Is your older, cash-strapped condominium or cooperative association contemplating a termination and/or sale to a developer? The once rare ideas of a termination and sale have now become much more common as community members struggle to maintain, repair and insure older buildings. Host Donna DiMaggio Berger and guest John Cadden, from the Condominium Advisory Group and co-founder of CF Capital Holdings, discuss terminations from beginning to end and what to expect throughout the process. They tackle the legal, financial, and psychological aspects of termination, the impact of inflation, interest rates, and insurance costs, and the finite lifespan of multifamily buildings.
John's extensive experience in the commercial real estate and banking industries provides insight into the developer's perspective: what grabs their attention - is it an alluring location, the flexibility of zoning codes, and/or the promise of redevelopment possibilities? Donna and John discuss the ever-changing dynamics of the real estate market which bring opportunities - and challenges - including the challenges of dealing with investor owners and the need for clear communication channels to facilitate membership approval.
Donna and John also examine the vital role of the board plays in the termination process: should they remain neutral or passionate advocates for the deal? While providing practical advice for managers and boards, they look at the factors that would encourage a group of owners to consider soliciting offers. Be prepared to come away with valuable insights to guide your journey if a possible sale is in your future.
Conversation Highlights Include:
Is your older, cash-strapped condominium or cooperative association contemplating a termination and/or sale to a developer? The once rare ideas of a termination and sale have now become much more common as community members struggle to maintain, repair and insure older buildings. Host Donna DiMaggio Berger and guest John Cadden, from the Condominium Advisory Group and co-founder of CF Capital Holdings, discuss terminations from beginning to end and what to expect throughout the process. They tackle the legal, financial, and psychological aspects of termination, the impact of inflation, interest rates, and insurance costs, and the finite lifespan of multifamily buildings.
John's extensive experience in the commercial real estate and banking industries provides insight into the developer's perspective: what grabs their attention - is it an alluring location, the flexibility of zoning codes, and/or the promise of redevelopment possibilities? Donna and John discuss the ever-changing dynamics of the real estate market which bring opportunities - and challenges - including the challenges of dealing with investor owners and the need for clear communication channels to facilitate membership approval.
Donna and John also examine the vital role of the board plays in the termination process: should they remain neutral or passionate advocates for the deal? While providing practical advice for managers and boards, they look at the factors that would encourage a group of owners to consider soliciting offers. Be prepared to come away with valuable insights to guide your journey if a possible sale is in your future.
Conversation Highlights Include:
Hi everyone, I'm attorney Donna DiMaggio-Burger, and this is Take it to the Board where we speak Kondo and HOA. Today we're going to be discussing a topic that is becoming much more common condominium terminations. Condominium termination is the process of dissolving the condominium form of ownership by selling the condominium property and distributing the sale proceeds to the unit owners based on their ownership interests. Condominium is a process that usually is a precursor to a developer's acquisition and redevelopment of real property. The termination of a condominium is typically accomplished through a vote of the unit owners, and the approval required can vary depending on the jurisdiction and associations governing documents. The decision to terminate a condominium often results from various reasons, such as financial strain, aging infrastructure, changing market conditions, a developer offer that is just too good to pass up, or a shift in lifestyle that makes condominium ownership no longer as attractive.
Speaker 1:I'm joined today by fellow Chicagoan, john Caddon from the Condominium Advisory Group. John received his bachelor's degree in accounting from Boston University and has been in the commercial, real estate and banking industries ever since. In 2008, john co-founded CF Capital Holdings, the parent group for CAG, which provides asset advisory, management, restructuring and consultancy services to the condominium development, multifamily rental and single family for sale housing industries. Such services include how to reposition assets that had become insolvent due to the 2008 economic downturn, many of which were condominium conversions that had not sold completely. So, john, we're delighted to have you here today. Welcome, to take it to the board.
Speaker 2:Thank you for having me.
Speaker 1:So I want to start out, john. I'd like to ask about termination from two perspectives From the perspective of those developers who are looking for properties to acquire and redevelop what basically attracts their interest.
Speaker 2:Well, I think the interest that they have is that they're looking at sites that are worth more as being redeveloped into something larger, bigger, newer, and it's a location factor more than anything else. The bottom line is they're looking at a property that has a redevelopment opportunity.
Speaker 1:What about the surrounding communities? Does that play a factor at all in the developer's interest of a particular building?
Speaker 2:Absolutely. I think the reality is certain locations that were developed many years ago have. Those areas may have been good then, but now they're fantastic, like oceanfront properties and things that you cannot find anymore. There's no vacant land. The community is very important, but, more important, the developer's looking for highly developed areas where you cannot find a similar plot of land anymore. Your only choice is to buy something and tear it down.
Speaker 1:You may not know the answer to this, but how active do the developers tend to get in terms of local politics and what they can potentially build on the site?
Speaker 2:Well, I think they have to understand the zoning codes. I don't think they're going to spend any time on something that they know they're never going to get approved. They're making a big bet on it. I think the developers have consulted zoning attorneys, talked with the municipalities and have an understanding of what they're going to be able to do long before they try.
Speaker 1:I have an older building, john, that is in a prime location, oceanfront, and they actually happened to have secured air rights years ago. While they are only four stories, they have the right to build, if they wanted to, up to 15 stories. It makes them a prime target for a developer's offer.
Speaker 2:Absolutely. Again, it all comes down to the old developers. It's FAR floor area ratio. They can buy a property and they can build however many square feet. That's going to determine what their value of the property is. They have to back into it.
Speaker 1:Developers looking for what we always hear in real estate location, location, location, right. What makes, from the perspective of the owners? What factors would encourage a group of owners to think about soliciting offers and how they would go about it? Not responding we'll get into responding. What group of factors do you think would encourage owners in some of these older buildings to start saying, hey, maybe we should go out and try to find somebody who wants to purchase us.
Speaker 2:I think the biggest factor is always financing. What has occurred over the last 20 years well, since the 2008 crash and then beyond is that kind of many of them, owners want one thing and that's to keep their dues down on a monthly basis as much as they can. A lot of buildings and we know the worst cases of those have spent a lot of time doing everything they can do to do the least they can do, but buildings need work. Deferred maintenance turns into deferred huge projects. Some of these buildings are looking at a situation where it's just not feasible to spend that kind of money. You're not going to get it back, so the sum of the parts are worth more as a whole than they are selling an individual unit, and that is the other thing that starts to come into play.
