Developments in REAL
ESTATE
TM
Special CONDO Issue!
Volume 16, Issues 4-5 Seth G. Weissman, Editor
Can Earnest Money be Used to Build the Condominium?
Earnest money and other buyer deposits can, in certain circumstances, be used to build the condominium. What are those circumstances? First, the sales price of the condominium unit must be more
ALSO IN THIS ISSUE
than $150,000. Second, the
Condominium Conversions in Georgia Page 2
sales contract which permits the use
How Does Phasing Work in a Condominium? Page 5
boldface disclosure and this disclosure
Why Building a New Condominium is Riskier than Converting Page 6
of the money must include the following must be initialed: Continued on page 4
First Buyers of Office or Retail Condos Do Not Get a Right of Rescission Page 7 Why Do Legal Descriptions of Residential Condominium Units Only Reference the Recorded Plans? Page 7 Why Doing a Development as a Condominium Can Avoid Subdivision and Certain Fire Code Requirements Page 8 So What is a Master Condominium Anyway? Page 9
Does the Developer Have to Pay Assessments on Developer Owned Units?
The general rule in a condominium is that all unit owners must pay assessments. However, the Georgia Condominium Act does give the declarant of a condominium the right not to pay assessments in certain limited circumstances. Specifically, a declarant may elect to be excused from paying assessments for up to 24 months after the declaration is filed provided that the declarant pays all common expenses which exceed the amounts assessed against the other unit owners. Continued on page 4
Condominium Conversions in Georgia Under the Georgia Condominium Act (the “Act”), a conversion condominium is defined as “[a] condominium all or part of which may be used for residential purposes, which condominium contains any building or portion thereof that at any time before the recording of the declaration was occupied wholly or partially by persons other than persons who, at the time of the recording, had contractual rights to acquire one or more units within the condominium.” Many apartments would fall within the definition of a conversion condominium, and if the demand for condominium product picks up, apartment owners and developers may be asking the question, “to convert or not to convert?” This article, written in a question and answer format, explains some of the key mechanics of conversion condominiums to assist those apartment owners and developers that may be sitting on the conversion fence.
QUESTION: Will I need to get my apartment property rezoned or upgraded to current building code requirements before I can convert it to a condominium?
ANSWER: If the existing apartment property is lawfully zoned for multi-family residential use, it will not need to be rezoned before it can be converted to the condominium form of ownership. On this point, the Act provides that, “no zoning, subdivision, building code, or other real estate use law . . . shall prohibit the condominium form of ownership or impose any requirement upon a condominium which it does not impose upon a physically identical development under a different form of ownership.” This also means that new building code requirements cannot be imposed if the property can already be lawfully occupied as apartments and the condominium converter is merely changing the form of ownership of the property to a condominium. Of course, substantial renovations to an apartment or condominium may trigger the need to conform to new building code requirements. Similarly, if the property is lawfully being used for a nonresidential use, as is the case with many loft condominium conversions, the conversion to a multi-family residential use will likely trigger the obligation to comply with current building codes and zoning laws, unless a variance is obtained.
QUESTION: What notice do I need to give my tenants if I am planning to do a condominium conversion?
ANSWER: The Act requires that apartment owners give tenants at least 120 days notice of the decision to convert an apartment to a condominium. During the 120 day period, tenants may not be required by the condominium converter to vacate the unit at any time during the 120 day period except by reason of nonpayment of rent, waste, or conduct which disturbs other tenants’ peaceful enjoyment of the premises, and the terms of the tenancy may not be altered during said period. The 120 day notice requirement was enacted to insure an orderly transition from an apartment to the condominium form of ownership. The law gives tenants whose leases expire during the notice period additional time to stay in their apartments until the end of the notice period. 2
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The 120 day notice requirement does not prematurely terminate leases that expire after the notice period is over. For example, if the notice period ends in July but a tenant’s lease does not expire until November, the tenant can stay in the apartment until the end of the lease term. In addition, tenants may not be coerced into vacating their apartments early. Of course, the condominium converter can offer to allow tenants to move out early without penalty should they so decide.
QUESTION: Must I give tenants an opportunity to buy their units? ANSWER: Under the Act, tenants must be afforded the opportunity to buy their units. Specifically, within 60 days of the notice to convert being sent to tenants, the condominium converter must offer tenants the opportunity to purchase their units. Tenants then have 60 days to decide whether or not to buy. In many instances, tenants will receive the offer to purchase their units at the time the notice to convert is delivered.
QUESTION: When can I start selling condominium units? ANSWER: Sales of condominium units may begin as soon as the 120 day notice has been sent to tenants. However, sales may be limited to vacant units and those units occupied by tenants who have decided to go ahead and purchase.
