Condo Conversion Problems

New condos look shiny and bright, but they often come with challenges. How does a board separate building challenges from individual unit-owner challenges?

Unit-owner challenges are typically punch-list-related items, like problems with the interior moldings, appliances and bathroom fixtures, which boards shouldn’t get involved in. That list is usually generated pre-closing between the unit-owner and sponsor, so any problems have to be worked out between them.

And when would a board get involved?

Typically, when there’s a buildingwide problem. I represent a condo, a conversion in a rehabilitated building, where the initial offering plan said it was completely asbestos-free. During the marketing process, but after a lot of closings had already taken place, it was discovered that there was in fact contained, encapsulated asbestos under the floors. The sponsor did the right thing and disclosed that condition in an amendment to the offering plan.

But what about those people who bought in before the problem was discovered. Weren’t they alarmed? What did they do?

In this case, the asbestos wasn’t airborne, and there was never a health risk, but needless to say there was widespread concern among the unit-owners. By this point the sponsor had relinquished control of the board, so the owner-controlled board had to decide whether the unit-owners should have to deal with this on their own. There was no problem with respect to the common elements, since the condition existed under the floors only within some of the units. So every dime that the board would spend on the problem would have to come from non-affected owners as well as affected ones.

What did the board decide?

Ultimately, they chose to try to negotiate a resolution with the sponsor rather than have the unit-owners bring individual lawsuits or file complaints with the attorney general's office. In other words, they really stepped up.

Was there a happy ending?

After months and months of negotiations, we wound up with a menu of options for affected unit owners. One was a buyback, where the sponsor offered to buy back any affected apartment for the original sale price plus the transactional costs. A lot of people took advantage of that, since there was a little softening of the market at the time and there was money to be made.

 What else was on the menu?

The second option was a cash payment, based on the square footage of the apartment together with what abatement expenses would be, in exchange for a release. The third, which I thought was the most interesting one, was a bigger cash payment in exchange for a release, but it would be deferred until the unit-owner or their successor did an alteration that would require the removal of the floor.

So for other boards, in condo conversions in particular, what would your advice be?

The takeaway is that if you have a sponsor who has acknowledged that something didn't go the way it was supposed to go, you can avoid having multiple lawsuits – and a whole lot of bad press that comes with that – by exploring the possibility of a global settlement. It’s a win/win.