Speaker 1:So some of the equation is look, bring this building building's not getting any younger. Owners are not getting any younger. Many of them have gone from working people to being on fixed incomes retirees. Maybe they come up with a consensus that we want to start looking. What's the first step? Would they try to find a real estate broker to hire and list the property?
Speaker 2:Well, there's a possibility of doing that. But first I want to just add a very important point In this market of condos there's no buildings that are really 100% owner occupied and in the case in many of the best locations and older properties, a lot of these buildings are majority rental, so you have this kind of fallacy that you're throwing people out of their homes. Yes, there's a number of people that live there, but, again, many people are strictly investors who rent their units, so there's only so much participation. They play in it.
Speaker 2:A board can do many things. Yes, they could get a broker, but you can't really list a unit for sale as a whole because you have to have the authority to do it and you have to go through the proper process. That's in your declaration, in the statutes. But I think the first step is recognizing you have an issue that makes it you kind of know look, I'm on the ocean and this property is surrounded by brand new, sparkling buildings and I'm the 1960s built building that's got X million dollars of work to do. So we'd like people to kind of reach out to folks like ourselves, but you need to get an idea of what the value might be. You might get approached by someone, but boards need the tools and that's where their council comes in and whatnot to try to figure out what's the best next step. It can come from anywhere, but you really got to know first that you have a good reason that something's not right here and we got to do something about it.
Speaker 1:Right and I think that was the purpose of my question is if you know that a majority or more of your owners are inclined to sell if they get the right offer. You just wait around and hope that some developer knocks on your door, or can you be proactive? I did want to add to your answer, though. We're talking about condominiums, but we could also be talking about cooperative associations, so I personally represent a lot of cooperatives, and a lot of the cooperatives in Florida at least, were built right along the coastline. In those cases, you really are talking about the cooperative property that the board could put that up for sale. Of course you have to look at the documents you may have underlying land lease. There's complications. I do want to say we're not giving specific legal advice during this show.
Speaker 1:We're talking from a 30,000 foot perspective, but let's walk back. So you've got some pressures. People may be inclined to do it. Being proactive. Let's take the cooperative. Would they be? Reaching out to a group like yours could help. But I suppose they could also reach out to real estate broker and say you know, find out if there's any interest out there. How do you assess? How does the board and or the owners assess what the sales price should be? This is the big question.
Speaker 1:This is the question everybody's asking what would our building be worth to a developer?
Speaker 2:When we take a board through a process, we reach out to not one broker but many, and we get what's called a broker's opinion of value. Listen, the major players in the sales of these land pieces for development, multi-family brokers. They know approximately where things need to be and they do their research and they give you an idea and that's a starting point. What is hard for board is it's volunteers, and you have people that have all different things. You could have everyone from a retiree to someone who works 90 hours a week. So it's hard enough to get people to volunteer for a board. It's even harder to get people to pick up tasks. So being proactive means trying to find out information and how much time people have to do it. Now, at the same time, there are people reaching out to likely candidates. We do it, brokers do it, attorneys do it, developers do it. So this has become such a big enough thing where you can look at the developer properties versus your other condos that really should just be rental properties again. But even then, there people are reaching out.
Speaker 2:Now there's a market that's occurring and it's happening organically to a large extent. They're looking at comparable sales, they're looking at the size of the property. They're looking at the zoning and they're saying, okay, this property has a 20-story building on it. I can build 40 stories here. I can sell it for X, y and Z. It's going to cost me A, b and C and based on that, I can pay you this amount of dollars for your property. And, generally speaking, the older high-end, what were high-end in their day, because they're listen, they're A location and they're maybe C buildings now, when they were built, they were the nicest there was. But, as we know, a buildings become B buildings and then become C buildings and it's all age and it's all maintenance level and what's been done there.
Speaker 1:So let's say you have a developer that's going to knock a building down. They know it right. They're going to knock down that 10-story building. They're going to put up a nice 40-story building. Do they factor in the current, the most recent engineering report? Now you're knocking the building down, but does that factor in their offer? Because they're looking at that engineering report and they're seeing the millions of dollars of upcoming maintenance and repair projects.
Speaker 2:Well, I think it factors in the likelihood of them succeeding is greater when people are facing a financial situation and I hate to refer back to it because it was really a terrible event, but Champlain Towers really brought all this to the surface because the condominium form of ownership allowed for many years for owners to waive reserves, to have to vote on special assessments for items.
Speaker 2:And you're a condo owner and the board's coming to you and saying, look, we've got to spend $8 million to fix all this and we need a special assessment vote. We need two-thirds or 75% of you and people are not going to vote to assess themselves. And I always give the example of although in Florida your government doesn't has a two-term limit for your governor, which I think is amazing like we do for a president, but it's like going to our senators and congressmen and saying I think you should put term limits in and they go yes, it's a great idea, they have to vote on it. So asking people to pay special assessments, to raise their dues, to spend money, has not worked in the condo world because you were allowed to waive your reserves and it builds up, and it builds up. So, yes, they're going to look at that and they're going to see a building that's not well taken care of, doesn't have any reserves and has potentially even code violations.
Speaker 1:You mentioned Champlain Towers that now the experts are basically saying that that building started with a construction defect, significant construction defect. So we have some buildings with construction defects that have never been addressed over time. That starts that building's lifespan out. You're already handicapped if you have that. We could do a whole segment on legislative approaches to things and why. On the one hand, you want to increase and you should increase safety, but on the other hand, you're making it harder to go after builders and contractors who do lousy work. I mean, it's my broccoli, but let's get back to the. Let's get back to how to assess value.
Speaker 1:So what do you say to the people because I get this too, John which is you've got a building. Let's say you've got 100 units in the building, right. And let's say you've got 20 people in that building that have really redone their units. They're gorgeous. They put a ton of money into the units. You got other people that have moved in. They've been there for decades, they've never touched it. You know where I'm going with this. The people who put all the money into the units said my place is a palace. The building may not be great, but my unit's great. How do you convince those people that you know because it's going to go according to their ownership interests. It's not going to go according to what they put into the unit. What do you say to those people?
Speaker 2:Well, we have always taken into account the upgrades to units and when you do a regular termination plan you can put provisions in there to take care of people that have put an upgrade. You put limits on it and you have to have a time limit on it. Okay, so someone who 15 years ago decked their unit out isn't really getting the benefit of that any more than someone who never did anything. If someone in the last we try to make it the last five years and you have to put sort of guidelines in and especially most of these building floor plans are the same on every floor, so your kitchen area is only so big. So you kind of try to come up with a pot of money for them to claim money for upgrades as part of a plan.