QUESTION: Can the condominium be converted in phases? ANSWER: The Act permits a condominium to be converted in phases. Therefore, the condominium converter can submit less than all of an apartment complex to the condominium form of ownership and reserve the right to add additional sections of the apartment complex to the condominium at a later date. However, as of the publication of this article, FHA prohibits phased conversion condominiums and requires that a conversion condominium be created and declared in a single phase.
QUESTION: What must be disclosed to purchasers about the condition of the property? ANSWER: The Act requires that the condominium converter prepare a statement of condition of property based on a report prepared by an independent licensed engineer or architect. The statement of condition of property must include the following information: (1) a list of any outstanding notices of uncured building code violations, (2) a statement of the present condition of all structural components and mechanical and electrical systems, and (3) a statement of the useful life of the above items or a statement that no representations are made in that regard. Condominium converters are advised to go beyond the minimum disclosure requirements of the Act and disclose in exhaustive detail any past or present problems with the apartment. In so doing, condominium converters reduce the risk of a lawsuit by disgruntled owners alleging that the condominium converter committed fraud and misrepresentation by failing to disclose the true condition of the property.
QUESTION: Other than the statement of condition of property, what other information must be disclosed to purchasers?
ANSWER: Under the Act, certain purchasers of residential condominium units are required to receive a “condominium disclosure package” that contains various documentation and information, including the statement of condition of property in the case of a conversion condominium, related to the condominium development. In addition, the Act requires that certain statutory disclosures be incorporated in the condominium unit sales agreements as well as in sales or marketing brochures. Developments in Real Estate™
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Can Earnest Money be Used to Build the Condominium? Continued from page 1
“ANY PAYMENT IN EXCESS OF 1 PERCENT OF THE PURCHASE PRICE MADE TO THE SELLER PRIOR TO CLOSING PURSUANT TO THIS CONTRACT MAY BE USED FOR CONSTRUCTION PURPOSES BY THE SELLER.� So, for example, if the purchase price of the condominium is $1,000,000, then 1% of this amount is $10,000. Therefore, any deposits over $10,000 can be used to build the condominium. Third, any monies withdrawn can only be used for the actual construction and development of the condominium property. No portion of the monies which are withdrawn may be used for salaries, commissions, expenses of real estate licensees or advertising purposes. Other than these limitations, all of the deposits can be used to build the condominium. It should be noted that this was not always the law in Georgia. It used to be that all money and other deposits had to be put into an escrow account. However, this law was changed in 2006.
The Georgia Condominium Act does give the declarant of a condominium the right not to pay assessments in certain limited circumstances.
Does the Developer Have to Pay Assessments on Developer Owned Units? Continued from page 1
To a large degree, developers who choose to pay all of the common expenses over the amounts paid by the other unit owners are gambling. If the association budget is accurate and there are no surprises, then this approach can save a declarant significant sums of money. On the other hand, if the declarant misjudges the common expenses of the association, or if there are surprise expenses, the declarant is on the hook for them. There are a couple of additional rules which apply here. Specifically, the declarant cannot offset his or her declarant obligations by spending monies designated for reserves or collected for start-up funds or capital contributions. Additionally, prepayments of assessments made by owners cannot be used to pay common expenses except as they come due.
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How Does Phasing Work in a Condominium? Under Georgia law, a condominium can be developed in stages or
amendment to the declaration describing the additional property, a plat
phases. So, for example, let’s say that a developer owns four (4) two-
of the additional property and any plans of new unit types. The benefit
story residential apartment buildings and decides to convert them to
of phasing is three-fold. First, it allows the developer to test the market
the condominium form of ownership. The developer can convert them
for the condominium without making all of the property a part of the
all at once or choose to convert one or two of the buildings and hold
condominium. Second, since the secondary mortgage market institutions
in abeyance the decision to convert the remainder. If sales in the first
require developers to presell a significant percentage of units before they
building or two goes well, the developer can continue the process with
will purchase mortgages on those units, it allows the developer to reach
the other buildings. If the sales do not go well, the developer can leave
the presale requirement sooner (since the presale requirement is imposed
the other buildings as an apartment.
on the phase and excludes the property not yet a part of the condominium). Third,
When the developer decides to do a
phasing is a way for developers to avoid
phased or staged condominium, the
paying assessments since units which are
property that may be added to the
not a part of the condominium pay no
condominium later must be specifically
assessments.
defined so that the buyers of the condominium know what other property can be made a part of the condominium at a later time. This property is referred to as “additional property” under the Georgia Condominium Act. The Georgia Condominium Act gives the declarant (the person who files the legal documents to turn the property into a condominium) the right to submit all of the additional property to the condominium for up to seven (7) years from the filing of the original declaration. The declarant can only add additional property to the condominium by filing an Developments in Real Estate™
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Why Building a New Condominium is Riskier than Converting Lawsuits brought by condominium owners and associations against
converter if the converter did additional construction work to the prop-
condominium developers have dampened condominium development
erty. So, for example, if the converter replaces all of the flooring in a
nationwide. Yet, even with the fear of such lawsuits, we are starting to
condominium conversion and the flooring starts to buckle, a negligent
see more condominium development in the Atlanta region.
construction lawsuit will likely be brought against the converter for this addition to the property.
