When the Distressed Condominium Relief Act (DCRA) was enacted in 2010 as part of the Florida Legislature's Condominium Act, it was done with intent to save countless developments across the state.
“Following the recession, numerous condominium projects had failed or were in the process of failing as a result of an inability to find purchasers for this inventory of units,” said Alex Dobrev, shareholder in the Distressed Real Estate Solutions Group at Lowndes, Drostick, Doster, Kantor & Reed, P.A. “(The DCRA) essentially encouraged investors to purchase, in bulk, condominium units in failing or distressed projects by alleviating concerns about potential liability for those buyers.”
Crafted as a temporary way to give the shaky economy time to rebound and investors a safe space in which to absorb unsold units in bulk without incurring developer liability, the DCRA has been extended three times since by legislators. But it's now set to expire on July 1.
Dobrev, who also serves as vice-chair of the Condominium & Planned Development Committee of The Florida Bar, questions whether the shield should expire at all.
“There has been a battle between different interest groups,” he said. “Those who oppose the law feel like somebody needs to be responsible and on the hook at all times … but I think the vast majority of people would absolutely agree that the DCRA has been a good thing that has really made it possible for these condo projects to survive.”
Luke Wickham, senior vice president at CBRE in Orlando, says the DCRA brought sorely needed liquidity to the market.
“It was a brilliant move by the State of Florida when things were really bad," he said. "There was blood in the streets in 2010 and 2011 when they put it in place. Without these bulk buyers, a lot of those HOAs would have went bankrupt. The DCRA saved a lot of people’s investments. It was very helpful.”
Wickham cites properties including Mission Club on International Drive and Legacy Parc in Kissimmee as having been helped by the DCRA. And though these days transactions served by the protection are fewer, no one has a crystal ball.
“Because this is such a high-growth state and there’s so much migration, sometimes the supply and demand get out of whack – and so then you overbuild and this law definitely helps,” Wickham said.
Pre-DCRA, bulk purchasers who had no connection to the property’s construction – even those buying units in foreclosure – faced the possibility of being deemed a developer due to a broad definition of the term within the Condominium Act.
“Under that broad definition, all of the obligations and liabilities that developers are typically held responsible for could apply to the buyer … including issues with construction, warranties, defects – things they likely would have no knowledge of," Dobrev said. "And in addition to the more direct monetary effects of imputed warranties and construction defects, it can also have a material affect limiting bulk owners’ ability to exercise its voting rights, which wouldn’t apply to any other unit owner.”
Lifting the DCRA protections, he says, will likely have a highly negative effect on the market, as lenders will see increased and unquantifiable risks. Dobrev points to the cyclical market and says there’s no need to mess with something that works.
“We know from experience that there’s going to be another boom and bust," he said. "These tools should be there. You shouldn’t have to wait for the legislature to put another floor under the market.”
Keeping track of what’s happening in Tallahassee, he says, and staying connected, is essential. Two pieces of legislation -- House Bill 841 and Senate Bill 1274 (Community Associations) -- are currently making their way through the legislature.
These will help keep these protections on the books, according to Dobrev. The plaintiff’s bar, he notes, “those who make a living filing construction defects and warranty type litigation," have traditionally opposed it.
“Contact your representatives,” Dobrev said. “Encourage them to support these, because it’s important for the market.”