Speaker 2:We never recommend using percentage of ownership as the dividing method for putting together what everyone's going to receive. That's usually done on square footage and that's very unfair to the smaller units. Smaller units sell for a higher dollar per square foot than bigger units. So if everyone's getting the same dollar per square foot, you're really benefiting the bigger units and, as you know, in the current statute of you have three different methods you can use. The market value is determined by the county or you can appraise each unit style. You don't have to do every unit and those usually come closer to giving people a fair balance versus straight square footage.
Speaker 1:I'm going to include a caveat for you, which is this is all dependent on what your local, what your statute say and what the governing documents say, because some governing documents, many governing documents, address termination and they also address how the proceeds will be distributed. So you know, you can't, we can't, make a blanket statement that we can, you know, make it equitable. In some cases, the termination provisions of the documents may be seen as inequitable by some of the unit owners. So it's okay, but again, but again, it's a, it's a, it's a balancing of what you're trying to accomplish. Some people, even the smaller unit owners, they're still going to come out ahead, okay, as opposed to staying in the unit and paying for maintenance and repairs over the long haul.
Speaker 2:Absolutely, and I don't think there's ever going to be any terminated property where you're not going to have some people that are unhappy.
Speaker 2:At the same time, there's a lot of people and this is what we found in the terminations we've done there's just a lot of people who haven't done anything, and especially the investors and some owners who bought in properties right before the crash especially, or they've been there since the early nineties and and whatnot. It's not as if they wanted to move, but when this presents itself, it sets in motion something that they've been avoiding thinking about and now they're starting to think about it and for some people a lot of them it turns into an opportunity that they they're actually glad that this kind of gave them a little push off the cliff. They needed to jump in and they get on with their lives. It's sort of like what we were discussing before we got on about how we're we're Chicago wins both of us and how the the. You know, the image of Chicago is that people are shooting in the streets, and we know they're not, and it's still great city. So it's sort of the same thing that people think that we're throwing people on the street who will have nowhere to live and we're kicking them out of their homes. When this happens and that's really not the case- John, you mentioned earlier about investor owners.
Speaker 1:How problematic can they be in the termination process? Because I will tell you, I'm finding that a lot of the investor owners are the ones who are opposed to large maintenance and repair projects because that's going to cut into their return on investment. How problematic or cooperative are investor owners in your experience with the termination process?
Speaker 2:Well, my experience with the investor owners is that they are investors first, and so educating them, talking to them, walking through things with them, is much different than someone who lives on site. That's a different approach and the investor owners will understand dollars and cents. And you're absolutely right If you're telling them you're going to give them X thousands of dollars of special assessments, and they know that it's not increasing their value whatsoever. It's money that should have been spent a long time ago. They're going to want to listen to what you have to say and especially listen.
Speaker 2:If their unit on the open market sells for 100,000 and you're going to give them 140,000 on a unit or more, or whatever it starts to make sense to them. Their issue is always OK, now what do I do with the money? That's probably more of an issue to them, but at the end of the day, they'd rather not write a big check and they'll figure out what to do with their money. But that's usually their first question is I'm just sitting here collecting rents, but yeah, I'm going to see my rents go down.
Speaker 1:What do you do with their long-term renters? So a lot of them do have long-term renters people, families who've been in their units for years. How do you address that issue? You said we're not throwing people out on the streets, but we're going to get into. People do need to move at some point. How do you deal with the renters?
Speaker 2:Well, the first thing is, if the property is just going to stay rental and a value add multifamily operator is, they're going to assume every in place lease, except for the ones where someone rents it to their nephew for $200 a month. That one won't be assumed. But for the most part they don't want to empty the building out. The developers are going to want to get people out of their leases and again, depending on the state you're in and the statutes and since we're both in Florida doing business in Florida, when you follow the new statute, you have to offer existing residents who are owner occupants a one-year lease. So any developer buying where those people are there, if they want to stay, that developer is going to be saddled. With those people, the other people, the leases will just burn off because most buildings don't have longer than one-year leases.
Speaker 2:There may be someone who had a two-year lease, but those are things you work through and it's just part of the matrix and the challenge that you face. You have to map all these things out and get an idea and people will be bought out of leases. Every tool you have to get the building empty because, as a developer especially, the faster you get in the ground, the less carry you have waiting to get there. So it's all cost. It's all comes down to dollars and cents at the end of the day, and it gets factored into a very complicated matrix of events.
Speaker 1:So I mentioned in the introduction deconversion, which is different than developer coming and saying I'm going to buy you out and knock this building down and put something brand new up. Deconversion is just the reverse of we're going to keep the building but we're going to turn it into rentals, and I would assume, john, that the developer will add some bells and whistles. Freshen things up, talk to us about deconversion and how often you see that, versus a complete tear down.
Speaker 2:Well, I would say I can't give you the exact number, but if you look at all the land in locations where it's worth more than the aggregate value of the existing condos, as they could be sold individually for every one of those and we know there's 90,000, or whatever the number is, condos in the state of Florida, as an example, there are 25 to 30 complexes that are never going to they're not worth more for their land value.
Speaker 2:So those are actually the norm and the land deals are the exception. In my opinion, there's just less of them, but they get more press because they're exciting. There are stories, especially they're on the ocean or they're a block off. They're at this corner where nothing's been available for land in 35 years. So, like you said, the perception is that's what it is. But at the same time, these complexes, especially the ones that were not built as condos but were converted in the 90s and up until 2008, those are facing huge challenges as well and those are very appealing to value add multi-family buyers. It's just they're going to go in and, as you said, they're going to change the look. They're going to take over all the rentals, do their thing, upgrade it, create a rental community.
Speaker 1:Well, this is all cyclical because, as you said, in the last 25 years we've flipped flop back and forth, because sometimes you will see apartments that are converted into condominiums. Now we're seeing condominiums converted back into rent or, for the first time, being converted into a rental building. What drives the trend, in your opinion?
