Condominium market expected to rebound early next year

You would have to be living in a '50s-style atomic bomb shelter not to be inundated with the fallout from the latest bombshell about plummeting financial markets, stagnating real estate values, and global gloom and doom. This will be the first place that you will actually read that the end is near, and not in the context of the end of the world.

However, we must continue to atone for our sins before we finally achieve absolution, predictably sometime in the spring of 2009, but I will profess to only know this about the condominium market.

First, the foreclosure epidemic is finally running its course and has bottomed with respect to the condominium and multi-housing market. How do we know this?

There were only so many subprime, under qualified buyers in the condominium feeding frenzy. Those folks properties have already been foreclosed and are well on their way to, first, bank ownership, and then, some third party who picks it up at 1992 prices.

The foreclosures in the beginning stages now are the "flippers" who bought properties with the intent of turning them over to the next sucker that came along, and got caught holding when the market collapsed. After, stalling long enough, they are reluctantly walking away from their equity, i.e. the initial down payment. Sadly, these folks - who do not engender too much sympathy - are being lumped together with those poor folks who lost their jobs, or have been hit hardest by the downturn and must sadly give up their homes before the federal bailout can help them.

That being said, how did the real estate and financial market crash impact owners and more importantly, how will it impact associations for the immediate future?

First, we are now seeing our first association bankruptcies. On Nov. 4, The Colony in Long Boat Key, Fla., announced it filed for Chapter 11. Notwithstanding a dispute between the condominium owners and the resort ownership, it bodes poorly for the availability of loans to associations that have been so prevalent for the last few years.

The major selling point for a bank to make a loan to an association in the past was they never went bad. However, as we know, these are not ordinary times.

When a lender looks at the financial picture of an association, regardless of the general picture of health, in the back of the underwriters mind will now be the fact that these entities, too, are no longer immune from default. Even though their collateral is worth millions and the amount of the loan requested is far less, bankers will now be compelled to look at even an association's request for a major repair loan with a "jaundiced eye," as my high school history teacher used to say.

Secondly, according to Crain's Chicago Business in an article published on Nov. 10, "developers sold the fewest condos in a three-month period since the aftermath of the Sept. 11 terrorist attacks."

With less than 1,000 units being sold thus far in 2008 in downtown Chicago, coupled with the fact that another 10,000 units are about to come on line in the next few months, one might say the market is oversaturated with product and the immediate future is bleak.

What some communities are doing, which is a start, is they are bulldozing partially finished projects that have sat unoccupied and unfinished for a number of months and the bank is just holding the property. This reduces the drain on city services.

Some communities are actually buying up some of the finished product, and either renting them out, or offering low interest loans to qualified low and medium income residents. This turns a near catastrophe into a win-win. Remember, for every unit that is no longer on the market, for what ever reason, increases the overall demand.

Third, developers with large numbers of unsold units are now in trouble with their construction lenders, contractors, subs and suppliers. This is alleviated somewhat by resourceful lenders who can negotiate with their lenders to buy more time and hang on, or to deal with those bargain scavengers who hope to sweep up the leftovers at near-theft prices. If they can just get those elusive, hard-to-find buyers to close.

Fourth, the developers not paying their contractors and subs find themselves in a stand off with them and the lenders. If no one makes a move for a long enough period of time, perhaps it will resolve itself, like the elevator that kicks on after shutting down for four hours.

The remedy for a contractor who is not paid, is the mechanics lien, which is recorded against the property and can be foreclosed. Here's the dilemma the contractors face; if the developer cannot sell units in this market, and if the lender takes the building back through foreclosure and it cannot unload the units, why would the contractor foreclose and then get stuck with the same property that neither the lender nor the developer, who are much better equipped, can sell.

So, the standoff continues.

The question remains, what happens when the gears begin to grind again? Who will get paid, and what? How will title companies deal with expired liens where the contractor still has a viable breach of contract claim? Each problem property will probably have to deal with this situation on a case-by-case basis.

In the meantime, high rises with large numbers of unsold units, or empty units, are standing-still time bombs. So long as enough cash is coming in from owners and/or developers to cover the monthly expenses, they will survive. If the market begins to loosen, the risk of default will drop. However, if the developer's unsold units are foreclosed, the association will have a multiple-unit owner that does not pay their assessments, typically, until they sell their units. A board may find that it must become more aggressive in dealing with the bank/owner in order to keep the hallways clean and the power on. What has been acceptable in the past, may not be when the resident owners do not pay in enough to cover the insurance premium.

However, as each little move forward takes place as previously mentioned, the odds improve that a building will be able to make it, owners will not have to go into panic mode and lenders will have one less piece of real property on the books. If the lenders and, where applicable, their clients, the developers, will sit down with the association that was to be created in the wake of all this, it will be one less piece of property on the front page of the financial publications.

• Condo talk appears alternate Saturdays in New Homes. Jordan Shifrin is an attorney with Kovitz Shifrin Nesbit in Buffalo Grove. Send questions for the column to him at jshifrin@ksnlaw.com. This column is not a substitute for consultation with legal counsel.