TIPS FOR EVALUATING YOUR LAND LEASE
Published February 3, 2021
A VERY BIG SURPRISE is coming, and it may not be the kind that you
like. Florida law allows developers to build condominiums and
cooperatives on leased land. In other words, there are many
condos/coops built on land that they don't own.
The major risks are that the lease may have requirements that the
land and all improvements (building) revert to and becomes owned by
the landowner. This is to mean that depending on what that 99-year
lease says, you may not own your unit after all. Furthermore, the
unit will be less marketable as the lease ends.
Sadly, not enough associations make this a priority to address a
real existential crisis at worst, and at best, a disastrous
financial obligation to the unit owners. A suggested plan of action
is first and foremost make this a priority for the association:
1. Create a committee that will only focus on the review of the land
lease and provide suggestions to the association board for
consideration and resolution. The predominant solution other than
negotiating a renewal of the lease is to purchase the land outright
for a mutually agreed on price. This may be a point of contention
for some associations since the land price may not be comparable to
market valuations for normal vacant land. The association needs to
keep in mind that it is buying the ability to eliminate a lease in
perpetuity and outright eliminating the risk that unit owner homes
will revert to the landowner. In other words, the association may
pay more than it may think as the landowner has very little
motivation to sell.
2. Engage your association attorney to conduct a very detailed
review and provide legal counsel on the major points of concern
i.e., expiration date, escalation clauses, valuation formulas,
duties of both parties, options to purchase, and most importantly
want happens the lease expires. Your association attorney should
feel comfortable with commercial real estate purchase/sale contract
negotiations and title/closing agent process.
3. Engage a qualified management professional that can conduct a
comprehensive evaluation of the operating budget, current
significant variances, liquidity which is your short-term ability to
meet current obligations, and solvency or the long-term ability to
meet long term obligations such as capital projects tied to special
assessments (more than one year) and reserves. This evaluation
should also include the impact of the purchase of the land.
4. If you do not have a website already, this is a point where you
can leverage this management tool to increase communication about
this very important issue, keep everyone informed on the progress,
post-meeting documents, and ensure that everyone is on the
essentially on the same page.
5. Whether there will be an increase in the association's regular
assessments depends A GREAT DEAL on the management evaluation. There
has to be a truly intimate understanding of the finances,
operational priorities, and ability to find the right financing
structure from a qualified banking institution.
Barring all these efforts, the association can hope that the Florida
legislature will create a mechanism of some sort that will allow an
orderly and fair process to deal with the leases' expiration and
protection of homes.