Speaker 2:I think the trend is driven by the construction cycles and the construction costs and eventually what happens is the cost of new construction gets to be way higher than you can take an existing building and turn it into condo. And if someone has built, for instance in a market, sometimes you go into places. I remember going to Delray Beach 20 years ago and looking around. And then you go down there today and you look around and it's oh my God, but people didn't think that that area would turn into what it has, which is amazing. But there's probably rental buildings there that were built as rentals, weren't condos. That now you can't touch that location and maybe the economics aren't right now, but five years from now, who knows, those will be conversion because you can't replicate the location and you can't build for that price and eventually that buy versus rent starts to change. So it's just an interesting. It's a moment in time where lines cross. I guess is the best way I can say it.
Speaker 1:Do you think there's factors that owners care about in a building that renters don't, and vice versa, in terms of, let's say, even size of the unit? So you'd have a building that has very large, two, three bedroom units. Maybe a developer says I can chop these up and make smaller units. I guess what I'm asking is are there different factors that appealed to renters versus owners, or is it about the same?
Speaker 2:I think the way I've always approached the condo business when I was doing conversions and doing new construction is at the end of the day, more people have less money, so smaller units always sell much easier, and bigger units are really harder to sell the higher you get in the dollar price. So the answer is, yeah, if you can chop a unit down, but you're talking about taking something that has one kitchen and now you got to make another kitchen and more bathrooms. It all comes down to dollars and anyone who's ever rehab knows that you can do all the planning you want. And the day you tear that first wall down is the day you find out oops, or like, sometimes the plans work quite correct, Someone built it differently than the plans and you based it on the plans and you open the wall and what's going on behind the wall isn't what's there. So there's so many factors but at the end of the day, the more units that you can sell at a lower price, especially in a condo conversion, those are the ones that always sold first.
Speaker 2:In the cities, like in Chicago, when we were doing towers, the studios one bedroom sold well before the two and three bedrooms did. Now, if you had a really special location with all big units, but it was an A location that high-end buyers wanted. That was a different story. But remember, when you build a multifamily building, especially a tower, and you start off as a rental, you're probably 70% small units. You have a bigger audience with you know you're charging $2,000 a month versus $4,000. There's just more people in that price range. So someone probably said it to me years ago. Just remember more people have less money, so that's your audience.
Speaker 1:More people have less money. I want to remember that when you're working with a community, do you prefer to go through the termination first and then close the sale, or do you recommend at times buying up units one at a time? And then you're just going to develop or work out the termination.
Speaker 2:Yeah, I mean. Look until Kauffman language passed in Florida. People had to deal with the existing terms of their declaration and they either turned them into tenants in common after a certain point to terminate, or they had a buyout option where the people that didn't agree if you had to vote there's a market value and they ended up in core valuations. I'm a believer in using the newer statute to terminate first, especially for the ones that are going to stay. Rental On the land deals you're starting to get in a really rarefied air when you're talking about the prices people were paying for some of those properties. If you have an offer from a legitimate developer that you know can close, that makes it a little different.
Speaker 2:I think the benefit to a community of having an in-place termination plan is that it allows you to go to market Even if you have a buyer. If they don't succeed, you don't have to start over. You already have a termination plan that's been approved. If you write it the correct way, then it's an asset to you. It gives you options. Look, in the Miami area especially, a small number of deals have been done where developers went and bought up 95% of the units. They had to negotiate with all those individual people, then they have to close on all those individual units and then they have to collapse the condo.
Speaker 1:They can make a contingent upon a termination approval.
Speaker 2:But most of them didn't decide to do that. I haven't seen a lot of those. I've seen it where they buy enough units, take control. That was all great while the market was as I say. The era was going up. Then we hit spring of 2022 and rates started soaring. Those deals started to fall by the wayside because the cost of money went up and inflation and all those things.
Speaker 2:As you know, in real estate things work when they work. We've seen a tremendous loss of value for everybody homes, condos, commercial buildings I don't even want to talk about office buildings because interest rates went up so much. Like anything else, you want to take advantage of things. I always joke that some of my big home runs grand slams or whatever you want to call them. When I'm volunteering to speak to a bunch of students at a school studying real estate, I'll tell the story like I knew exactly what was going to happen. You try to do good deals and if they turn into great deals, a lot of it's out of your control. But afterwards you say I knew, I knew.
Speaker 1:You're saying it's luck.
Speaker 2:I know I don't call it luck. I think it's not as much bad luck. How did anybody know that interest rates were going to do what they did suddenly when they started? And you never know. You have to be reactive and you have to think ahead. Developers take risk. That's just the name of the game. Anybody who has any level of risk averse are not developers, because developers put it all out there. They're the venture capitalists of our business. They're the guys who buy the startup costs, because you can spend, as you know, hundreds of thousands of dollars. And here you are now. You can't get financing to build your building because the interest rates went up and whatnot.
Speaker 1:You're sitting on the sidelines and there's no, that's why we have the concept of successor developers, john. Yes, the guys who come in to fix it. I do want to circle back to our listeners. As you mentioned, kaufman language. It's based on a case in Florida, kaufman v Shear, which stood for the premise that basically, the governing documents for an association are locked in stone with the statute that was in place at the time the documents were created, unless you have certain magic language that suggests the documents to changes in the statutes over time. In case anybody was scratching their heads saying, kaufman, what?
Speaker 2:Sorry about that.
Speaker 1:That's what, it's, no problem. I do want to ask you and this is just your philosophy, john what role do you think the board should play in the termination process? Their unit owners? Okay, they are going to be impacted by the offer that's ultimately accepted or rejected, just like everyone else. But do you believe they should be a neutral party, or should they be advocates pushing for a good deal?
Speaker 2:What's your philosophy on?
Speaker 1:that? What's the role of the board?
Speaker 2:Well, that's a great question, because I think the most important thing to bring up is, you know, is that if the board is not interested in doing it, you don't even get started. So they're the gatekeeper for all of this. They are the ones who really, if you're going to especially do a termination plan, if they're not interested in doing it and you can't get the board to act on it, then nothing starts. Now, if someone starts going up and buying units and then takes board control because they want to do it, they can introduce it. So in many ways, your board always has got to be an advocate of it. You want everybody on the board to be in favor when you go forward with it.
Speaker 1:Let's say, john, they're all gung-ho, okay, now do you want them communicating things to the membership? Do you want them, before you've even formalized an offer, starting to talk to people about what the potential offers are? Because this can get really muddy really quickly with boards in terms of the communication channels.
