Daily Business Review
June 30, 2005
Mixed-Use Unit Owners In For Surprise
By Terry Sheridan
Condo buyers who've been frustrated by the power trips of board members and managers may want to avoid buying in increasingly popular mixed-use or hotel-condo projects.
Developers and hotel operators could make heavy-handed boards seem like amateurs.
As thousands of residential units are built within nontraditional condo projects, a new issue is looming: How much influence should condo owners have in the management of the overall property?
It's tough to sell a hotel operator, for example, on the notion that Mr. and Mrs. Smith in Unit 1602 can help decide what the hotel lobby should look like or whether the pool chairs need to be repaired and replaced, said attorney Gary Saul of Greenberg Traurig in Miami.
That's why owners of residential units won't have the kind of control in a building with hotel, office or retail space that they would have in a completely residential project.
"There's an issue on the horizon that we are monitoring, and that is whether hotel-condos are residential or commercial enterprises, and what rights the unit owners have," said Karl Scheuerman, chief of arbitration for the state Division of Land Sales, Condominiums and Mobile Homes, which oversees condos for the state Department of Business and Professional Regulation.
In mixed-use projects residential unit owners generally will have less control, or their units will be kept legally separate from the commercial uses.
They can do that by structuring the commercial uses separately from the residential condos, he said. "You have layers and layers of different regulations that apply."
Attorney Donna Berger at Becker & Poliakoff in Hollywood questions how much residential condo owners actually know about what they are buying.
"Do the condo unit owners realize they won't have the same access to the books and records in running their community that regular condo owners have?" Berger asked. "And I don't believe that the hotel management contracts for the hotel are subject to cancellation by the unit owners and typically long-term contracts can be canceled, so the unit owners are stuck with the hotel management."
Saul, who represents developers, fields calls from sales representatives at projects who report that would-be buyers get upset about the lack of control they have in the condo documents.
For buyers who demand that control, then a condo-hotel or mixed-use condo, "isn't the right building for you," Saul said.
More than ever, condo buyers must read the condo documents before buying, Berger advised.
The concerns are emerging for several reasons, mainly because more of the hybrid units are being built than ever. Attorneys, too, are raising questions. And newly appointed state condo ombudsman Virgil Rizzo in Fort Lauderdale said he has been getting more inquiries about such units.
Developers have embraced hotel-condos for decades, largely because including condos as part of a hotel project makes it easier to obtain financing, provides a revenue source to help repay construction loans and is a marketing tool.
The latest rash of questions isn't the first time that hybrid condo units have been questioned.
The Securities and Exchange Commission issued guidelines decades ago for the sale and marketing of condos in hotel projects, to ensure that they are not being sold as unregistered securities.
Basically, if buyers think they are going to make a profit on an investment, such as profiting from a shared rental pool of units, it's likely the unit would be considered a security, which would come under regulatory scrutiny.
To avoid that scrutiny, and to avoid scaring away purchasers, many developers don't sell the units as securities, said hotel broker and hospitality consultant Guy Trusty of Lodging and Hospitality Realty Inc. in Coral Gables.
On the other hand, mixed-use projects in South Florida are relatively new. State condo law has addressed them only since the mid-1990s.
South Florida's scarcity of vacant land has caused many sites to be redeveloped, often into a hybrid of shops, offices and residences.
Condo buyers increasingly are finding a mix of legally different condos in the same building. The lower floors could be retail-condos or office-condos. The upper floors could be residential condos. Sometimes, those are structured as two different entities, commercial and residential condos, in the same building.
Or, they may be joined through a master covenant or operating agreement, Saul said.
To complicate matters, state law leaves gaps in condo oversight.
Commercial condos come under the same state law that governs residential condos, but the state has no oversight or enforcement authority over commercial condos.
And projects that may appear identical often can be far apart in their legal structure.
Meg Shannon, spokeswoman for the state Department of Business and Professional Regulation, which oversees condo regulation, provides this example:
Take two 100-unit buildings, each with only 10 units that are residential. The remaining 90 units in each building are commercial condos.
If the 10 units in one of the buildings are designated for full-time permanent residents, that would be considered a mixed-use condo and the state would have enforcement authority according to state condo law, Shannon said in an e-mail.
But if the 10 units in the other building are for transient residents, owners may only live there one month a year and must rent it out the rest of the year, those would be commercial condos, and the state may not have oversight depending on how the condos were set up.
Saul doesn't agree.
"They're taking the position that those transient units are commercial but they go back and forth on that," he said.
"From a conservative viewpoint, if someone can sleep in their unit, I generally consider it residential, though I may not have to."
By submitting condo documents for state review that make those units residential, the structure would face more scrutiny.
"But then they have written back, saying that the units are commercial, and I say, "Thank you very much," " he said.
Overall, consultant Trusty,who lives in a hotel-condo in Miami that he declined to identify, said that buyers must carefully evaluate what they are purchasing, and understand the differences.
In his case, Trusty's hotel-condo-retail home is a mixed-use project set up as three separate condos, he said.
The common elements, such as the pool and elevators, are held in a separate entity by all three associations.
"Do I have a concern about whether or not the common-area money is being wisely spent and do I know what they are doing with it?" he postulated. "I'm OK with it. But is there room for abuse? Yes."
The joint entity that controls the common elements, for example, has two members each from the three condo associations, even though the residential condo units far outnumber the hotel and retail units.
"So if we have our retail and hotel components who want to have a wonderful pool area, they could vote for that and have a disproportionate influence over the [residential units] two members," he said. "If we have 70 percent of this project contained in residential condos, you'd think we'd have 70 percent of the say-so, but we don't."
Still, Trusty isn't griping, because he knew what he was buying into.
"Yes, I think there could be more efficient use and more control," he said. "We'd spend less on the things that benefit the hotel and retail components. But that's how it was set up."
But the project's documents made it clear how the arrangement was structured, he said.
"We knew what we were buying and signed, and we're happy," he said.