What happens if a big redeveloper wants to buy and redevelop my condo building?

In My Humble Opinion
1

My wife and I have owned a lovely 2 BR condo in the DC area for about 6 years. The building is about 30 years old, and not very big (single digit stories in height, around a hundred units in total, I think). Around us, many older buildings have been knocked down and redeveloped into ~20 story condo buildings with several hundred units.

We like our place, but with the right offer I’m sure we’d consider selling.

What happens to unit owners like us if some big developer wants to do the same to our building? Do potential redevelopers have to make offers to each unit owner? Would we be able to trade our old unit for a brand new one in the new building without a new mortgage? What happens if some owners want to sell but others do not?

I’m sure some of this requires knowledge of the specifics of my particular building (i.e. what the various owners’ agreements and associations of the building require), but does anyone have experience with anything like this? Just looking around the neighborhood, this seems pretty likely in the near or medium-term.

2

Depends on the jurisdiction and the bylaws of the condo association. I have no idea about DC, but New York requires 80 percent of the owners to agree to sell and the remaining 20 percent have to sell as well. Your particular association might have less stringent rules or DC might permit unanimous only purchases.

3

I’m in Arlington, VA, not DC.

4

For personal reasons, I just looked into this and have some idea how it works. It varies from state to state and your condo association’s governing documents might change this so your mileage may vary.

Generally, the developer must get the votes of a majority or a supermajority (75-80% is common) of the units’ owners to agree to terminate the condo association and sell the property. (From what I can tell, Virginia’s Condo Law requires at least 80% of owners to approve the sale, or more if the condo instruments, like the by-laws, require a larger number).

The developer can get the votes by buying up units on the open market, negotiating through the condo association to buy all the units simultaneously (subject to the approval of the requisite number of unit owners), or it can make offers to individual unit owners as it sees fit. It can also use a mix of these strategies in the same deal. It might start by quietly buying up units sold on the public market. Then it might make private offers to the units owned by investors. Finally, it might make offers to select other owner/residents. Thus, once the developer has a good chunk of units, it needs a proportionally smaller number of the remaining owners to force the sale. For example, if there are 20 units in the building, the developer needs 80% of unit owners to agree, and the developer already owns 12 units, it needs only four of the remaining eight owners to agree to the sale.

Developers can also buy proxy rights without buying the units themselves. For example, your neighbor might sell the developer an option to purchase his unit and the rights for the developer to vote your neighbor’s proxy approving the sale. So, the developer can quietly start acquiring the votes it needs to achieve the termination of the condo without generating a lot of public sales and records.

Even requiring a supermajority to approve the sale doesn’t protect reluctant sellers as much as you might imagine. Once the developer has more than 50% of the units (or even just 50% of the proxies necessary to elect the board of directors and set policy), the developer can start to play hardball. It can do things like (subject to the condo association instruments) nominate all the directors to the board, change the association rules in inconvenient ways - imposing special assessments for repairs and renovations, closing the pool, closing parking lots, prohibiting plants or furniture on balconies - and levying fines to owners who fail to comply. So, once the developer has control of over 50% of the units, the condo might become a much less pleasant and more expensive place to live for the holdouts.

Furthermore, once more than 50% of the units are investor-owned, it will be very hard for any would-be buyers to get a conventional mortgage on the property, so your pool of alternative buyers will likely get limited to cash buyers who are fewer and farther between. Then, the developer may have the holdouts over a barrel and its offers to them might start dropping.

Finally, a municipality can seize the property by eminent domain and then sell the property to the developer. The municipality must pay every owner the fair market value of their property. I have no idea if this is happening where you live but, if so, you would probably read about it in the local papers. It’s newsworthy when a city starts kicking its residents out of their homes so it doesn’t happen too often.

Not in my state. In Virginia, the developers can negotiate with the homeowners’ association subject to the approval of 80% of the condo owners. The homeowners’ association has a fiduciary duty to its members, so even if the developer has taken control of the association, it can’t entirely screw the minority members. The minority members can be in a precarious position however.

Some condo associations (and some states) require 100% of condo owners to approve any sale. This suggests that the developer will have to make offers to everyone but I believe such places are in the minority. It’s hard to redevelop condos in places that require unanimous consent because a single holdout can try to extract so much money from the developer that it’s no longer worth pursuing the project and the developer just walks away.

If your current unit has no mortgage, there is no reason you and developer couldn’t agree to this but it seems unlikely either of you would really want to. Usually the developer builds more expensive condos than the ones it replaces so trading your old condo for a new one might not be in the developers’ interest. He also doesn’t want to make promises so early in the development about things like the size and layout of units, the amenities, or the prices, so the developer is unlikely to make any guarantees to you about the condo you would be getting. It’s probably not in your interest either because you would be giving up your condo for the unsecured promise of the developer to give you a new condo. If the project goes bust, you might lose everything. Take money instead.