Speaker 2:I think absolutely, and I also think I want to bring up something that you know well, and that is participation by condo owners in the operation of their community is anemic. It is non-existent. We had a board meeting on one of the boards we sit on and a property we managed the other night, and there's the five board members and there were three owners, and this is a 350-unit community. Now in ones that have more owner occupants you might get 10 people besides the board. So the reality is people only show up to board meetings when they have a complaint. There's some people who really care.
Speaker 1:They're going to be specially assessed. They'll show up to those.
Speaker 2:Yeah, Anything or something happened in their unit. That guy above had a leak and they don't understand why the documents and how that reads, or they don't like something they see in the parking lot. It could be anything. They come, they ask questions, they want to get answers and then, once that's solved, you never see them again. So what we do when we're involved in the process is we act as the communicator and one of the reasons and every board member that has elected has a certain amount of people that are on their side but we find it best that the board support the plan and then bring in a third party like us to engage. We do seminars, we talk to people, we contact them individually. I just think people need to hear from someone who, although we're there to get it terminated, it's sort of a neutral party. There's no animosity towards you, other than they may not like what you're doing. But board members and again you have 300 units who has time to do that? The boards don't.
Speaker 2:What about their managers, the role of managers to help get the contact information out. But again, the management companies aren't set up. The average manager has enough on their plate to operate the property and pay the bills and keep that property going like any other property manager, and the idea that they would have the time outside of their job to be calling people. And let's remember, it's hard to call people during your workday. People are at work. A lot of your owners are at work, so you have to call people at night and on weekends. Then you have language issues, especially in a market like Florida. You have people from all over the world owning units living, so you have to have people that can speak different languages and talk to people.
Speaker 1:And you may be getting a hold of someone in Europe or South America or China God forbid, although we don't know, and hopefully you're not calling them, john, at two in the morning to talk about a possible termination of their condo.
Speaker 2:Well, it might not be two in the morning there at time, but sometimes it is our time.
Speaker 1:Well, I mean, I'm going to play double sad picket with you for a second. Okay, do you get pushback? You're calling me, and who are you? Why are you calling me? You're not the board, you're not the manager. Do you get pushback like that?
Speaker 2:Well, we try, yes. And then the pushback is for people who don't read what they have, whether it's through their portal or their email or a registered letter or anything, and then, but we're ready for that. So we talk to the people and we say, okay, if you look in your owner's portal, it was posted, it was sent out in an email and you know when that happens. I'd say close to 90% of the time they're like I never read it. Okay, now I know who you are, tell me what's going on, and so they might not even know what their community has been facing and why this is happening.
Speaker 1:I have an idea for you Video messaging. Have you ever done video messaging?
Speaker 2:We record videos, we do zoom meetings, teams.
Speaker 1:People learn in different ways and a lot of people are more visual than you know. They'll listen and watch a video as opposed to, as opposed to reading document. We. That's a problem is association counsel we encounter all the time.
Speaker 2:Yeah, you have to. There is no one way. But what I do think is important is when people actually are talking to someone who's spending the time to listen to them, you're actually getting people's attention. Maybe to complain about something that they never would have brought up unless you called them, or they don't know, or they want to know this, so you have to be ready for anything. But I think people do enjoy the one-on-one contact and the ability that someone cares, because, again, it's too much to ask board members to respond to every single owner directly in their issues.
Speaker 1:Listen, this is a big decision. You're settling, you're moving, and that's not going to be easy for everybody. Let's say a board doesn't use you okay as a third party, whose job is it to deal with the holdouts? Let's say you have one or two holdouts, everything else has fallen in place. If they're not using a third party like you, or they're not, is it the developer or the board? Who's going to deal with the holdouts?
Speaker 2:To be honest with you, it's all over the place. It could be the developer, it could be the board, it could be somebody.
Speaker 1:So it's the agency council.
Speaker 2:It could be anybody. You can to get to talk to them, to try to bring them into the fold. But there's no right answer to what you do. You try to figure out the situation and listen. If they're hostile to the board, the board's not going to talk to them.
Speaker 2:The developer's tried a lot of times. There's a sales broker involved who's the person who brought the developer in and they might sometimes have people reach out to these people. But the difference is when you are doing it through an organized plan, you have been hired. You have access to a lot more information than someone who's just trying to contact owners. So basically, the board shouldn't be handing out owners information to non-owners. You're starting to get in a gray area which just opens up the board's liability. So if the board gave information to a broker or to developer, if everyone's contact information, people could technically use that against them and say look, you didn't have the right to do that, it's technical. So there's just a lot of misunderstanding about how to do it and, like you said, how do you start? Well, we start with the board.
Speaker 1:You got to start somewhere.
Speaker 2:Yeah, I don't think go to owners directly. Now some buildings might have a bulk owner who owns a lot of units. Usually they're represented on the board, but you have to assess every deal differently and you have to look at every owner and try to get as much information as you can and understand who they are, where they are Now have you ever seen a great deal blow up because of holdouts? Yes, I have.
Speaker 2:I can't imagine that makes for a healthy, functioning community on a going forward basis Well again, they weren't healthy to begin with and that's one of the reasons why they needed to do this. But yes, we've had a time or two where a number of owners and this was when we were doing it under the new statute just refused to sell and wouldn't, didn't want to talk and would constitute that 5% and at the end of the day, two years ago they didn't do it. Now they wish they did because values have come down. But it happens.
Speaker 1:But there's ways I had a community. John, sorry to cut you off. I had a community that sold, closed the deal and a month later the building was condemned. So it was imminent. It was imminent.
Speaker 2:There are communities and this is a teardown land deal.
Speaker 1:Yes.
Speaker 2:Yes, that's probably a very happy moment for the developer, because they counted on that.
Speaker 1:Yes, it was a happy moment for the owners as well, because they had made a decision that they wanted to get out, because they just were not in a position to pay the special assessments that were going to be needed.
Speaker 2:Then it all leads into out of all this. We were doing this before they brought up the new statutes for condos that are changing the paradigm. Now you've gotten that coming down the road and you've got higher interest rates. It's a double whammy. And then let's add the third whammy, which is insurance. No matter what anybody is doing, even if your building is completely in fantastic condition, you've reserved everything your reserve studies. You never waived reserves. You're still seeing increases in assessments like you never have before.
Speaker 1:We just did a webinar on insurance and we had a Florida State Senator on and look, everybody's optimistic about the ability to turn this around in terms of the insurance crisis, except for the insurance companies.