If developers build a bad condominium housing product, they will almost certainly get sued by the owners. Unfortunately, developers sometimes
What a condominium converter is responsible for is to disclose all latent
get sued for minor construction issues that are typical of new construc-
or hidden defects in the property of which the converter is aware. Devel-
tion but are sometimes unfairly overblown by plaintiffs’ lawyers and their
opers can eliminate much of their potential liability in this area by hiring
handpicked engineers in multi-million dollar lawsuits.
engineers to fully evaluate the building being converted and prepare disclosure reports for unit buyers on what is wrong with the building. In
The law in Georgia makes it easy for developers of new construction
fact, the Georgia Condominium Act requires converters to provide a
condominiums to be sued. This is because with any new construction, the
report on the condition of certain components within the building. When
developer is subject to claims for “negligent construction”. This means
we work with converters, our recommendation is usually to go beyond the
that the developer can be held liable if any part of the condominium is
disclosure requirements in the Georgia Condominium Act and to disclose
not built in accordance with building codes or accepted standards and
every possible thing that might not be perfect about the property. This is
practices in the construction industry.
because if a converter tells a buyer, for example, that the shingles are old and need to be replaced, the owners will not likely win a lawsuit when the
It is the second part of the definition which results in the most disagreements
shingles then need to be replaced.
between developers and condominium owners. This is because whether something is built in accordance with accepted standards and practices in
Condominium development is a risky business for developers which
the construction industry is often a matter of opinion. The condominium
requires a lot of strategic thinking on how best to minimize claims. Of
owners usually find an expert to testify that what was built was not built
course, if proper thought is put in on the front end, it can avoid claims
in accordance with accepted standards and practices in the construction
on the back end.
industry. The developer’s engineer argues just the opposite. With the costs of litigating being high and the outcome uncertain, most of these lawsuits settle, oftentimes for sums far larger than what the developer believes is reasonable. A condominium conversion eliminates the risk of negligent construction lawsuits (except for the construction upgrades undertaken by the developer) because the developer normally has not constructed or overseen the construction of the condominium. As stated before, a negligent construction lawsuit can normally only be won against a condominium 6
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First Buyers of Office or Retail Condos Do Not Get a Right of Rescission We are seeing more nonresidential condominiums including office, retail and industrial condominiums, parking space condominiums and master condominiums where entire land uses in a multi-use building, such as a hotel, office or apartment are converted into master condominium units. While the first buyer of a residential condominium unit has a 7 day right of rescission from the date they sign a purchase and sale agreement and receive a condominium disclosure package, this requirement does not apply to purchasers of non-residential condominium units. Interestingly, there is not even a requirement to provide buyers with a condominium disclosure package in a non-residential condominium. Of course, the more information developers provide to buyers, the less the likelihood of lawsuits with buyers down the road. As a result, most developers will still provide buyers with a package of information to help them evaluate their decision to purchase.
