Condominium Wave On The Way
Coming Soon: A Wave of Condominium Conversions
By: Michael J. Zenner, Esq.
During the Great Recession and its immediate aftermath, the construction of both apartment buildings and condominiums came to a virtual standstill. With the economy now on the mend, cranes once again dot the skyline of Atlanta. Most of the new multifamily residential buildings currently under construction are being built as apartments. There are several reasons for this. Many developers who were burned by the collapse of the condominium real estate market are still reluctant to reenter it. For the same reason, many lenders are currently unwilling to finance condominium construction. Rents in and around Atlanta are historically high and rising. All of these factors have contributed to a boom in the construction of apartments. At the same time, real estate agents report a shortage of new condominium inventory in many areas of Atlanta. We believe these trends will result in a new wave of condominium conversions over the next few years.
Condominium conversions are governed by Section 44-3-87 of the Georgia Condominium Act (the “Conversion Statute”). The Conversion Statute has two distinct purposes. The first purpose is to protect existing tenants of buildings undergoing conversion to condominium use. This is accomplished by requiring that tenants be given adequate prior notice of the conversion and an opportunity to purchase their unit should they wish to do so. The second purpose is to protect purchasers of units in the conversion condominium by requiring disclosures as to the condition of buildings which, in some cases, may have been constructed years earlier.
The Conversion Statute requires that the “declarant” or developer of a conversion condominium deliver notice of the conversion to each tenant in possession of a unit which is subject to conversion. The notice must be delivered at least one hundred twenty (120) days before the developer will require the tenant to vacate the unit. The notice must set forth generally the rights of tenants under the conversion statute. The tenant may not be required by the developer to vacate the unit at any time during this one hundred twenty (120) day period except by reason of nonpayment of rent, waste, or conduct which disturbs the peaceful enjoyment of the premises by other tenants. Any notice which, under the terms of the existing tenancy, must be given to prevent the automatic renewal or extension of the term of the lease may be given. However, no existing lease may be terminated by the developer in violation of its terms. As a practical matter this means that each tenant must be allowed to remain in his or her unit until the later of (i) one hundred twenty (120) days after the date the notice of conversion is sent or (ii) the end of the tenant’s existing lease.
The Conversion Statute also provides that within sixty (60) days after delivery of the notice of conversion, the developer must deliver to the tenant an offer to convey the unit to the tenant at a specified price and on specified terms. If the tenant fails to delivery acceptance of the offer to the developer within sixty (60) days after the date of delivery of the offer, the developer may offer to convey to the unit to a third party. However, during the one hundred twenty (120) days following the date on which the offer to convey is delivered to the tenant, the developer may not offer to convey the unit to a third party at a price or on terms more favorable to the offeree than the price or terms offered to the tenant, without first delivering the same offer to the tenant, who, under the statute, has at least ten (10) days within which to deliver acceptance of the offer to the developer.
In order to protect purchasers of units in a condominium conversion, the Conversion Statute and Section 44-3-111 of the Condominium Act require that the developer include the following as part of the Condominium Disclosure Package provided to tenants and other prospective purchasers: (a) a statement by the developer, based on a report prepared by an independent, registered architect or engineer, describing the present condition of all structural components and mechanical and electrical systems, excluding fixtures and appliances within the units, material to the use and enjoyment of the condominium; (b) a statement by the developer of the expected useful life of each item reported on or a statement that no representations are made in that required; and (c) a list of any outstanding notices of uncured violations of building code or other county or municipal regulations together with the estimated cost of curing those violations.
The foregoing statement is important from the standpoint of both the developer and the prospective purchaser. It is crucial that the developer retain an independent registered architect or engineer early in the conversion process. The architect or engineer should inspect the project and identify potential problems which will need to be disclosed. The developer may wish to address many of these problems prior to preparation of the final report by the architect/engineer and the corresponding statement by the developer as to the unit that is being purchased. Obviously, the developer’s statement contains information that is important to a prospective purchaser in deciding whether or not to purchase the unit. It is also an important tool by which the developer may limit its liability to purchasers and to the condominium association. It is important to understand that the developer, who most often has not constructed the building, is not required to restore the building to any particular condition. He is simply required to describe the present condition of all structural components and mechanical and electrical systems and to properly design and construct any improvements he chooses to make. So long as existing problems are properly identified by the developer, he is under no obligation to correct them. However, failure to identify problems could lead to a possible claim against the developer, based on misrepresentation and/or fraudulent concealment.
An understanding of the conversion process outlined above will be critical to both purchasers and developers as the upcoming wave of condominium conversions becomes a reality.