It has become increasingly common for Hotels and Motels along the Jersey Shore to undergo the process of converting to condominiums. Such conversions offer prospective buyers a reasonably priced alternative to a multi-million-dollar single family/duplex style vacation homes. Conversions also offer a means of addressing aging Hotels/Motels, which would otherwise become eye-sores and turn off seasonal Shore-goers. With condominium purchases, however, there comes responsibilities that one would not otherwise have as a weekly or monthly renter or owner of a second home. A critical responsibility relates to management of the Condominium. Because the ownership is one shared with other owners in the condominium development, there must be a structure in place to manage the Condominium. A condominium is managed by its Board, whose members are elected by the owners. The owners are not the initial members of the Board, however. The Board is initially controlled by the entity which converted the Condominium, known as the Developer. There is a period during which the Developer will transition control of the Board to the owners, which occurs in staging as more units are sold. New Jersey statutes detail the order in which the transition is to occur. At some point the Board will be fully controlled by the owners and the Developer will be fully removed from the management of the Condominium. If a newly elected Board does not undertake its due diligence, it could find that there are problems with the Condominium not disclosed by the Developer. Such problems could range from construction defects to under-capitalization for repairs and renovations. Such under-capitalization can result in significant monthly association fee increases and disgruntled owners.
What steps can condominium owners and board members take to protect themselves from these concerns? Be informed. The starting point in becoming informed is review of the Public Offering Statement (“POS”). When you are considering the purchase of a condominium unit in a converted hotel/motel, the Developer is required to provide you with a POS which must include all information to allow you to make an informed decision regarding your purchase. The content of the POS is regulated by the Division of Codes and Standards of the State Department of Community Affairs (the “Agency”). What must be included in the POS is regulated by Statute and Regulations. The pertinent regulation provides:
(a) No developer may dispose of any lot, parcel, unit or interest in a planned real estate development or retirement community unless said developer delivers to the purchaser a current public offering statement on or before the contract date.
1. The Public Offering Statement for new construction applications may be prepared in two parts. Part I shall be in narrative form and shall consist of the information required by N.J.A.C. 5:26–4.2(a)1 through 6, 7i, 8, 9i, 10, 12, 14 and 15 through 23. Part II shall consist of the documents required by N.J.A.C. 5:26–4.2(a)7ii through 9ii, 11, 13 and 22.
2. For new construction applications containing 24 or fewer units, the information specified in N.J.A.C. 5:26–4.2(a)4 need not be included.
3. Public Offering Statements for the conversion of existing buildings shall include all information required by this subchapter and N.J.A.C. 5:26–9.
(b) The public offering statement shall disclose fully and accurately the characteristics of the development and the lots, parcels, units or interests offered and shall make known to prospective purchasers all unusual and material circumstances and features affecting the development. The public offering statement shall be in clear and concise language and combine simplicity and accuracy in order to fully advise purchasers of their rights, privileges, obligations and restrictions.
(c) The Agency may require the developer to alter or amend the proposed public offering statement in order to assure full and fair disclosure to prospective purchasers and may require the revision of a public offering statement which it finds to be unnecessarily complex, confusing or illegible.
(d) The developer shall provide copies of the Public Offering Statement, Part I, at no charge to prospective purchasers upon their request. In any event, the Public Offering Statements, Parts I and II, must be provided at, or prior to, the time a contract is executed, at no charge to the prospective purchaser;
(e) A Public Offering Statement shall not be deemed current unless it contains all amendments approved by the Agency. N.J. Admin. Code § 5:26-4.1
All Condominiums must be registered with the Agency and, as reflected above, the Agency may require amendments to the POS. If the Developer does not provide a POS to you as a prospective purchaser, this is the first clue that this investment is not for you. Most Developers are wise enough to register and provide the POS to prospective purchasers. When you receive the POS, be sure to read it. While reading the POS may seem to be a commonsense option, many purchasers will fail to undertake this task, often becoming overwhelmed by the length of the document. For this reason, it is advisable that you consult with an attorney when contemplating a purchase of this type. The POS includes a number of attachments, including the Master Deed. With the Master Deed, the POS can be over one hundred (100) pages. The Master Deed is the most important of the documents created as part of a condominium development. It will explain, among other things: (i) the role of the managing body of the Condominium (known as the Board); (ii) how the Condominium was established; (iii) the Limited and General Common Elements of the Condominium; and (iv) restrictions on leasing. The Master Deed may disclose information which may make a purchase ill advised. As an example, the Master Deed may include restrictions on the number and size of pets. If you are the owner of four (4) great danes, a restriction in the Master Deed prohibiting ownership of more than two pets, and restricting the size of dogs to fifty pounds or less,, may be a deal breaker for you. You will only know of such a restriction if you read the entire POS including the Master Deed.
If the POS and/or the Master Deed fails to provide certain disclosures, or the documents include deceitful or misleading information, there are statutory protections offered in the Planned Real Estate Development Full Disclosure Act (“PREDFDA”) to protect buyers. One of the most protective provisions of the PREDFDA provides:
a. Any developer disposing of real property subject to this act, who shall violate any of the provisions of section 6 hereof,1 or who in disposing of such property makes an untrue statement of material fact or omits a material fact from any application for registration, or amendment thereto, or from any public offering statement, or who makes a misleading statement with regard to such disposition, shall be liable to the purchaser for double damages suffered, and court costs expended, including reasonable attorney’s fees, unless in the case of an untruth, omission, or misleading statement such developer sustains the burden of proving that the purchaser knew of the untruth, omission or misleading statement, or that he did not rely on such information, or that the developer did not know and in the exercise of reasonable care could not have known of the untruth, omission, or misleading statement. N.J. Stat. Ann. § 45:22A-37 (West)
The above statute gives a Developer a significant incentive to be honest in its dealings with prospective purchasers, as the consequences of not being forthright is an assessment of double the purchaser’s damages and payment of his/her attorneys’ fees in prosecuting a lawsuit. The purchase of a condominium unit can feel overwhelming; with a multitude of documents to review, it is easy to overlook an important component of the process. The best way to protect yourself is to know your rights, and speaking with an attorney can be an important first step to determining whether purchasing a converted Hotel/Motel unit is the right option for you. The professionals at McNally & Bellino, LLC are familiar with Condominium conversions and regularly represent buyers and sellers in real estate transactions. Our office stands ready and willing to advise you of your rights when purchasing a condominium unit.