Information on Condominiums
Condominium
Basics.
What is a condominium? And what are the basic steps
that must be taken to create a condominium?
A condominium usually includes a number of condominium
"units" (the residential or commercial spaces that are commonly referred
to simply as condominiums), "common elements" such as walkways and
exercise facilities that can be used by all of the unit owners, and
"limited common elements" such as parking spaces that are assigned
to specific units. A condominium unit is real property that may be
bought and sold just like a house or vacant land, but instead of being
defined by a traditional legal description, a condominium unit is
defined by its horizontal and vertical boundaries, like a "box of
space." This allows condominium units to exist on top of one another
in multiple-story buildings. But condominiums are not always high-rises.
Groups of townhomes are often established as condominiums, and sometimes
even what looks like a detached, single-family home may in fact be
a condominium unit. There are usually detailed rules governing the
relationships among the unit owners, and how the condominium operates.
To establish a condominium in Washington State, the following minimum
steps should be taken:
Select
a lawyer to draft the basic condominium documents and facilitate the
process.
Given the recent increase in condominium lawsuits,
it is important to retain an experienced lawyer to guide you through
the process and prepare the documents necessary to establish the condominium,
including the articles of incorporation for the condominium association,
the bylaws for the association, the declarations of covenants, conditions
and restrictions (this is the document that contains most of the rules
governing the relationships among the condominium owners--it includes
provisions for collection of assessments, the allowable uses of the
condominium units, assignment of parking spaces, the use of common
areas, etc.), and the public offering statement that must be given
to purchasers of condominium units.
Hire
a surveyor to measure and complete drawings of the condominium units.
These drawings are referred to as the "Survey Map and Plans" and
are used to define the horizontal and vertical boundaries of the condominium
units.
Determine
who will serve on the initial board of directors of the condominium
association.
As the person establishing the condominium (this person is referred
to as the "Declarant" in the condominium laws), you select the initial
board of directors.
Select
a lender who will commit to finance the purchase of the condominium
units.
Your lawyer will need to submit a letter to the lender certifying
that the condominium complies with Fannie Mae's requirements.
Select
a listing agent to market the condominium units.
Select
a company to manage the condominium.
Unless you have professional experience in this area, it is a good
idea to retain a management company. Initially, the management company
would help you prepare the budget for the association (which must
be completed before any units can be sold). After the condominium
is established, it would manage the building and the ongoing affairs
of the condominium association.
Certain additional steps are required when an apartment building
is converted into a condominium (see Conversion
Condominiums), and local jurisdictions such as Seattle impose
additional requirements as well.
For further information about establishing condominiums, contact:
Steve Rovig or Chris
Addicott.
Conversion
Condominiums.
What is involved in converting apartments into condominium units?
This is known as a "conversion condominium." To turn the apartments
into condominium units, you must take all the basic steps that are
necessary to establish any condominium (see Condominium
Basics). In addition, there are a number of specific requirements
related to disclosure of the condition of the building and tenants'
rights.
Because this is a conversion condominium, the public offering statement
(see Condominium Basics) given to unit purchasers
must contain information describing the condition of the building.
You must hire an independent, licensed engineer or architect to inspect
the building and certify the condition of all of the building's structural,
mechanical, electrical and other systems. If the building is in Seattle,
you will need to obtain an additional inspection by the City of Seattle,
and, if any repairs are necessary to bring the building up to code,
a follow-up inspection will be required.
You also must comply with very specific requirements governing the
rights of the current tenants in the building. The tenants cannot
be forced to leave until their leases have expired. Furthermore, you
must give the tenants 90 days notice that they will be required to
either buy or vacate their apartments. By law, the tenants have the
right to purchase their apartments, and up to 60 days to make this
decision. If a tenant decides not to buy his or her apartment, then
you cannot sell the unit at a lower price for the following 180 days
unless you first give the former tenant the option to purchase at
that lower price. Finally, depending on the income of the tenants
and the location of your apartment building, you may be required to
pay up to $500 in relocation assistance to tenants who elect not to
purchase their apartments. It is important to take these requirements
into account in planning your marketing strategy for the condominium
units.
