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New Arizona Law Raises the Bar for Forced Condo Sales

By July 13, 2022November 14th, 2022No Comments

By Nick Phillips | Arizona Capitol Times

In 2010, as the housing market was crashing and the value of their Tucson home sank, Rekha Tataria and her husband made an investment.

Acting on the advice of a relative, the couple bought a condominium unit on the southern end of Phoenix’s Arcadia neighborhood, planning to rent it out. A few months later, they bought a second unit in the same complex.

Tataria, 66, and her husband, 68, were planning for the future.

“Thinking about when we retire, at least our rental income will continue, and we won’t solely depend on our Social Security,” she said.

The investment turned out well. They’ve been renting to the same tenants in both units for about five years, Tataria said. Maricopa County property records show the properties are now valued at several times what the couple paid for them more than a decade ago.

But earlier this year, Tataria was surprised to learn that a larger investor had bought up most of the units in the condo complex – and wanted to force her out.

A little-known section of Arizona property law, A.R.S. §33-1228, allows an investor who accumulates 80% of the properties in a condominium complex to trigger a “condo termination” and force the remaining owners to sell. News reports have revealed some troubling stories about condo termination over the years, like older adults being pushed out of homes they wanted to stay in for the rest of their lives.

In the final hours of this year’s legislative session, lawmakers passed a bill that targets situations like the one Tataria is in by raising the threshold for condo termination.

House Bill 2275, which passed the House and Senate with near-unanimous support recently, will set the default threshold to 95% for new condominiums. Gov. Doug Ducey signed it into law earlier this week.

Rep. Jeff Weninger, R-Chandler, the bill’s sponsor, said the change is designed to stop deep-pocketed investors from snapping up buildings at a cheap price – which they can convert into profitable rental apartments – when the existing owners have no desire to sell.

“They’re essentially assembling apartments together for a serious discount, and in doing so, they’re taking away people’s homes,” Weninger said. “I just, in my heart, just feel it’s wrong.”

For their part, some real estate investors and attorneys argued in legislative hearings earlier this year that the existing system works well. They said condo terminations can help get aging buildings into the hands of investors who want to put money toward much-needed maintenance. Plus, they noted, individual condo associations can set a higher threshold for termination if they want.

A forced condo termination typically works like this: First, an investor buys up 80% or more of the properties in a condominium complex (or properties representing at least 80% of the votes in the condo’s homeowners association).

Then they draw up and sign a termination agreement, specifying that units not owned by the majority owner will be sold to the majority owner once the condo association is terminated. Finally, they hire an appraiser and pay the remaining owners for their units (unit owners can also seek arbitration to set the sale price).

Condo terminations don’t happen very frequently, but they’re part of larger forces changing Arizona’s housing market.

“This problem in general is a small part of the affordable housing” issue, Weninger said.

Even in situations like Tataria’s, which involve a property that’s already being used for rental, a change in ownership can have market implications. Compared to bigger, corporate investors, “mom and pop” landlords are more likely to provide affordable housing or accept subsidies, said Joanna Carr, policy director for the advocacy group Arizona Housing Coalition.

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