Large Assessments for Repairs Could Prompt Decision for Bulldozing in Hot Areas
This is an article I wrote for the Charlotte Business Journal in 2006 on potential redevelopment of aging condominiums. At that time, real estate prices were continuing to rise and land acquisition for infill projects was in demand. I stumbled on the article recently and thought that it still carried relevance today. Now that the real estate bubble has burst and prices have fallen considerably it is arguably easier to acquire enough Units in an aging condominium complex to control the field. I guess the question is whether the lower acquisition price point can still yield redevelopment profits, but with real estate recovery inching along, it may prove beneficial to get out in front with land acquisitions even if it meant conversion to apartments for a period of time before demolition and redevelopment.
What happens when older condominiums deteriorate? One option I’m hearing about frequently in Charlotte is termination, which typically means selling the building and land so the building can be torn down. The land can then be redeveloped, depending on zoning options.
Unit owners and their condominium associations typically face two choices when dealing with older condos that need significant help. Either they fund substantial repairs or they terminate the condominium. Termination can be attractive to unit owners when:
- The costs of repair or replacement exceed the relative value of the structures;
- The association can’t raise capital through assessment to cover the costs of repair or replacement; or
- The potential value of the land escalates to a point where the value of the existing structures becomes irrelevant.
Termination of condominiums is most common in areas with older suburban infrastructure and infill, and in areas subject to natural disasters such as hurricanes. While termination of condominiums is not yet common to our area, that appears to be about to change. Large numbers of condominiums here are approaching 30 and 40 years in age.
Several forces work to put pressure on condominiums.
First, a condominium experiences economic pressure from increasing or unanticipated maintenance costs or mismanagement of association funds. Because the association cannot afford to properly or timely repair or maintain the structures and common area, the condition of the condominium structures and the common areas deteriorates. In an exaggerated case, an association could experience complete inability to honor its maintenance and management obligations, and, thereafter, face insolvency. As a result of deterioration, the cost of the units does not keep pace with area real estate prices.
Second, resident ownership tends to turn over quicker in deteriorating condominiums, which continues to destabilize the community. At this point, the condominiums tend to evolve into investment rentals. As ownership of units begins to concentrate in absentee landlords, voting on an issue like termination becomes more predictable as one person may own any number of units and vote all of those units as a block.
Third, land for redevelopment and infill continues to be in high demand. As land values dramatically increase, the value of the structures becomes less relevant until the point can be made through tear down and redevelopment.
Nevertheless, termination is never easy. Unless the condominiums are business condos restricted to nonresidential use, termination requires a positive vote of at least 80% to 100% of the unit owners. The percentage depends on whether the condo is subject to the Unit Ownership Act, which requires 100% agreement or the Condominium Act, which requires at least 80%.
Specific procedures need to be followed, such as execution of a termination agreement by the required number of unit owners. Reluctant owners or owners who refuse to sell will invariably pop up to delay, complicate or torpedo the process.
For condominiums struggling to keep pace with standard fair-market value appreciation, however termination can result in a high return for the unit owners than any alternative. The analysis is similar for townhomes and other planned communities.
At my firm, which handles commercial and residential real estate law and transactions, we’re hearing about possible condo redevelopments all over the county. Developers may see some exciting and unexpected locations become available for new residential and commercial developments, particularly in booming areas were land is scarce.
It’s possible some sections of the county will have new landscapes in five years, replacing structures that have not aged well. While we need to preserve Charlotte’s beautiful historic buildings to give the city soul, tearing down and starting over may be the best choice for some condo communities.
Bill Hamel is an attorney at Horack Talley in Charlotte and can be reached at firstname.lastname@example.org