Update: Interstate Land Sales Full Disclosure Act of 1968

Back when this Blog was in its infancy our partner, Kristin Boose, reported on the then legislative environment relating to the Interstate Land Sales Full Disclosure Act of 1968.  As many of you already know the Act is broad in its application and can be dangerous to a developer if not complied with to the letter.  Given the downturn in the real estate market in the last several years Congress saw fit to pass (410-0) H.R. 2600 which amends the Act to exempt out condominiums from Act's registration requirements.  The Senate version of H.R 2600 is awaiting action.  

The timing might be very good as this will reduce the red-tape for the development of condominium projects as new construction heats up.

 

 

Risk Appetite: One Perspective from Chicago

YoChicago.com recently interviewed Alan Lev, CEO of Belgravia Group.  Alan discusses his company's recent performance and strategies in this challenging market and his thoughts on the future of the Chicago residential real estate market and its ability to absorb the current inventories. What struck me as insightful and telling are Alan's insights (at the video 10:40 min. mark) about the demographics and risk appetite of the developers and lenders as the industry comes out of the recession.  

 

 

Legislation Introduced to Create Condominium "Super Lien" in Ohio

Representatives Ken Yuko and Brian Williams recently introduced House Bill 408, which would create a condominium “super lien” in Ohio. Ohio condominium associations currently have the right to lien a condominium owner’s unit for unpaid assessments; however, that lien almost always sits behind the first mortgage lien. When the unit is foreclosed upon and sold at sheriff’s sale, the association often finds that the sale proceeds all go to the first mortgage holder and the association is unable to collect what it is owed despite having filed a lien. Condominium associations have argued that their right to collect past due assessments deserves priority over the first mortgage because the association uses those assessments to keep up the entire condominium property, thereby protecting the collateral of the first mortgage holders. Thus, the associations have argued, it’s unfair for the first mortgagee to take all the sale proceeds and leave the remaining owners to make up for the lost assessments. To address this problem, some states have adopted “super lien” legislation, which allows a condominium association to collect up to six months of assessments from foreclosure proceeds before any other liens on the unit are paid. Not surprisingly, most mortgage lenders are opposed to these super liens. We will follow this legislation and keep our readers apprised of the latest developments.

No Exclusive Cable Contracts for Apartment and Condominium Projects

The U.S. Court of Appeals for the District of Columbia recently upheld a 2007 Federal Communications Commission ("FCC") order prohibiting the owner's of apartment buildings, condominiums and other multi-unit residential properties from entering into exclusive contracts for providing cable T.V. services.  The FCC relied upon Section 628(b) of the Communications Act.  The FCC's position is that to restrict a multi-unit residential project's access to only one cable provider forecloses the expansion of fiber and phone, video and internet bundling services; thereby, denying residences the benefits of increased competition, lower prices and improved content and services. Take note of this ruling when the issue arises in the multi-unit residential projects you own, manage or are developing.

Shankapotomus

It was reported this week in Crain’s Cleveland Business that the Blue Heron Golf Club in Medina County is for sale.  The golf course, only four years old and ranked in 2006 as one of the best new courses in the country, is surrounded by a residential development consisting of more than 400 home sites. 

 According to Crain’s, the broker for Blue Heron does not believe the fact that the course is on the market will negatively impact the sale of lots in the surrounding development.  He is most likely correct.  The general state of the economy is doing that job just fine on its own, thank you very much. 

Residential developers and new home builders have been two players in the market hit hardest by the current credit crisis and rising unemployment. 

 Data just released today (April 16) by the U.S. Census Bureau and HUD estimates single family building permits issued nationally in March 2009 were down 7.4% from the revised February figures, and down 42% from one year ago.  Estimates for February had been up slightly over those for January 2009.

 While March housing starts are estimated to be unchanged from those in February 2009, they were down a whopping 49.6% from March 2008 national levels.  Total single family units under construction, both nationally and in the Midwest, have declined each of the last 12 months.

 While sale rumors - - now confirmed - - may not have hurt new home sales in the adjoining subdivisions, the sale of the Blue Heron course cannot help unless the sale is to another operator intent on maintaining the property as a golf facility.  That issue can turn on what is or is not required by title covenants, documents which are often ignored by home buyers.

Park use is one alternative which could complement neighboring residential development.  The 2007 sale of Orchard Hills Golf Course to the Geauga Park District is a prime example of a golf course being converted to a use that successfully preserves the green spaces and recreational aspects of the property.  

