THE DILEMMA OF CONDOMINIUMS

Improvements and renovations are driving association costs higher and pushing owners to sell

The reality after the collapse of the Champlain Towers South in Surfside is impacting condominium unit owners in old buildings in South Florida where it hurts the most: their wallets.

Owning older condominiums has become quite expensive, especially in coastal areas with higher climate risks and more wear and tear on the buildings. This could create opportunities for investors to buy discounted condominiums for their redesign. However, a recent court ruling has made condominium terminations much more difficult.

“It wasn't enough that we probably had the biggest condominium disaster with Surfside. The impact of all these potential legislative changes will likely leave many people homeless; they will have to leave their condominiums,” said Sunny Isles Beach Mayor Larisa Svechin. “This is going to explode, starting with South Florida, and will move along the coast.”

It has been just over three years since the deadly collapse in Surfside. And state legislation now requires more thorough inspections for most buildings that are at least 30 years old by the end of this year. Additionally, condominium associations must complete structural integrity reserve studies (SIRS) and can no longer waive establishing financial reserves for future repairs starting December 31.

Experts say many buildings are overdue for repairs, and catching up will be costly. That has led to dramatic increases in association fees and staggering special assessments, causing many owners to want to exit.

Older condominium accumulation looms across South Florida

According to the first-quarter report from broker ISG World, condominium unit listings in South Florida doubled year over year to 18,704, with 78% of them being at least 40 years old.

But ISG CEO Craig Studnicky said the overwhelming majority of condominium buyers are now looking for newer buildings to avoid the headaches of special assessments and fee increases. Lenders are also concerned about the financial stability of condominium associations and might not approve loans for purchasing in those buildings.

“Forget it; buyers don’t want the oldest ones,” said Studnicky. “They feel uncomfortable moving into older buildings now.”

Florida has more than 1.5 million individual condominium units, and nearly two-thirds of them are at least 30 years old. About half of those units are in South Florida.

This past winter season, typically the best time for condominium sales, was the slowest in South Florida since the Great Recession in 2008, said Peter Zalewski, head of Condo Vultures, who has tracked the condominium market for decades.

For investors, the general rule is that the monthly rent should equal 1% of the purchase price to generate a decent return. But if a large special assessment and higher association fees are added for older condominiums, that target becomes difficult to achieve, Zalewski said. The only solution is for sellers to lower their prices.

“A lot of people in older buildings are in denial,” he said. “Many older buildings need a decrease of 20%, 30% or even 50% in value to match market rents. So why buy it with the special assessments and insurance when you can rent it for less?”

Rising costs affect older condominiums in South Florida

Many older condominiums are under-reserved, so they are about to undergo a shock, said Greg Batista, head of G. Batista Engineering & Construction, based in Fort Lauderdale. He expects to see a lot of restoration work in the coming years.

For example, if the useful life of a roof is five more years and repairs will cost $2 million, the association needs to raise one-fifth of that cost annually to prepare for the work, he said.

But some buildings will require immediate repairs to pass their 30- or 40-year recertification process, Batista added.

“The people who will be most affected are those living on fixed incomes like Social Security,” he said. “They bought their units 20 or 30 years ago, and the fees are catching up with them.”

The new state budget includes $30 million in funds to help condominium associations statewide make structures less vulnerable to storm damage. Given the great need, that money is just a drop in the bucket.

The most expensive items for condominiums to reserve are exterior structural repairs, which often cost millions of dollars, said Doug Weinstein, senior vice president of operations at AKAM's Dania Beach office. He oversees 60 local condominium associations, some of which have adequately reserved for those repairs, but many have not.

“Since the Surfside collapse, engineers have been much more critical of buildings,” he said. “There is a shortage of engineering firms and qualified contractors to perform the actual restoration work. That, of course, will increase prices.”

Another driver of maintenance fees is insurance premiums, which have skyrocketed between 40% and 100% in recent years, he added.

Oscar Seikaly, CEO of NSI Insurance Group, based in Miami Lakes, stated that insurance costs for condominium associations have risen dramatically since the Surfside tragedy because lenders want associations to insure the full cost of replacing a building. Additionally, insurance providers are looking to limit their exposure to coastal buildings in South Florida, and they find it increasingly difficult to calculate risk due to global warming and stronger storms.

“Insurance companies are not lining up to insure buildings from the 1960s because it’s likely that residents didn’t do what they should to keep them updated,” said Seikaly. “The only company willing to insure them would charge a lot and have very high deductibles.”