Speaker 1:They're not optimistic as everybody else. But let me ask you the plan is everything. The plan is everything. How much sensitivity do you typically bake into that plan when you're dealing with older or disabled people? I mean, I'm talking about people in their 90s, maybe even 100 or over. I had one person in the community. It's going to be really difficult for those people to move. What do you typically put into the plan?
Speaker 2:to help those people.
Speaker 2:Well, again, whether or not you're using the new statute or what's in the documents, we're always going to recommend, put it in the plan that these people have the right to stay for up to a year. We also recommend that the new owner, whatever they're doing, doesn't hold them to their lease, so that if some people aren't ready to go but they need 60 or 90 days, they can cancel their lease free of charge, so to speak. But again, there's so many different situations and it just constantly surprises me. You talk about someone who's 90, sometimes their kids are wishing they'd move and they can't get them to. So, like you said, it's all perception and the perception is you're putting people out and a lot of those people really. It's a good thing for them.
Speaker 2:Sometimes not for everyone, but a lot of times the cost of living there is going to not be possible for them to absorb anyways, with what's going on and why it makes sense to sell and it's just a perfect storm. But we do try to use as much care for those people and give them options and ways to accommodate them, because closings are not necessarily a certain date. But you have to get through the process, you have to wait. Developers and buyers are notorious for delaying for reasons or listen if the finances change, which has happened recently. So you always want to. The one thing to make clear is that until the day it closes it's still operating as a condo. So no one's people think, oh, if I terminate, it do I have to leave? Now Sometimes they ask or like oh, no, no, no, if it doesn't sell at the minimum price that's in the plan or whatever's in the plan, it doesn't sell, you go on as a condo.
Speaker 1:That's a really important point because I think you're right. I think most people think as soon as the plan's approved, we're out of here. That's not the case.
Speaker 2:No, you have to finish the terms of the termination plan, which are usually a sale.
Speaker 1:We've been talking about the issue of aging in place for a long time here at Backer, because people moved into a lot of these communities when they were in their 40s and 50s and they're now in their 80s and 90s and the buildings are not typically set up to handle some of their new challenges. Let's say I hear that a lot. I just spoke to a board last month and they said we feel like it's turning into an assisted care living facility here rather than a condo. So I said in the introduction, shifts in lifestyle as well can be a factor that plays into the decision whether or not to terminate. If you have a significant percentage of your residents who really do need to be living in an assisted care facility, a place that has more support for their growing needs, that may be a good thing. As you said, the adult children may be very supportive of moms going somewhere where they can get more help.
Speaker 2:Well and look, buildings that were built in the 60s and 70s generally didn't have washer and dryers in the units. That wasn't a thing. And you can't necessarily put them in some of these buildings because the plumbing isn't there. And think about being, as you grow, older and you have to go down to the laundry room or you have to have someone come in and do your laundry because you can't do it in your unit. So all those little things about how people live day to day are very important. But, like I said, the perception is you may be throwing people out on the street, but you're really not most of the time, and especially when you look at who actually lives there, whether they own or they rent or they're not even there anymore sometimes. So, but you have to take that on the consideration and at the end of the day, when you're facing huge.
Speaker 2:You've seen some of these stories where it's 80,000 a unit for $100,000 a unit that there now have to be specialists assessed. You're never seeing that money again. Your unit is not going up by that amount of value when that money spent. This is old stuff that wasn't taken care of. So that puts people that it's not the termination that's driving them out. It's the fact that they're building, did not keep up with what they needed to do and wave reserves or whatever, and now they're facing Armageddon, the terminations, they're way out. People twist it into it, but what gets you to the termination is really, to me, the event and the add up of those things that get you there. It's more of a saving grace than it isn't. It's just again the news stories and people will perceive it differently, but I don't believe that it normally is.
Speaker 1:Well. Do you think the expectations of new purchasers are a little more realistic these days about what it costs to maintain a property, particularly one along a coastline, where they are subject to harsh conditions? Salt water, hurricanes all these things take a toll. Do you agree with you to an extent that people who bought years ago I just don't think they thought about it. A lot of them didn't think about it. Some of them did, though, so it's not always a question. We've got some associations that are looking for possible sales, and they've maintained their property very well, but the question is do we want to keep doing this? It's a really question of stamina. It's not that they're catching up. They've caught up, they've had full reserves, they've done it. But the question is do we want to keep doing it, particularly with the rising costs? Do you think people, the new people buying in these communities are more realistic about what it takes to maintain them?
Speaker 2:That's a very hard question to answer. I think my guess is that the majority of people aren't thinking 30 years down the line, 20 years down the line Again. If you look at statistics, the average ownership length of a condominium unit owner is still under five years, and that's one of the contributing factors to why this occurs.
Speaker 1:Wait, wait, say that again. So you're saying data supports. Average length of ownership is just five years.
Speaker 2:If you go around the whole entirety of a state or a market in Chicago, it was like three and a half years, several years ago and people are coming and going. Especially people, if they're buying their first place, will buy a condo. Well, if you're a young person and suddenly then you get married or then you have kids, we have to move out. So people don't stay in condos as long as they do houses. And I don't think people think long term and they think, well, I'll be gone before that matters.
Speaker 2:I think the people who think about that long term thing and then you don't know. It's sort of like writing a legal agreement you write the best you can at the moment and nothing covers everything, but you cover everything you've ever heard of and then things you think of, and then some conflict comes up and you go, oh well, we didn't foresee that coming. So I think with the condos it's sort of the same thing. The newer buildings, the assessments are huge, especially on the oceanfront ones. The assessments and the reserves are huge amounts of money, but how can you possibly know it's ever going to be enough? It could be too much, it could be too little.
Speaker 1:I don't know I have a lot of clients. I have a lot of communities with even legacy owners. So the kids have inherited. They continue living there In some of these communities. I don't think they're thinking I'm not going to live there that long.
Speaker 1:I think I'm either not going to live that long altogether, or I think they think they'll be able to get their way with the board, push the board to do certain things or not do certain things, and if the board that's in place doesn't agree with us, we'll vote them out and we'll vote in people who do agree with us. So I do have a lot of long-term residents in many of my communities but I agree that far too often the focus is on more aesthetics. I had a realtor, I've had on the program, I've had a lot of real estate people and I'll never forget Marissa DeLenge said they care about the view, they care about the landscaping and not necessarily nobody's asking about the stucco and the concrete and the generator and the roof. They're caring about very specific things and usually it's the aesthetic projects that take precedence. I hope that's changing.