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Condominiums
versus Subdivision.
What are the advantages and disadvantages of establishing townhomes
as a condominium?
Before you can sell townhomes, you will need to either subdivide
the lot into separate parcels or else turn the townhomes into condominiums.
The primary benefits of establishing the townhomes as condominiums
are timing and certainty. The subdivision process can be time-consuming
and expensive. With most kinds of subdivisions, local government has
discretion on whether to approve the subdivision, and the local government's
decision is subject to public comment and appeal opportunities. In
contrast, the townhomes could be established as condominiums in as
little as one-to-two months, without the need to obtain subdivision
approval from the city (building permits are, of course, required),
and without public involvement in the condominium process.
To establish the condominium, you will need to hire a surveyor and
take a number of other steps (see Condominium Basics).
To minimize the risk of lawsuits from purchasers of the townhomes,
you will want experienced lawyers to draft the condominium documents
(see Condominium Lawsuits). Also, depending
on the prices of the condominium units and the lender that will be
financing the purchase of the units, certain Fannie Mae restrictions
may apply. But overall, most developers find that it is less expensive,
faster, and easier to establish the townhomes as condominiums than
it is to subdivide the property into separate lots.
For further information about establishing condominiums,
contact Steven R. Rovig or D.
Christian Addicott.
For further information about the subdivision process, contact
Melody B. McCutcheon.
Condominium
Lawsuits.
As a builder and developer, what can I do to avoid or minimize the
risk of lawsuits by condominium owners and associations?
Construction defect litigation involving condominiums has become
more and more common in recent years with the boom in condominium
construction. These lawsuits are large, complicated, and expensive,
involving multiple parties and claims. When a pipe bursts, a roof
leaks, cement cracks, or something else goes wrong with a condominium
building, the unit owners or the condominium association frequently
are turning to the courts to try to force the contractor or developer
to pay for any damage. Even when the claims lack merit, defending
against the claims is costly and time-consuming for the developer.
There are a number of strategies to try to avoid such lawsuits, or
at least to minimize a developer's exposure. Most importantly, and
most obviously, the best way to avoid suit is to hire skilled architects
and contractors with a proven track record in condominium construction,
and to build a quality building. However, problems do arise even when
skilled professionals are involved. Other ways to minimize the risks
of condominium lawsuits include the following:
Full
and Accurate Disclosure.
The condominium documents should clearly define the rights of the
condominium unit owners, and developers should fully disclose any
known problems or risks in the public offering statement (see
Condominium Basics). For example, if noise is likely to penetrate
the condominium building, the public offering statement should clearly
state that the condominium is a multi-family building located in an
urban area and that noise cannot be entirely prevented by the developer.
Detailed
Limited Warranty.
A thorough "limited warranty" included as part of the public offering
statement can help establish reasonable expectations among condominium
unit purchasers. Such a limited warranty can establish explicit procedures
for dealing with minor complaints (e.g., minor cracking in surfaces
or malfunctioning HVAC systems) and provide the unit owners with some
assurance that problems will be resolved by the developer in a timely
manner.
Limitation
of Implied Warranties.
The public offering statement (see Condominium
Basics) may be written to disclaim certain implied warranties
of quality established by Washington's condominium law. However, for
new construction projects, this strategy may pose significant marketing
problems. Purchasers of new units expect quality construction.
Independent
Audit.
Consider an independent audit of the project toward the end of the
construction period to identify problems that must be corrected. It
is much, much easier to resolve construction defects in an empty building
under the total control of the developer than it is when unit purchasers
call the building home.
Communication.
It is critical to maintain open and effective lines of communication
with the homeowners' association and property management company,
and act quickly to repair legitimate problems that do arise following
the sale of units.
For further information on strategies to limit the risk of condominium
lawsuits, contact: Steven R. Rovig
or D. Christian Addicott.
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