July 1, 2010

Trending Towards Commercial Condos


By Brad Eriksen

Summer 2010

Owners and developers of commercial buildings are currently struggling to sell large assets due to declining property values and credit conditions remaining tight. There is an increasing trend toward conversion to or development of commercial condominiums to increase the chances of a project's success. Anyone contemplating such a move should be aware of the pros and cons and do the necessary research to determine whether going condo will pay the expected dividends.

The Advantages

1. Shifting Management Responsibilities

A condominium shifts the management responsibility from the owner/developer to the condo owners' association. Once the owner/developer transfers control to the owners' association, the owners' association assumes responsibility for collecting assessments, maintaining the common elements and common areas, and dealing with any disputes between unit owners. This relieves the owner/developer of most of the traditional property management responsibilities.

2. Flexibility and Marketability

Condominiums provide the owner/developer with flexibility and options. An owner/developer of a condominium can sell, lease, or choose a combination of the two. The prospective purchaser pool is substantially deeper for individual units than for an entire commercial building or development. The current lending environment seems to favor loans for small, owner-occupied properties. Selling units will provide a quick return of capital to the developer, who can then move on to the next project. Leasing condominiums provides the developer with the benefits of ownership, a steady stream of income, and retention of condominium units that may increase in value and be sold for a greater profit at a later date.

3. Documentation

In Oregon a condominium project and the form of required documents, including the declaration and bylaws, requires approval at the state level by the Oregon Real Estate Commissioner. However there is no such regulation in Washington, where enforcement of Washington condominium law is purely civil. This reduces costs and minimizes delay during the preconstruction period.

The Disadvantages

1. Increased Liability Concerns

Condominiums seem to breed litigation and liability concerns for both the owner/developer and the contractor — perhaps because it is more cost-effective for the unit owners, banding together through the owners' association, to bring suit for real or imagined building or construction defects than for a single owner or tenant to bring such an action individually.

2. Additional Costs

Converting an existing building to or developing a commercial condominium also involves additional costs that may not otherwise be incurred in a conventional project. In addition to the declaration, plat, etc., bylaws must be prepared, setting forth the condominium's rules and how the owners' association operates. Although a reserve study to estimate maintenance costs and determine the monthly assessments necessary to establish sufficient reserves to repair and replace major building systems is not required for purely commercial condominiums, it may still be a good idea, depending on the type and size of the development.

3. Insurance

Insurance costs are also likely to be higher due to increased litigation and liability concerns. During conversion or construction an owner's wrap policy may be the only way to provide insurance coverage because individual contractors and subcontractors may not be able to obtain coverage for their participation in a condominium project.

There is no "one size fits all" answer when deciding whether to go condo on a commercial building or project. Often it is necessary to proceed through the design stage to get all the information you need to make an informed decision. By carefully analyzing the advantages and disadvantages of condominiums in designing a commercial building or project, the developer can help ensure the success of the project.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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