Speaker 1:I hope that's changing.
Speaker 2:Well, I'm not sure you're going to have a choice anymore. We'll see. But if they keep things away, it looks like they're going to go. But I agree with you.
Speaker 2:Listen, a lot of people leave houses to go into condos because they don't want to deal with the lawn, they don't want to deal with the plumbing, they don't want to deal with that even anymore, and it's a simpler way of life. Now, if you're in a homeowners association where there are zero lot line homes or town homes, that's a little different. But when you start getting into multi-story buildings that have, and especially near the water and all that, I think people think that it's going to be less for them and someone else is going to worry about it. I do think there's a lot of educated people that educate themselves and understand the future, but I think for the most part people are just glad to let someone else deal with all that. And yes, it's great when you pull up and the bushes and the outside is good and they paint, they do the lobbies and everything and the elevators look good, but the bones of the building, the skeleton of the building, is everything.
Speaker 1:And what we both know, having been in this industry, is there's no hassle-free housing choice. Right, there is no hassle-free housing choice. You may think it's turnkey, but there's a lot more going on behind the scenes. I did. I asked you about what you thought the role of the board is in the process. What do you think the role of association council is?
Speaker 2:Well, I think association council is there to advise the board and thus all the unit owners of what their options are and what they're facing.
Speaker 2:And, to be realistic, termination brings about an interesting situation for the attorneys is that you may be losing this association as a client At the same time, if you know your client's going to be facing terrible challenges and you know they're going to end up being in that situation in a worse place down the road, it's a balancing act.
Speaker 2:So I feel when an association attorney has the air of the board and they're listening and they're understanding what their options are, then you're doing the best you can. I think the worst thing in the world is the opposite, which is and you see movement with association attorneys and management companies all the time the manager company, the attorney, sit down and say look, here's what you have to do. You have a, you have a challenge here. We don't like to say problems, you have a challenge here and they look for another opinion, or they fire you, they fire their manager, they fire the and the next people. You know they go shopping for someone who's going to tell them what they want to hear and that is what has created all these problems over the years and the challenges.
Speaker 1:Gosh we could talk about. There's a whole other episode of opinion shopping. You're absolutely right. They do it with engineers, they do it with attorneys, they do it with accountants and sometimes they're just looking online to hear what they want to hear. But you're right, listen to the role of counsel and we'll lose the client. But it's what's right for the client If termination is what makes sense for that community. In my opinion, the role of association counsel is to help them do it and help them work.
Speaker 2:And there's plenty of important work in that plan for the association counsel to be involved in, to protect their client through that process. So you know your role in that as an association counsel is very important and to make sure and you're still there to protect your board and your unit owners and everything. But, as I said, no one likes bad news. We face that in everything we do. Being the bearer of bad news is sometimes. You know, what do they say? Don't shoot me. I'm only a piano player and the guy sitting in the old Western bars smiling with the bullets racing over his head, you know, don't shoot the messenger.
Speaker 2:But not everyone feels that way. Some people feel they just don't want bad news and then they think you have some whatever reason I don't know. They think something's going on behind the scenes of why you're telling them something that isn't right. And I do believe that the vast majority of attorneys that represent associations are interested in providing the best legal advice they can and are not looking to. Well, let's put it another way, we all know that boards don't want to spend money anyway, so they're always trying to avoid paying more fees. So association attorneys are always walking that balance between giving the best advice and not making it so hard for them that they push back. But it's not as if you're doing something wrong and getting people to understand that sometimes can be difficult.
Speaker 1:But terminating the condominium is not something that any volunteer board should be doing on their own, flying solo. So, and frankly, if you're getting a good enough deal, you factor that in. That always amazes me that you could be talking about a 50 or $100 million deal and they're concerned about a $12,000 legal fee.
Speaker 2:Right, but that goes on between building owners and buyers and sellers all the time. Some people, that's just their mentality and we all deal with it throughout our careers. But again, at the end of the day, I think the last piece of this, that is a simple thing. You have to be a psychologist, and all providers to boards are. It's a lot different dealing with one owner or a mega fund who buys value add deals and even though they have a corporate structure behind their fund, they're professionals. This is what they do. They buy properties, they solve problems.
Speaker 2:So a lot of what we do is always based on the psychology of how do you approach a board, how do you talk to them? How do you talk to owners? What are the challenges facing these owners? You have to think through all of it with a site and you do too when you're advising your board. You know some boards. You can one board president and their board. You can punch them right in the face with whatever news and the other ones you got to come through the back door and bring it in slowly, and that's part of the job.
Speaker 1:So I do think that I'm going to ask you if that is part of the. A big part of the challenges you face is just our society's general skepticism, paranoia. All of the issues we're dealing with on a macro level in society probably also present challenges for you at this level.
Speaker 2:Yeah, and I've always had that. You know, I started my career as a commercial mortgage investment banker and dealing with just people borrowing money and commercial deals. It's always to me that's always been there. You have to read the room, I guess, is the short way of saying it.
Speaker 1:So, John, I'm going to ask you to take out your crystal ball for me for a minute and tell me if you can forecast some trends.
Speaker 2:Well, I think the two trends that are absolutely going to be happening for the next few years is the fact that everyone beginning in 25 in the condo world in Florida is going to have to put the reserves in. According to the reserve studies, they get the SIRS, as we call it, and I think it's going to drive higher dues. I think inflation alone is driving it. There's just more costs increases, and I think I don't know about insurance, but I talk about being negative is, once you reach a level of insurance costs, those people glom onto it, those insurance companies, and I think they're going to do everything they can. They might cover people more, there might be more players, but I think they're going to do everything they can to keep that level high, because that's what's going to bring in new people into it.
Speaker 2:If the premiums drop, then you won't get new insurers, so there will be people jumping in because all of a sudden the numbers are there and I think that's going to drive up the price of owning a condominium. Interest rates being higher has certainly changed that and I think there's going to be a two or three-year period here where the projects that need to be terminated will eventually get there. And it's not all of them, and it's not the majority of them, but the ones that have just passed the point of no return in terms of their financial health and the challenges they face with projects and costs, and especially with higher investor concentrations. For sure, I think you're going to see a lot of movement there.
Speaker 1:I also think you're going to see I'm sorry, go ahead. Go ahead. No, don't cut that. You'll cut that, claude.
