is clear that the days of the developer as a "gatherer" of sales is over. In this market, only a "hunter" will survive. Unfortunately, so many developers and their sales staff have never sold in a "hunter" marketplace.
The problem of dealing with fractured condominiums will take on added dimension as their numbers grow and markets soften.
Clearly, taking on the challenge is not for the faint of heart. Yet, a developer who masters the fractured condominium will have ample opportunities as this marketplace disgorges distressed condominiums in greater numbers.
BY NORMAN RADOW, PRESIDENT
RADCO RADCO Rappahannock Area Development Commission DEVELOPMENT SOLUTIONS