The number of housing starts plunged to less than 3, 000 per month in 2011 from nearly 19,000 per month in early 2006.

With too few buyers, many developers are selling uncompleted units in bulk or losing entire properties through foreclosure. Lenders often take title so that they can resell and permit another developer to finish a project. Investors and developers can purchase failed or failing residential communities at relatively low cost.

But taking over a distressed development poses costs and risks that must first be investigated and mitigated.

A prospective buyer or foreclosing lender of bulk condominium units needs to structure the acquisition so as to avoid the difficulties associated with becoming a successor developer — unless that is the intention. And unless proper steps are taken in advance, a new owner can face unexpected expenses and lawsuits.

Obligations

Under state laws governing condominium and home development, a successor developer generally assumes many of the original developer’s obligations. These include operating the condominium association, including the hiring of employees and contractors and funding of maintenance budgets and reserves, repairing properties damaged due to poor design, construction or to exposure to the elements while the project sat idle, making proper representations to prior purchasers, constructing improvements and amenities called for in the project’s plan, even if they are economically unfeasible, honoring warranties, whose costs likely are not recoverable from the original developer’s insurers, maintaining proper building permits, some of which may have expired if the project sat dormant for a long time, and bringing the property up to environmental and building code standards that were not met while the property was sitting undeveloped or under a foreclosure action.

A successor developer may be able to make some changes to the original development plan, but not necessarily to covenants and restrictions that the original developer recorded (i.e., the Declaration of Condominium). Likewise, a court can sometimes find a successor developer liable for the wrongful conduct of the original developer, including violations of the Interstate Land Sales Full Disclosure Act.

Liabilities

And assuming the original developers’ obligations can lead to legal liabilities, individuals and companies that had claims against the original developer can often assert them against the successor developer. If successful in pressing those claims, the successor developer may have to make payments for damages incurred by the original developer, assume liabilities that the foreclosing lender transferred with development rights to the property, take back lots or condominium units and refund deposit monies, and defend itself against class action lawsuits over irregularities committed by the original developer.

Costs

Even if there aren’t claims against the original developer, legal costs can arise from the actions necessary for operating the project and selling homes or condominium units. There may be past-due assessments on foreclosed condominiums. You may have to investigate the status and ownership of development rights, and clear up title issues.

Tiptoeing around the legal land mines is not easy. A lender seeking to foreclose on a residential development can instruct its attorney to formulate its complaint to exclude those interests the lender does not want to acquire. This strategy works best with land on which nothing has been built.

However, if a project is partially built, the developer rights may need to be included in the foreclosure action so that the lender can make them part of the sale to a successor developer that intends to complete the project. The successor developer may also want the rights in order to alter the project’s governing documents, to make use of exemptions or special rights, or to control the operating condominium association for a longer period of time.

Given the financial and legal exposure associated with becoming a successor developer, the plan for buying part or all of a project, or for taking title through foreclosure must be well thought out. The attorney assisting a lender or property buyer should review all documents and make special note of those that could build the case that the new owner is, in fact, a successor developer. Once identified, those liabilities should be discussed for the risks they pose.

The buyer’s legal counsel must also be cognizant of — and should attempt to favorable structure the acquisition — in accordance with the Distressed Condominium Relief Act, which was promulgated by the Florida Legislature in 2010 to provide guidance to buyers, foreclosing lenders and attorneys in connection with bulk condominium purchases.

With the advice of counsel, a buyer or foreclosing lender can determine which risks can be eliminated and reduced, and which risks are essential to moving forward with taking title to the property. A buyer should decide how to handle the risks before the contractual inspection period or title review period has concluded. Likewise, the foreclosing lender should do the same before putting the property up for sale.

Dennis J. Eisinger is the managing partner of Eisinger Brown Lewis Frankel & Chaiet. He represents developers, successor developers, and condominium and homeowner associations and is an adjunct professor at the University of Florida School of Law.

Dennis J. Eisinger
Daily Business Review

Net worth for households and non-profit groups decreased by $2.45 trillion to $57.4 trillion, the Federal Reserve said today in its flow of funds report from Washington. Americans reduced debt in the third quarter, extending a string of declines dating back three years.

A 14 percent slump in the Standard & Poor’s 500 Index, the worst quarter since 2008, combined with another decrease in households’ real estate values in the third quarter. A rebound in stocks at the end of this year and slower home-price declines may help stabilize Americans’ balance sheets at the same time employment growth picks up.

“We’re kind of in the third inning of the consumer deleveraging at this point,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said before the report. “Job growth suggests that we’ll see some pace of increases in consumer income.”

The value of household real estate decreased by $98.3 billion in the third quarter after dropping by $37 billion in the previous three months.

Owners’ equity as a share of total household real-estate holdings was little changed at 38.7 percent last quarter, today’s report showed.

Mortgages Outstanding

The volume of outstanding home mortgages was $9.93 trillion at the end of the second quarter, the lowest since the end of 2006, according to separate Federal Reserve data. That means U.S. mortgage debt, a driver of consumer spending during the real estate boom, may be about to enter its fourth year of decline as foreclosures wipe out home loans and housing purchases fall.

The value of financial assets, including stocks and pension fund holdings, held by American households decreased by $2.78 trillion in the third quarter, according to the flow of funds data.

