As residential real estate development continues to improve post-recession, real estate developers and investors are increasingly acquiring and developing property within partially developed residential communities which are governed by recorded declarations of restrictive covenants and homeowners associations. There are significant opportunities for the stealth hearted and real estate entrepreneur in the current real estate market to obtain properties that were once deemed unobtainable. As real estate investors and professionals continue to evaluate potential acquisitions of land within residential communities, they should be wary that potential pitfalls may lurk in what they may view as routine association documents applicable to properties within communities governed by existing homeowners associations. While these documents generally provide real estate developers with certain rights and the ability to control the association for a certain time period, it is important to be cognizant that these documents, and Chapter 720 of the Florida Statutes, also impose obligations as well. Consequently, association documents should be reviewed carefully as part of the due diligence process and several issues should be fully examined in order to determine the full ramifications of such acquisitions. A potential buyer of such properties must understand what it is buying, including any trouble that it may be buying. Although such properties may present attractive real estate acquisition opportunities, buyers must be prudent and there are several legal as well as practical considerations that have to be examined.
Among many due diligence issues that a buyer should consider when acquiring such properties, the buyer’s due diligence should include the review of property level documents, land use, and development issues. Applicable property level documents such as homeowners association documents should be reviewed. In addition, zoning, entitlements, compliance with law, and other normal items of property due diligence should be performed. Related to property level due diligence, development issues should be fully explored. Often times, such property is marketed as “fully approved” which should lead to the first question of “approved for what?” Assuming that the anticipated use is the same or similar to the approved use, it must be determined whether the approvals, permits and licenses that have been obtained are transferable and assignable, in whole or in part, to the buyer as a successor developer (sometimes referred to herein as the “Developer”) and, if so, what potential costs or liabilities may be associated with the transfer and assignment of the approvals.
An important aspect of acquiring such properties is due diligence relating to the homeowners association documents and subsequent developer issues. A buyer should consider whether it wants to succeed to any special rights of the original developer (i.e. developer rights) and analyze whether under state law it will succeed to any obligations or liabilities of the original developer. In conducting such an analysis, the association documents should be thoroughly reviewed to ascertain if certain rights and exemptions that are advantageous to a developer are provided in the documents, including provisions regarding:
- Control of the Association
- Amendments to Homeowners Association Documents
- Architectural Review and Exemptions from Such Requirements
- Assessments and Exemptions from Assessments for a Subsequent Developer
- Status of Current Sales and Timing for Turnover of Homeowners Association
- Rights to Engage in Sales Activities and Maintain a Sales Office and Models
- Rental and Re-Sale Provisions
- Successor Developer Issues.
- Current Ownership of the Common Areas
While the foregoing list is not an exclusive list of items to be reviewed, and due diligence is dependent upon the particular seller and property, this list is representative of significant aspects of the association documents which should be considered in connection with a prospective purchase. Each set of association documents can vary greatly. Consequently, they should be properly analyzed by legal advisers to evaluate, among other things (i) whether they contain the appropriate developer rights including those rights identified above, (ii) whether there are any potential issues with the developer obligations set forth therein or imposed by Florida Statutes, (iii) whether any modifications are necessary and (iv) how any such modifications can be effectuated.