Speaker 2:I also think, like everything else, things correct themselves and people will get used to the new paradigm and the new projects will come along and the older ones will be in better shape and eventually everything adjusts to what the market is. But I always used to joke that I had an ex-brother-in-law and he borrowed my crystal ball and when he gave it back to me and it had a big crack in it. So every time someone asks me something I say I don't know. I don't even know if he gave me the right one back.
Speaker 1:But do you think multifamily buildings have a finite lifespan?
Speaker 2:Well, I think they absolutely have an interior. There's different lifespans to the components, so you break it down to the amenity components, the interior components and the buildings themselves, and they're not all on the same schedule To keep up. If you're a rental property to rent them, you have to, every whatever period of time you're going to have to do that value add interior, where you're changing out the cabinets and the flooring and the appliances. The buildings themselves I mean, look, nothing's built to stand forever and, especially in certain climate conditions, you're going to have wear and tear. The roofs have to be replaced, the exteriors have to be replaced and building products change over time.
Speaker 2:What was in vogue in the 90s is now something no one would ever do and there's all sorts of new building products coming out all the time to where they're going to come up with an exterior cladding that moisture cannot affect. Well, they thought that happened 25 years ago when they were doing this kind of paneling. So I think it's just forever changing. But they're not on the same schedules and the pool only lasts so long. The clubhouse the old weights that you had in a clubhouse well now, they used to have a big TV in the clubhouse. Now you need a flat screen and a sound system so they're smaller. But all that's always changing and if you don't keep up with it, your building keeps downgrading its class and the amount of money you can get as a rental, and it's hard to compete, because you're right.
Speaker 1:I remember when my mother-in-law moved in years ago to a building I'm not going to name the name, but it was amazing and it was right on the ocean in sunny aisles, gorgeous. Now you drive by, 25 years later, by that building and it looks sad. I mean, and there's so many other buildings that have all the bells and whistles that one was state-of-the-art 25 years ago. Today it's lacking so many of the amenities and it's hard for that building to compete. Still has the great view, but it doesn't have all the bells and whistles.
Speaker 2:Do you remember when people would advertise rental communities as condo quality finishes? I don't. So that was a big thing going into the late 90s and the early 2000s and it was sort of a race that continued on as so, okay, the condo building had to have X and the rental building got right up next to it. And then the condo building up their game and the rentals up their games. So we're now, you know, look, you build a rental tower, especially a tower you better have in unit laundry and granite countertops, and it became quartz and they can make stone. But the condo had to be better because it was something that someone was technically supposed to live in and never rent. So that's never gonna stop.
Speaker 2:And then architecture is always listen, architects are artists. Yeah, they're engineers in one sense they have to do build a sturdy building, but they're artists, you know, and they're always coming up with new looks. I mean, when you look at the buildings from the 60s with the sleeve air conditioners and they look like just really plain, but back then that was, you know, neo-gothic, classic, whatever they named it straight lines. And now you see their continually building on and on and on. So that'll always change and new is always better in our society.
Speaker 2:So to keep your older building up, you have to take care of it, because if it's an A location and you take care of it, you're still going to survive. If you're in an A location and you don't take care of your building, that's someone else's future tear down. If you're not in that area but you have a nice condo that's not on the water but it's in a great location and a great town, if you don't take care of it you're just losing value and your property becomes third rate, so to speak. So it never stops evolving, in my opinion, and there's always people thinking of what's next. What's the newest of many Now in multifamily gardens it's dog parks. They used to build tennis courts and we did a condo conversion that has a racquetball court in the clubhouse and nobody used that.
Speaker 1:No, that was. I used to be a member at the Chicago Racquet Club and it's funny being down here on the floor. I've always said, why aren't there indoor tennis courts? But of course there's no indoor tennis courts that I know of. And now pickleballs all the rage. But yeah, we've got some older communities with shuffleboard courts. Right, who plays shuffle?
Speaker 2:Yeah, now, people want, you know, people work out, you know, and it just isn't a side. It's not really a side, it's truth. When we built a project back when Mike and I were with American Vesco in 2004 in Chicago, it was 60 stories and we had to put a health club in and the architect designed, not a health club but, you know, a workout facility. And he designed this 4,000 square foot health club. And we sat down with him and went, no, no, no, no, no, no, size it down. And he's like, why? And we said it's an amenity you have to have in the building.
Speaker 2:But in an urban setting, 90% of the people that work out want to go to the East Bank Club If you remember that in Chicago or one of the big health clubs, you have to have it, because if you don't have it, then it looks bad. But at the same time, people would rather go to a health club than there's a special type of person that works out in their building and they're not, and that's not the same. But the majority of people want to go where it's social. So you have to think about the way. Every time you design a building and new amenities, you're trying to figure out how people live today Like. One of the big things is you have to have a better Uber pickup area. We used to be at a cab light in Chicago. Now you turn a cab light on, that thing can go for four hours. There's no cabs.
Speaker 1:That is very interesting. You're right, our needs change completely.
Speaker 2:And that's not going to stop. And every generation lives differently, and even older generations. New things that everyone can relate to is what they want. They want that ease of everything and people are thinking it's like apps on your phone. You can think of a great app and I don't like to poo poo anyone's ideas but someone people have spent hours in think tanks coming up with these apps and then you go and look for it oh, they have that already. I can get that. I think that's how developers are and the architects they work with. They're constantly thinking of the next thing and what people need and what's going to draw them to this property, why someone's going to pay more to either rent there or own there, and that's just never going to stop.
Speaker 1:A lot of the new construction down here in South Florida, john. It's almost like self-contained cities. You get everything delivered, all your entertainment. They even have nightclubs inside the building. They're really amazing. Look, I want to thank you for all your time today. You've given, I hope, our listeners who are potentially considering termination or they're being approached by developers some real food for thought. Where can people find you?
Speaker 2:Well, they can. I'm just going to give. They can call me at 312-890-3338. They can go to our website, which is coadvisorygroupcom, and they can email me at jcadden at coadvisorycom. Or they can call you and say what was that guy's name, caden? Oh, thanks.
Speaker 1:I missed having that 312 area code. John, thanks so much for joining us.
Speaker 2:Thank you, you're great.
Speaker 1:Thank you for joining us today. Don't forget to follow and rate us on your favorite podcast platform, or visit tickettotheboardcom for more ways to connect.