Household debt dropped at a 1.2 percent annual rate last quarter. Mortgage borrowing decreased at a 1.8 percent pace. Other forms of consumer credit, including auto and student loans, increased at a 1.2 percent pace.

Labor Market

Americans are reducing debt and rebuilding savings to weather an unemployment rate that has averaged 9 percent this year. Payrolls climbed by 120,000 in November and the jobless rate fell to 8.6 percent, the lowest level since March 2009, the Labor Department said on Dec. 2.

Ahead of the holiday shopping season, consumers were limiting their expenditures. Household spending slowed to a 0.1 percent gain in October, the smallest since a 0.2 percent drop in June, according to Commerce Department data.

Today’s report also showed the balance sheets of businesses are faring better relative to households. Companies had $2.11 trillion in cash and other liquid assets at the end of the third quarter, up from $2.07 trillion in the prior three months.

Total non-financial debt last quarter rose at a 4.3 percent annual pace, led by a 14.1 percent increase by the federal government and a 3.5 percent gain among businesses. State and local government borrowing was little changed.

By Timothy R. Homan
Bloomberg

What is a super lien? Among Florida real estate attorneys, municipal super liens are notorious. But many property owners have never heard of them until it’s time to sell their house.

A super lien begins when the city or other governmental entity discovers a violation on real property. A violation occurs for many reasons: failure to maintain the lawn, failure to remove garbage from the property, allowing construction without first obtaining a permit or creating a nuisance or an unsafe condition — in the city’s opinion.

When the property owner does not cure the violation within a pre-set period of time, the city has the right to file a code-enforcement lien against the owner. What property owners may not know is that once a lien appears in the public records against them, the lien is filed not just against the property where the violation occurred, but against every property they own in the entire county where the violation arose. Once the now-powerful super lien is placed in the public records, a title defect appears upon every property they own in the same county.

As a result, the filing of a super lien will stop an owner from selling any real properties in the same county until the lien is paid. If ignored, a super lien’s daily penalties are stiff — up to thousands of dollars per day. Payment of the super lien itself can be insurmountable. And in today’s real estate market, it is not unusual for the super lien to exceed most of the equity in the property being sold.

What about a homestead? Is it protected from a super lien? Section 4, Article 10 of the Florida Constitution does protect a homestead from forced sale by a city, but not from title defects imposed by a city’s super lien. So, at this time the answer is “NO”. If the property owners are unable to pay the super lien, they must hire an attorney to obtain release of the lien or negotiate the lien down to an affordable amount. The cost of removing the super lien can be high; closing costs increase and the time needed to negotiate a release could delay the closing.

Before closing, the property owners must first negotiate a release or “no action” letter from the city attorney. Often that means showing proof of homestead status and threatening a declaratory action against the city for a judicial determination that the homestead is protected under the Florida Constitution. While the city attorney might eventually relent and admit that a bona fide homestead is entitled to protection from the super lien based upon conclusive Florida cases on the issue, such a result is not guaranteed. Plus, the additional costs and delays can be deal killers.

Some have taken note of the inequity of imposing super liens upon homesteads and the accompanying costs incurred by Florida homeowners to remove super liens in order to close upon their homes. In the 2011 legislative session Sen. Jack Latvala, a Republican from St. Petersburg, proposed a cure to mitigate code-enforcement liens on homesteads. Proposed Senate bill 1072 would have added new language to Section 222.01, Florida Statutes and placed code enforcement liens on par with judicial liens on homesteads.

Section 222.01 now permits homeowners to extricate their homestead from judicial liens by filing a notice of homestead in the local court and waiting 45 days for a response from the judicial creditor. In many cases, the judicial creditor does not respond within 45 days and relinquishes its judicial lien. This is a simple remedy for the homeowner to avoid judicial liens on his homestead and can be accomplished during the pre-closing process at a fraction of the cost of a lawsuit. The proposed senate bill would have permitted a similar remedy for code-enforcement liens.

Unfortunately, to the dismay of real estate attorneys and their clients selling homesteads, Section 222.01 was not expanded in 2011 to include code enforcement liens. At the last minute, the curative senate bill was “laid on the table”, which means that another “similar” bill was substituted for bill 1072. Unfortunately, the substituted bill did not contain the original language allowing the expedited release of code-enforcement liens. In other words, it died in committee.

When asked about the future of bill 1072, the senator’s office confirmed that the missing code-enforcement language would not be reintroduced in the upcoming 2012 legislative session by Latvala, but may be contained in bills to be introduced by other legislators, including Sen. Jeremy Ring, a Democrat from Margate, and Rep. John Wood, a Republican from Winter Haven. At this time, however, there are no proposed bills for 2012 appearing on the public records of the Senate or House supplying the missing code enforcement language proposed in 2011 by bill 1072.

Florida law should include more protection against code enforcement super liens on homesteads. The proposed changes in bill 1072 were supported by the homestead protection in the Florida Constitution. And the bill would have helped the already beleaguered economy by helping to eliminate homeowners’ costly and time consuming fights against these super liens.

Rana Gorzeck is a partner at the law firm of Ward Damon in West Palm Beach. For the past 29 years, she has concentrated her practice in South Florida on real estate and construction law, business law and public finance.