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Use of Condominium Form of Ownership can Facilitate Creative Development By John R. Blake, Jr., Esq.

Thursday, March 16, 2006 - By: John R. Blake, Jr.

By John R. Blake, Jr., Esq.

Use of the condominium form of ownership can be a creative solution for problematic real estate development. A typical condominium regime vests ownership of a "unit" in the owner, and the places ownership of the common elements in a unit owners association. This arrangement can, in some cases, be employed when developing real estate by subdivision is problematic.

The condominium regime is created by submitting the land and any buildings thereon (or any to be constructed thereon) to the provisions of the applicable state's condominium statute. The owner creates the condominium by executing and recording an instrument which submits the land and buildings to the jurisdiction of the applicable condominium statute, which instrument describes the land, building, units, common elements and appurtenant rights which make-up the condominium. The master deed also sets forth the percentage interest attributable to each unit in the common elements. Governance of the unit owners association is spelled-out either in the master deed creating the condominium, or in a separate document such as a declaration of trust.

The condominium unit is typically described referring to planes, surfaces, and appurtenant rights. The actual fee ownership in the unit does not usually include the underlying land on which the building is situated, and frequently it does not include the structure of the building of which the unit is a part. Appurtenant to the unit is a percentage interest in the common areas of the condominium, ownership of which is vested in the unit owners association.

Unit ownership may also include "exclusive use" areas within the common elements, made up of portions of the structure or the land which comprise the common elements. As the name implies, exclusive use areas are akin to easements, while fee ownership remains in the unit owners association.

A condominium regime can also be structured so as to provide unit owners with real estate interests similar to those of a separate parcel. If the condominium contains several single use buildings, each building can be designated a separate unit in the master deed. The land surrounding each unit and necessary for the owner's use and operation of the property (such as parking areas) can be designated as part of the unit, or remain part of the common area and designated as an exclusive use area appurtenant to the unit in the condominium documents. Driveways within the condominium would be left as common areas. By including the necessary interests for the use of the property as appurtenant elements, the "unit" has the character of separate parcel of land created by a subdivision, but the property does not go through the subdivision process.

Condominiums can also be phased, such that construction of the buildings happens in stages. The condominium's creator (sometimes referred to as the "Declarant") reserves to himself the right to construct future buildings and to add them to the condominium either as units or common areas.

One important note: in some municipalities zoning laws may limit development of property to one principal structure per lot. In such a case use of the condominium regime is not possible without zoning relief (if available).

In some cases, a real estate development project would, on the surface, make sense to follow the conventional form of ownership where individual parcels of land improved with buildings are conveyed in fee simple absolute (outright ownership), but because of a problem with zoning, subdivision control law, or private restrictions, the end result cannot be achieved through the subdivision process.  Use of the condominium form of ownership may provide a way around such an obstacle.

This was the case for an owner who sought to develop a large parcel of land with single family dwellings in several phases. The parcel had an existing commercial building on it which had access to public utilities which were not generally available to all parts of the municipality. The landowner intended to raze the existing structure, and build single-family houses on the land. Due to the construction financing requirements, the owner and the developer structured their arrangement so that the project was built in two phases over several years. Also, the construction lender sought to finance the project in several phases, with separate mortgages covering separate and distinct real estate interests. However, phasing and financing the project in this fashion posed several challenges.

A local bylaw restricted the ability to extend the municipal utilities to more than the lot which they currently served. To achieve the desired result of phasing the development, and at the same time addressing the local bylaw restrictions, the owner and the developer created a condominium, whereby each unit consists of the land for each phase of the development. Appurtenant to each unit would be development rights to build the individual houses.

As required by the condominium statute in the applicable state, the landowner constructed a small out-building on each of the "units," even though that building would later be removed as it was not be part of the ultimate development plan (each state's condominium laws will vary in certain respects; however, at least one title insurance company has taken the position that land-only condominiums are permissible). Despite the transitory nature of the buildings, an architect was engaged to prepare a set of floor plans for recording along with the master deed, as required by the statute.

The condominium documents provided for the future construction of the dwellings by including development rights for the houses appurtenant to each unit. The construction phasing was also addressed, with particular attention to preserving the right to extend the municipal utilities. The mortgage securing the construction financing included the appurtenant development rights as part of the mortgaged premises.

The foregoing development plan and the condominium documents required the construction lender's prior approval, as its mortgage would be subject to the condominium documents. Also critical to the success of the development plan was its blessing by the title insurer, as the institutional lender required a title insurance policy insuring its mortgage on each of the condominium units and the appurtenant development rights. The policy also insured the validity of the condominium regime. The developer consulted the title insurer early in the process as to the form of the condominium documents, and the insurability of condominium created in this manner so as to meet the lender's requirements.

Through creative drafting of the condominium documents and consideration of future development and financing objectives, condominiums can be a valuable development tool where a typical subdivision is problematic.

For ease of reference herein, I refer to such instrument as a "master deed."