A condominium conversion is the process of transforming an existing rental building, usually apartments, into residential condominium units. When the economy booms, so does the trend of converting apartment buildings into residential condominiums. The market for residential condominium conversions usually arises when the price of single-family homes increases beyond the reach of a first time home buyer as converted condominiums are usually priced lower than single-family homes and/or new construction.
In 1980, Florida enacted the Roth Act (Part VI of the Condominium Act) to govern the process of residential condominiums by conversion. Since condominium conversions are previously occupied structures, it is important to understand the building’s condition prior to purchasing. The Roth Act requires a condominium conversion report be prepared by an architect or engineer. What is in a conversion inspection report? Contained within the report are detailed disclosures pertaining to the age of the specified components in a structure, the building’s existing condition, structural soundness, the remaining useful life of the specified building components and the estimated cost of replacement of the specified components. The report is substantiated by attaching a copy of a certificate under the seal of an architect or engineer authorized to practice in Florida. Pursuant to Florida Statute, Section 718.616, each unit owner and the Association are third-party beneficiaries of the report. Additionally, the developer must prepare a report disclosing whether there is termite damage or infestation and whether it has been properly treated. This statement must be substantiated by an inspection report by a certified pest control operator.
It is important to consider the condition of the property prior to making a decision to purchasing a unit in a condominium conversion. Often apartment buildings converted into residential condominiums are older in age which can lead to a quicker deterioration of the property and/or lack of proper maintenance. If the conversion report reveals that construction defects exist, it is important the Association consult with a law firm that has experience in handling construction defect litigation and, in particular, conversion cases. Legal counsel will review the conversion report and discuss with the Association its legal rights and options. Legal counsel will usually go through a condominium conversion checklist with the Association and review such things as: did the developer prepare a report that discloses the condition of the improvements, the condition of certain components and the current estimated replacement costs (as of date of the report)? These components include: roof, elevators, structure, electrical systems, pavement and concrete (including roadways, walkways and parking areas), heating and cooling systems, swimming pool, drainage systems/irrigation systems, plumbing, seawalls, pilings, docks and fire protection system.
Furthermore, a developer is required to provide one of three types of post-purchase protections for unit owners regarding the improvements. The developer must also disclose which type of protection is being utilized. Under Florida Statute Section 718.618, the developer has three options when existing improvements are converted to ownership as a residential condominium:
- Establish converter reserve accounts for capital expenditures and deferred maintenance;
- Grant to the purchaser of each unit, an implied warranty of fitness and merchantability for the purposes or uses intended;
- Post a surety bond equal to the total amount of all reserve accounts which would otherwise be required.
A funded reserve accounts requires the developer to fund a reserve for air conditioning, plumbing and roof replacement. The age of any component or structure which the developer is required to fund in a reserve account must be measured in years, rounding to the nearest whole year. The amount of reserves funded must be based on the age of the component as disclosed in the inspection report. Florida Statute, Section 718.616(3) goes into more specifics regarding how the reserve account must be funded. The developer must establish the reserve accounts in the name of the condominium association. Another option is for the developer to post a surety bond. This requires the developer to obtain a surety bond that may be used to fund repairs and replacement of the covered items. The bond is issued in the name of the Association and issued by a company licensed in Florida. If the developer fails to fund the converter reserves, the developer is deemed to have granted to the purchaser of each unit an implied warranty. Implied warranties require the developer to pay for repairs and replacement of improvements during the warranty period. According to Florida Statute, Section 7718.618, if the developer is deemed to have provided implied warranties, the warranty period begins with the notice of intended conversion and continues for 3 years thereafter, or the recording of the declaration to condominium and continuing for 3 years thereafter, or 1 year after owners other than the developer obtain control of the Association, whichever occurs last, but in no event more than 5 years. For this reason, it is important for a homeowners association governing a conversion to consult with experienced legal as soon as practical.
An Association may challenge a limitation on warranties or establish other claims against a developer if:
- Converter reserve accounts were not properly established or funded;
- The developer failed to properly maintain the common elements during developer control of the Association;
- The developer failed to disclose or remedy structural or maintenance defects he knew or should have known of existed; or
- The developer failed to make appropriate disclosures under Florida Statute, Section 718.616.
Due to the amount of construction defects that not corrected and covered up in the conversion process, it is not uncommon for such statutory warranties to be the focus of litigation. If too much time passes and the Association does not address these types of issues as wells as construction defects mentioned in the conversion report, the Association’s rights to pursue the developer for any remedy may become exhausted. It is important that Associations’ seek the guidance of legal counsel experienced in the area of construction defects as soon as turnover occurs so counsel may discuss with the Association what remedies may be available.
For further information on condominium conversions, please refer to Florida Statutes, Sections 718.616 (Disclosure of condition of building and estimated replacement costs and notification of municipalities) and 718.618 (Converter reserve accounts; warranties).