What property owners should know before they convert
Owners and developers of commercial buildings are currently struggling to sell large assets due to declining property values and tight credit conditions.
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, as well as do the necessary research to determine whether going condo will pay the expected dividends.
The Advantages
1. 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.
2. 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.
3. 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 state condominium law is purely civil.
The Disadvantages
1. 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.
2. 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.
3. 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.
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.
Eriksen represents business and corporate clients in all aspects of business operations at the Vancouver office of Jordan Schrader PC. He can be reached at 360.567.3903 or by e-mail at brad.eriksen@jordanschrader.com.
