Understanding the Basics of Condominium Conversions
Suppose you have lived for 3 or 4 years in an apartment complex which recently had been purchased by a new Owner/Developer, intending to convert the buildings into future condominium ownership. As an apartment owner or renter, you may want to know what is going to happen in the future to evaluate your personal options. What might be the responsibilities of the new Owner/Developer to prepare, process and accomplish a conversion to condos?
So, who is responsible, what is the process and what Florida statutory requirements apply to this transition of ownership?
The “Condominium Act”, Florida Statutes 718, guide any new condo conversion process for the creation, sale and operation of all converted condominium projects. Assuming that your apartment complex will most likely have some construction deterioration requiring repair and/or replacement due to past continued use, the Owner/Developer needs to decide what to “fix”. Parking areas, landscaping areas, living units and common areas may need refreshing together with plumbing, air-conditioning and electrical system improvements and/or code updates.
A. The primary filing document by the Owner/Developer will be the “Declaration of Condominium”.
B. Prior to the new Owner/Developer’s filing, however, a Disclosure of Condition Report must be authored by an inspecting professional of the property; site, utilities and buildings. The required scope of the Report will be to account for the actual condition of the improvements by including an analysis of the prior use of all common elements, termite status of the building, age of the property, and the remaining “useful life” and replacement costs of project components. These components for review are specified in Florida §718.616 (3)(a) and include:
C. Prior to the filing of the “Declaration of Condominium”, the Owner/Developer must retain the services of a professional who will apply the requirements of §718.618 to calculate and provide what is called Converter Reserves. The professional must also certify as to the accuracy of such opinions. Due to the shorter “useable life” remaining of the already inhabited property, statutes require under §718.618 (3)(a), that at least three (3) building components be assessed; Roof, Air Conditioning and Plumbing. Other components regarding maintenance will also be considered. This is a positive enforcement of future condo the owner’s rights to have the basic converted condo building’s functions not be depreciated at the time of a new purchase, or at least a means to extend its useful life. It doesn’t mean these components would be new but are to be covered by the Owner/Developer, with either an option of funding the identified Converter Reserves, assume warranty obligations and/or post a surety bond.
D. After §718.616 is satisfied by the inspecting professional, the Architect or Engineer is required to submit this official Disclosure of Condition Report with the Converter Reserves calculations to the Department of Business and Professional Regulation, Division of Land Sales and Condominiums in Tallahassee. This becomes the “official” public filing of the conversion project. The public has a right to rely on its accuracy for any purchase consideration.
E. Now, after the transaction of Turnover from Owner/Developer to the Association and individual unit members, they (you) will be responsible to continue the reserve funding on an annualized basis. Based on the estimated projected replacement costs, including an escalator per year over the next 20 to 25 years, each owner of a unit in the new condominium association will be responsible, on a pro-rata basis, to support the annual budget, including a line item for all building reserves.
Lessons Learned: These Statutes identify the “Reserve” responsibilities of the Owner/Developer prior to a Turnover to a Condominium Association. Moreover, it is critical that any future Condominium Association understands that the quality of the pre-Turnover building Disclosure of Condition Report and cost estimates for component replacements/maintenance are accurate, reflect current values and anticipate that the “useful life” of all building components are industry standard….to ensure enough financial liquidity to respond to any future common area building needs.