It’s pretty common for developers to offer slight discounts to former residents. Be prepared to wait a few years for the project to finish, however, and don’t expect a super-duper deal.

It will be effectively impossible to trade the old condo for the new one while keeping your mortgage. The developer will need clean title to the property, which it won’t get if your mortgage is still on the property. Your mortgage lender will also demand to be repaid when you sell the unit to the developer because it will otherwise have no collateral. There is no simple way for you to hold onto the mortgage and attach it to a new property.*

*Okay, if you throw enough money at it to pay lawyers, negotiate security agreements, and make concessions to the people affected, perhaps it could be done, subject to state law, but I’m not sure and I’m not doing the research. Perhaps you could: (1) get your lender to agree to not call the mortgage upon your sale and instead accept a priority lien on the developer’s property; (2) get the developer to agree to buy your property encumbered by your mortgage; (3) get the developer to accept that your mortgage lender, as the first lien holder, will now impose a bunch of weird and perhaps uneconomical conditions on redeveloping the property (e.g., what does your mortgage say about what happens if your condo is destroyed and you choose to rebuild? Will those conditions apply to the developer now?); (4) get the developer to agree to secure a higher-cost second mortgage on the condo property just to accommodate your desire to keep your first mortgage; and (5) get the project’s investors to accept that they will get one fewer unit to sell. How much would all this cost? I expect a few hundred thousand dollars might pay for the legal research, title research, and concessions necessary to make everyone involved play along. Also, I think this would eliminate the deductibility of your mortgage interest since the mortgage would no longer be on a home, but factor in some more money for an accountant to figure that out for you. How badly do you want to keep your low-interest rate mortgage?

5

Thanks so much for the lengthy answer! It sounds like unit owners don’t have a ton of power if a big developer comes. So how much would they be likely to offer? Fair market value, or maybe more? Or maybe less?

6

Before they can do unkind things to induce sales, they need to own a large number of units. So first they need to buy these on the open market. Presumably, the least they will have to pay is fair market value. Probably a little more.

7

The important thing to remember is that when you sign an HOA contract, you are voluntarily giving up an incredibly large portion of your rights to a group of people who may or may not have your best interests at heart and you may have little if any power over them. HOAs can be very unkind things. The HOA if it wants to play hardball can make laws that are nearly impossible to follow (depending upon the state, you can sue if you feel the laws are ‘unreasonable’, but you’re leaving that up to a judge and if it’s a developer with their own team of lawyers, expect to lose that fight,) fine you egregious amounts (depending upon your bylaws. Some HOAs have caps on amounts per violation, others do not. Might want to read your deed) and when you lack the ability to pay, put a lien on your property and eventually foreclose on you.

You have to remember that the purpose of HOAs was largely to discriminate and enforce housing segregation. Even after 1968, HOAs were still used as a primary tool to keep out minorities from predominantly white neighborhoods. It has largely shifted from ‘minorities’ to ‘undesirables - who often correlate with minorities, but pretty much anyone we don’t like.’ As such, particularly post-1968, their covenants were drawn up to get extremely close to the anti-discrimination laws without going over. So almost all of them have a ‘No criminal record’ statute that typically includes simply an arrest since they know so many black men have at least one run in with the law. They also have all sorts of crazy powers that they can ‘universally’ enforce that fall on just one person’s head. You paint your door? “All changes to the property must be approved by the HOA, this wasn’t approved, 250 dollar a day fine until it is corrected.” Left your Christmas tree up until New Years? “All visible holiday decorations must be removed within one week of the end of the holiday. 250 a day until the tree comes down.” Christmas lights wrapped around your balcony rail? “All decorations must not project beyond the edge of the balcony rail. 250 dollars a day until fixed.” It’s not hard to see how HOA fines can spiral out of control to the point that you’re unable to pay them and when that happens, lien on the property and foreclosure. An HOA can make your life a living Hell if you become someone that they don’t want. This might be all well and good for you if you’re not an ‘undesirable,’ but if you are, then you’re screwed.

8

I went through this exact thing a few years ago. I owned one unit in a six-unit building. When I bought it, every unit was owner-occupied. But it was an up and coming neighborhood and nobody wanted to sell, so when each owner eventually moved on to bigger dwellings, they would hang on and rent it out. Twenty five years later, it was 0% owner occupied. We realized none of us would ever be able to sell our units if we wanted to. And the place was falling apart!

By then the land was worth much more than the building. A developer came along and offered the HOA a deal to buy the whole place. I was the only one who voted “no” (since I had bought my unit so long ago it was making a huge profit), but that wasn’t enough to kill the deal, per our bylaws.

The developer researched some comps, made us all very fair market value offers, and we closed in a couple weeks. I rolled my profits into another investment unit a few blocks away so I wouldn’t have to pay any capital gains taxes. It was pretty painless.