In 2021, deductibles for a South Florida condominium association were around $300,000, but now they are around $3 million, he said. That premium is often raised from the association’s reserves or through a special assessment to unit owners. And the insurance company will not pay its part of the claim until the association pays the deductible.

“At the time there is storm activity, you'll see many of these issues come to light,” said Seikaly. “Buildings could remain damaged for longer after storms.”

Neighborhoods in South Florida with older condominiums face community hardships

It is hard to advise investors to buy condominium units in older buildings near the beach because, with all the additional fees and special assessments, returns often don’t add up, said Alex Algarin, a Compass agent in Miami Beach.

The buildings that will struggle with rising costs are boutique condominiums with fewer units, he said, as it is harder to distribute those costs among dozens of owners instead of hundreds.

“I would never steer anyone toward buying in an older building unless they have deep pockets,” said Algarin.

The trend will accelerate the gentrification of Miami Beach, as those who cannot afford the condominium costs will be forced to sell and relocate. It is a great opportunity for cash-rich buyers to acquire older units at a discount, but Miami Beach could lose many of its middle-class residents, he said.

“This changes the profile of the people walking around Miami Beach,” said Algarin. “The entry barrier in Miami Beach keeps going up.”

Many owners of older condominiums are lowering their prices to avoid paying large assessments, some of them in six figures, said Greg Main-Baillie, CEO of project management and real estate development services across Florida for Colliers. He has seen values cut in half in some condominiums due to impending assessments.

“We’re seeing the first wave of buildings being hit with these assessments, and they’re starting to get scared,” said Main-Baillie.

There is likely to be increased demand from buyers for older condominiums in attractive neighborhoods like downtown Miami, Coconut Grove, and Coral Gables because more buyers plan to actually live in the units, said Ron Shuffield, president and CEO of Berkshire Hathaway HomeServices EWM Realty in Miami. Many buyers understand that the trade-off for buying an older condominium at a lower price is that the repair fees will be higher.

“There are many older condominiums that are wonderfully built and managed,” he said. “You aren’t going to tear down all the buildings in Miami that were built 50 years ago.”

Still, there will be a large number of condominium association failures in buildings where residents simply cannot afford the special assessments and higher fees, said real estate attorney Joseph M. Hernández, partner at Bilzin Sumberg in Miami. Some associations may have a designated receiver to decide how to resolve the situation.

“The buildings are functionally obsolete and the costs to preserve the buildings are rising, while the value of the units is decreasing,” he said. “In the next five, 10, or 15 years, most of those older projects will disappear, and there will be tremendous displacement of people living in coastal areas.”

Program offers South Florida condominium owners an exit strategy

When the state approved its condominium association rules, many experts predicted it would lead to more condominium terminations, with developers buying from cash-strapped unit owners and redesigning sites. However, a court ruling has put a halt to many of those plans.

On March 13, the 3rd District Court of Appeal in Miami ruled that an affiliate of Two Roads Development, based in Miami, could not terminate the Biscayne 21 condominium in Edgewater because it failed to obtain unanimous approval from unit owners. Seven owners in the 191-unit building filed a lawsuit opposing the termination after the developer purchased the remainder.

Although this ruling is on appeal and does not apply to associations that never required unanimous consent, it has had a paralyzing effect on termination deals. Still, most condominium associations require at least 95% approval.

Hernández said many developers tell him they will not attempt a condominium buyout and termination due to the litigation threat from a small number of opponents.

“The truly sad part is that when we need terminations to work efficiently the most, we have a legal ruling that is putting a big hurdle in front of them,” he said.

It’s a huge challenge to get all condominium owners on the same page, as these are people with different levels of sophistication and wealth, said Ellen Buckley, CEO of Prospera Real Estate Collective, based in Miami. In some cases, developers buy condominiums one by one until they have enough ownership to control the association. But Buckley sees that strategy as too risky now. No developer wants to get stuck paying the maintenance of condominiums without short-term redesign prospects.

She believes financial pressure will eventually convince unit owners to sell.

Although it often makes financial sense to sell an older unit to a developer above its market value, some older residents are not motivated by money and want to stay, said Henry Pino, CEO of Alta Development, based in Miami.

That’s why he developed a program that offers some residents a comparable-sized unit in his new building instead of a cash payment. He hopes that will satisfy potential opponents in areas like Brickell.

One condominium association he is speaking with had a special assessment of $10 million for just 66 units.

“This storm is starting to occur now,” said Pino.

Source: https://www.bizjournals.com/southflorida/news/2024/07/11/south-florida-condo-law-surfside-cost.html