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So you want to be a condo developer?
There are still plenty of opportunities out there for converting both residential and commercial buildings to condominium ownership. If you have or plan to acquire property with the intent to convert the property into a condominium and sell the units, here are some legal issues to consider in order to maximize your benefit and minimize your risk:
General Disclosure and Compliance:
The Florida Condominium Act establishes the rights and responsibilities of Condominium developers, unit owners and prospective purchasers. The Division of Florida Land Sales, Condominiums and Mobile Homes (the “Division”) has the power and duty to enforce and ensure compliance with the Act and related rules. Every new condominium in Florida must be approved by the Division before any unit is sold.
Purchasers have a 15 day right of rescission to cancel a contract to purchase a condominium unit. However, the 15 days do not start to run until the purchaser is given a full package of documents approved by the Division.
Condominiums with 100 units or more are also subject to the federal Interstate Land Sales Full Disclosure Act (“ILSFDA”). If the requirements of ILSFDA are not met, purchasers can rescind their contract up to 2 years after execution.
If you are converting a building with existing tenants, any action considered as an “offer for sale” of any unit triggers notice requirements for tenants. Even month-to-month tenants will have certain rights to extend their leases for an addition 6 or 9 months (plus 90 days in Miami-Dade County). All tenants will have a right of first refusal to buy their unit by giving notice within 45 days. These time periods don’t start counting until you have provided your tenant with certain documents approved by the Division, including a properly drafted and delivered Notice of Intended Conversion.
Reservation Program:
Typically, you want to test the market and start taking deposits on units even before you have approval to start signing contracts. For a $250 filing fee, you can submit for approval your Reservation Deposit Escrow Agreement and Reservation Agreement and start taking reservation deposits before you get all your other documents approved to go to contract. Under a recently passed rule, the Division must accept your filing or notify you of any changes they would like you to make within 20 days. Contrary to popular opinion, you absolutely must return reservation (not contract) deposits upon request, and this obligation must be made clear in your documents in order for it to be approved.
Yes, you can use contract (not reservation) deposits you get in excess of 10% of the purchase price to finance construction, but you must have the proper disclosure in the Contract for Sale of the unit. Your condominium documents must be approved by the Division in order to convert reservations into contracts.
Funding Reserve Accounts vs. Warranty:
Unless you are willing to provide a three year warranty on major capital expenditures, such as roof, structure, fire protection systems, mechanical, electrical and plumbing systems, you will have to post a bond or fund reserve accounts so the condo owners’ association has the ability to fix those items when necessary. Most developers choose to improve their cash flow and take their chances with the warranty.
Successor Developer:
If you are buying and selling multiple units in a condominium be careful not to become a “successor” developer. Anyone buying or selling more than 5 units in a condominium within a one-year period could be considered a successor developer and be subject to many of the same disclosure and compliance requirements of the developer who created the condominium.
By: Eduardo R. Arista, CPA, Esq.
Phone: (305) 444-7662
Email: Ed@AristaLaw.com |
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