Broken Condos

Some note holders who foreclose on broken condo projects are attempting to maximize their recovery by completing the project and either selling the individual units to the public or the entire project in bulk to someone who will then retail the units themselves. This article discusses what is required of the receiver to complete the project and the pros and cons of a bulk sale versus a sale by the note holder of individual units. For purposes of discussion, I am assuming that the building structure is complete, but the interiors of the units are otherwise unfinished.

Before a decision to complete a broken condo project can be made, it helps if the borrower has abandoned it, with little likelihood of redemption. In today's economic environment, most developers have absolutely no equity and no incentive to redeem the debt and regain control of the project. With the borrower out of the picture, the situation is much less complicated.

As with any action requested of a receiver, it is imperative to confirm that the order appointing the receiver includes the authority to hire consultants, appraisers and contractors as well as the authority to sell the property. Assuming the receiver has the appropriate authority, the first order of business is to determine if he can rely on any previously issued regulatory approvals (in California, that would be a final subdivision report or white paper). Some states permit the note holder to step into the shoes of the original developer in connection with such approvals (including building permits and the like), while other states require that the note holder be a licensed and regulated financial institution, rather than a private non institutional note holder. In the case of the latter, the receiver must secure fresh approvals. If no additional approvals are required, the receiver can then hire a construction consultant or estimator to determine the completion cost. Once the cost parameters have been established, it is appropriate for the receiver to hire the contractor.

Selling the completed project to someone who intends to market individual units is the easiest and least cumbersome approach. However, the extent of the financial recovery must be balanced against the potential liability that attaches to the seller of individual units. In California, strict liability for construction defects follows for a lO-year period whoever is designated the builder. Although there is no case law addressing the issue,

it is generally assumed that builder liability will not attach to a note holder who sells the project in bulk through a receiver, particularly if there are some portions of the project to be completed (e.g., installation of appliances, etc.) so that the actual final completion is done by the bulk buyer, leaving it as the "builder."

Conversely, if on behalf of the note holder the receiver sells individual units to the public, there is then a greater likelihood that strict liability for construction defects will attach. However, many states, including California, have statutes designed to protect a foreclosing note holder from builder liability, but only if the note holder has done nothing more than preserve and protect its collateral. Unfortunately, there is little or no case law analyzing the issue.

Regardless of the approach taken, it is important for the receiver to establish pricing based on competent appraisals. Depending on the specific facts, it is usually prudent to seek court approval of the proposed sale price or prices. In this manner, the receiver protects himself from any potential claims that the property was sold too cheaply.Clearly, maximizing recovery in connection with a broken condo project is fraught with pitfalls. However, with an experienced receiver, these dangers can be avoided.

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