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A Guide to Dealing with Increased Delinquencies in Condominium and Homeowners' Associations

According to the Community Associations Institute, nearly 60 million people across the country live in association-governed communities. Many of these communities have been severely affected by the current economic downturn and increase in foreclosure rates. In a condominium or homeowners’ association, delinquencies and foreclosures create a ripple effect that impacts all owners. Once an owner ceases paying assessments, the association must either incur costs to collect the assessments, increase the amount of assessments to other owners, cut back on services, or some combination of the three. The problem is compounded when multiple owners become delinquent. 

The biggest mistake an association board can make is ignoring the problem and hoping that delinquent owners will eventually catch up. An association must have a properly enacted collection policy and adhere to it. For example, the policy may state that an owner whose payment is 30 days late will receive a reminder letter from the board. An owner who is 60 days late will receive a collection letter from the association’s attorney indicating that a lien will be filed if the past due amount is not paid promptly. At 90 days past due, the board should authorize the association’s attorney to file a lien to secure the delinquent assessments. Beyond 90 days, the matter should be reviewed by the board to determine if it is appropriate to file a foreclosure action. 

 

The decision to file a foreclosure action can be a difficult one and must be made on a case-by-case basis. The association’s lien is generally going to be lower in priority than the owner’s first mortgage, and possibly a second or third mortgage as well. This means that unless the property sells at sheriff’s sale for more than the total amount due under the mortgage or mortgages, the association will not receive payment. Additionally, the association will have to bear the costs associated with pursuing a foreclosure action. Nevertheless, it may be worthwhile for the association to file the foreclosure action because it may prompt the owner to pay the delinquent assessments. Even if the owner fails to pay, and the property is ultimately sold at sheriff’s sale without the association receiving any of the sale proceeds, the association may ultimately be much better off having a new owner who will (hopefully) be better about paying assessments. State law and the association’s declaration may permit the association to assess its costs of collection, such as attorneys’ fees and court costs, to the delinquent owner. The association should carefully track these expenses and consult with its attorney to determine if they can be recovered from the delinquent owner.    

Mix It Up! Mixed-Use Condominium Developments Can Be Rewarding for Developers

“Mixed-use” developments, which incorporate residential units with retail or other commercial uses, have steadily gained in popularity over recent years. This is due to the fact that mixed-use developments offer advantages to developers, owners, tenants and residents when compared to traditional single-purpose developments. Many of today’s home buyers are increasingly interested in living within walking distance of amenities such as restaurants, movie theaters and shopping. From the developer’s perspective, mixed-use projects provide diversification in the product they have to offer. Commercial owners and tenants benefit from having a built-in customer base and consistent traffic through their stores due to their proximity to the residential units.

The condominium form of ownership and governance is flexible enough to accommodate a mixed-use project, though it can also be combined with other forms of ownership for even more flexibility. The overall structure must be well-planned in order to balance the sometimes competing interests of the various uses. In a residential-only development, dealing with commercial uses is easy—the developer simply prohibits them in the governing documents. In a mixed-use development, however, commercial and residential must coexist peacefully. This can be accomplished in a variety of ways, but careful planning is the key to ensure that the “balance of power” between residential and commercial is maintained. 

 

One of the most important considerations in developing the ownership and governance structure is the physical layout of the development.  For example, will residential and commercial uses be located in the same building? If so, the developer and design professionals must pay close attention to access, noise and light issues, trash disposal and parking, among other issues. If the residential and commercial uses are located in separate buildings, the same issues often exist, but usually to a lesser degree. In a high-rise mixed use development, the parcel may sometimes be “horizontally subdivided” so that two separate condominiums can be created, one stacked on the other. Or, the ground level parcel may be a fee parcel used for a hotel, retail shops or other purposes with a residential condominium created from the upper parcel. In either case, a variety of easements for access, support and utilities will be required. Once the basic organizational structure of the development has been determined, the governing documents—usually consisting of one or more declarations, codes of regulations or reciprocal easement agreements—must be meticulously drafted to provide the easements, covenants and restrictions necessary for the successful operation of the development. 

 

Financing for a mixed-use development can also be complex, as funds often come from a mix of public and private sources, each with its own lending standards and requirements. Lenders may require that one or more portions of the project be held under separate ownership to minimize the risk of default. This is another factor to consider when planning the ownership structure of the various project components and the content of the governing documents.

 

Is mixed-use development just a short-term trend or is it here to stay? The International Council of Shopping Centers recently held a conference on mixed-use developments at which one leading developer told participants that mixed-use developments have gone from “novelty to normality” and that “[i]t’s been established that all of the other components—apartments, hotel, office—do better in concert with the retail component.” As the economy recovers and new real estate development projects take flight, expect to see mixed-use developments at the forefront.