Terminating a Condominium: Navigating the Process, Redevelopment Considerations, Benefits and Pitfalls

Description

Many aging condominiums nationwide will require significant repair and renovation soon and will reach the end of their useful life. This is especially true in extreme coastal areas. The best alternative may be termination, sale, and redevelopment. The problem is exacerbated by deferred reserve funding and construction cost inflation. Termination presents a profitable opportunity for redevelopment. Termination is typically governed by state law and the recorded condominium declaration. There are over 20 states that follow either the Uniform Condominium Act or the Uniform Common Interest Ownership Act.

Under the Uniform Acts, terminating a residential condominium requires approval by at least 80 percent of the unit owners (more if required by the condominium declaration). State laws vary greatly--anywhere from 67 percent to 100 percent approval. The condominium association may seek a sale to a developer or, in rare cases, participate in the redevelopment in various ways. Termination is often the best exit strategy with costly repairs looming and inadequate reserves. Some developers purchase enough units to unilaterally vote to terminate unless regulated by state consumer protection laws. The termination agreement is also based on state law requirements, but most states and the Uniform Acts allow great flexibility on the terms of the sale. The unit owners must approve the sale and the termination agreement.

The distribution of sale proceeds can be complex due to many issues, including size, location and condition of the units, mortgage liens, property and transfer taxes, and any delinquent assessments. Developers who purchase units to terminate must meet fair price and independent appraisal requirements. Unit owners in some states can dispute the appraisal which may delay the process. Also, working with a title company is important to ensure that the association can convey a clean title. Transferring possession upon the sale, with or without existing leases, must be carefully planned.

Listen as our authoritative panel provides real estate counsel with an analysis of a condominium termination and its benefits and challenges. The panel will also offer best practices and recommendations for commercial real estate development projects amid the trend of more condominium terminations in the future.