COVER STORY, OCTOBER 2005

LEGAL ISSUES SURROUNDING CONDO CONVERSIONS
Oscar R. Rivera, Esq.

Rivera

The scarcity of land for new developments, coupled with low interest rates, high rents and skyrocketing property appreciations, has created a tight rental market in South Florida. Developers are finding it outrageously expensive to purchase large parcels of property for new construction. Therefore, they are opting to pay apartment building owners top dollar to convert existing properties. The conversion of pre-existing buildings allows developers to sell units quicker than new construction and draws consumers to converted condos because they are often priced lower than new units.

Although there are many incentives for a developer to convert an existing building, it is important for developers to understand the legal issues involved. For example, Florida developers cannot purchase buildings and evict existing tenants on the spot. During the 1970s conversion wave, tenants were forced to move in the face of conversions with little time and ability to find other accommodations. In response to the outpouring of tenant complaints, the state of Florida enacted the Roth Act (Part VI of the Condominium Act) in 1980. The act provides protection to tenants without substantially reducing a developer's ability to convert an apartment building into a condominium.

Specifically, the Roth Act requires that tenants receive prior notice of a developer's planned conversion. A “notice of intended conversion” alerts tenants that their building will soon cease to be a rental property. It also affords tenants time to seek other housing. The act states that a developer cannot deliver a conversion notice to tenants until it has been filed with, and approved by, the Division of Florida Land Sales, Condominiums and Mobile Homes. The division has up to 35 days to review the conversion notice. The act further stipulates that developers can not advertise condominiums for sale, take purchasers' deposits or offer units to existing rental tenants until a “notice of intended conversion” is filed with the division.

Under the Roth Act, existing tenants must have the right of first refusal to purchase their units. If they choose not to purchase, they have the right to ride out the terms of their leases. Any tenant who has occupied a unit for at least 180 days prior to receipt of a conversion notice can extend his or her lease without any increase in rent for up to 270 days. Some counties, Miami-Dade and Broward for example, have extended this period to up to 360 days. Tenants in occupancy less than 180 days can extend their leases for up to 180 days, and in Miami-Dade and Broward counties tenants can extend up to 270 days. However, if a tenant chooses to extend the lease term, the developer can buy out the tenant and pay the tenant to move. In addition, any tenant with a lease expiring in less than 180 days has a right to cancel his or her lease with 30 days' notice.

The Roth Act also stipulates that within 90 days following the written notice of the intended conversion, the developer is required to provide each tenant with a copy of the condominium offering documents. The tenant then has a right to purchase a unit at the developer's offering price prior to any purchase of the tenant's apartment by an outsider. The tenant's right to purchase terminates within 45 days after the tenant receives the condominium offering materials or when the tenant vacates the apartment. However, if the developer reduces the offering price while the tenant remains in possession, the apartment has to be re-offered to the tenant at the reduced offering price.

The Roth Act also requires a conversion inspection report and a pest inspection report. The pest inspection report can be completed in a couple of days, but the conversion inspection report, required to be prepared by an architect or engineer, takes several weeks. The conversion inspection report reviews the building's existing condition and the remaining useful life of various building components. Upon receiving the report, developers may establish a “converter reserve account fund” for capital expenditures and deferred maintenance projects as outlined in the conversion report. As an alternative to establishing such reserve accounts, a developer can provide a warranty of fitness as to these main components.

The Roth Act is proving to be important at this time. Over the past year, South Florida has experienced a condo conversion explosion. Broward County has more than 13,000 new condo units due in the next few years. Three of the recent projects are Fairway Greens in Pembroke Pines, and South Palm Place Condominium Homes and Westwood Pines in Tamarac. In Miami-Dade County alone, more than 25,000 new condo units are due for completion by the end of 2007, and more than 60,000 units are in the planning stages. The Coral Club Garden Villas and Ocean View Project in Sunny Isles are examples of some of the projects currently underway. In 2004, there were about 5,880 units in Palm Beach County. In the next 30 months, more than 10,000 new condo units are expected on the market.

South Florida will continue to see a rapid boom in condo conversions in the near future. It is predicted that more than 48,000 apartment units will be converted into condos over the next 2 years. While conversions are popular, developers must be mindful of Florida laws designed to protect tenants. This will ensure that projects are completed on time with maximum profitability.

Oscar Rivera is the managing partner of Siegfried, Rivera, Lerner, De La Torre & Sobel.

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