What to Do When a Condo Project Goes South

By Hallem, Timi Anyon | American Banker, April 28, 2009 | Go to article overview
Save to active project

What to Do When a Condo Project Goes South

Hallem, Timi Anyon, American Banker

Byline: Timi Anyon Hallem

In determining whether to make a loan for the construction of a condominium development, a lender will typically look at pro formas, market studies and developer track records. But if a loan goes into default, a lender must quickly become familiar with everything from internal condo rules and regulations and association by-laws to state and federal regulations governing the sale or reuse of failed projects.

The good news is that the collateral security is a real asset: real estate, which, for the right price, can be used by someone for something. The bad news is that those documents can present many hurdles that may limit the value of that collateral.

Before evaluating their options, lenders need to understand that condo rules can vary from state to state. The Department of Housing and Urban Development, the Federal Housing Administration, Fannie Mae and Freddie Mac each have their own rules governing whether they will buy or insure condominium mortgages and, in the case of HUD, whether a separate filing is required.

In addition to all the statutory requirements, every condo project is governed by documents covering how the project is managed and what the owners, occupants, association and developer can do in or to their units and in common areas. These documents may create a lender's biggest headaches.

Consider Project X, a high-rise building that was completed and partially sold out when the lender foreclosed. Since the lender did not control the homeowners association (because too many units had been sold), it could not amend the documents to give itself needed rights. Therefore, it had no extraordinary voting rights, no control of the association, no right to a model unit, no right to use a unit as a sales office and no right to amend the condo documents.

Since the project could not be marketed without an on-site office and model, the lender had to pay the homeowners association to "purchase" the rights to an on-site office, model unit and big signs in front of the project.

Moreover, the lender ended up having to fund obligations that belonged to the developer, such as a new HVAC system that cost hundreds of thousands of dollars. Without the new system, units were not saleable.

In Project Y, another foreclosed property, the lender spent hundred of thousands of dollars trying to repair a water problem before concluding the problem could not be totally fixed. The lender finally made the repairs it could make and then sold the units at a discount. The sale terms required every buyer to sign a disclosure acknowledgment and a waiver of liability and promise not to sue the lender.

In Project Z, a condo hotel project that was partially built (for over $100 million), the lender hired a consultant who concluded that the project did not work as a hotel, could not be used for residential housing, needed $30 million of work, and would have a value of $40 million once it was completed.

So far the lender has not foreclosed, but every day the partially completed project deteriorates a little more.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

What to Do When a Condo Project Goes South


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?