Why Do Legal Descriptions of Residential Condominium Units Only Reference the Recorded Plans? Most legal descriptions of property are what are known as metes and bounds legal descriptions. They are based on surveys of the exterior boundary lines of properties. The property includes both the land and the air rights above the land. The boundaries of residential condominium units cannot normally be described in this manner. The challenge with a legal description for a residential condominium unit is that the developer must often describe what is essentially a three dimensional box sitting within a multi-story building and do so with vertical and horizontal boundaries. Trying to physically survey such boundaries, while possible, would be extremely time consuming and expensive. The Georgia Condominium Act eliminates the need for such surveys with condominium units by allowing the declarant to record floor plans and a plat showing where the unit exists in space on the recorded condominium plat and plans. Developments in Real Estate™
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Why Doing a Development as a Condominium Can Avoid Subdivision and Certain Fire Code Requirements
One of the more remarkable things about the condominium form of ownership is that it is not subject to subdivision laws. Specifically, the Georgia Condominium Act states that “No subdivision law, ordinance, or regulation shall apply to any condominium . . .”. How does this benefit developers? When subdivision laws apply, for example, in a townhome development, each townhome must meet the lot requirements of the subdivision ordinance. So, for example, if the subdivision ordinance requires a certain front and rear yard requirement, each townhome must meet that requirement. When the same development is done as a condominium, the subdivision laws do not need to comply with the subdivision ordinance. This usually means that when a townhome development is done as a subdivision, the lot yield or number of townhomes the developer can get on the property is less than if the townhome development is done as a condominium. With townhomes, the other part of the equation is the ability of buyers to get mortgage money. With condominiums (at least at the moment) it is much harder to get end loan financing than with fee simple townhomes. Therefore, most developers today will choose to do a townhome development as fee simple townhomes (and comply with subdivision laws) rather than a condominium. Of course, as market cycles change and mortgage money for condominiums becomes more available, this may change. The other benefit of doing a project as a condominium is that most fire codes are written to impose special requirements along property lines. So, for example, let’s imagine a typical mixed-use development with three interconnected buildings. If the developer decides to draw traditional property lines between the buildings, in order to sell one off or finance a part of the development separately, fire codes will normally require the developer to construct extensive and expensive separations between the buildings. However, let’s say that the same three interconnected buildings are done as a master condominium where the property lines are replaced with unit boundary lines because each building is its own condominium unit. In that case, fire codes generally do not require special separations since fire codes are written to create those separations along property lines rather than condominium unit boundary lines. Many zoning ordinances are similarly written with property lines in mind. So, for example, many setback requirements apply along property lines but not along condominium unit boundary lines. Therefore, organizing a development as a condominium can avoid some of these requirements and give the developer greater flexibility in developing property.
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So What is a Master Condominium Anyway? A master condominium is a relatively new concept in condominium law. The definition of a master condominium is a condominium in which the condominium instruments permit one or more of the units to be submitted to a subcondominium. Vertical mixed use developments are usually organized as master condominiums. So for example, let’s say that a mixed use development consists of a retail, hotel and residential component. Under a master condominium structure, each component will usually be its own master condominium unit. Therefore, the three components in the development would be a master condominium. A master condominium association will normally operate the mixed use development for the benefit of the master unit owners. Let’s say that the owner of one of the master condominium units decides to submit its unit to a subcondominium regime. The owner of the master unit would file a sub-declaration of condominium dividing the master unit into a series of smaller condominium units. So for example, let’s say that the apartment master unit consists of 200 units. These apartments can be divided into 200 condominium units which can be sold individually through the filing of a sub-declaration of condominium and other condominium instruments.
What are the benefits of organizing a development as a master condominium? The first is that it allows the developer to more easily sell off or separately finance different portions of the mixed use development. Second, it makes it easier for the owners in the sub-residential condominium to get mortgage financing since FNMA and FHLMC will not normally finance units in a condominium if more than a small percentage of units are of a non-residential use. Third, it can allow a residential condominium developer to control at least portions of a residential sub-condominium (i.e., usually the exterior portions) for longer than the normal control period set forth in the Georgia Condominium Act, by having the developer control the master condominium association and then having the master condominium association maintain all of the building structures. A well-crafted and well-planned master condominium structure is a helpful tool in structuring and repositioning developments. Developments in Real Estate™
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About the Editor
Weissman Offices
SETH G. WEISSMAN Seth Weissman represents developers, builders, investors and real estate brokers. He is co-author of The Red Book on Real Estate Contracts in Georgia, Secrets of Winning the Real Estate Negotiation Game and Zoning and Land Use Law in Georgia. The Red Book is a highly regarded legal reference used by real estate brokers and agents. As general counsel to Georgia REALTORS®, Seth drafts the standard real estate forms used by REALTORS® throughout Georgia. In addition to a law degree, Seth has a master’s degree in city and regional planning and is a Professor of City Planning in the College of Architecture at the Georgia Institute of Technology. Seth has used this additional knowledge to draft the legal documents for complex real estate developments, including vertical and horizontal mixed-use developments, residential condominiums, office condominiums, master planned communities, senior communities and themed developments. As a result, he is considered a leading authority on new urbanism. You may reach Seth at seth@weissman.law or at 404-926-4505.
This Issue’s Contributors DARRYL MOSS Darryl Moss, partner in the firm’s commercial real estate practice, represents builders, developers, investors, brokers, and lenders in commercial real estate transactions, including acquisitions, dispositions, and leases. He represents developers throughout the country in the creation of new real estate developments, and is considered an industry leader and expert in condominiums (both commercial and residential), master planned communities, new urban communities, mixed-use developments and other types of real estate developments involving complex ownership structures. Contact him at darrlymoss@weissman.law or at 404-926-4519.
JANE KOTAKE Jane Kotake is a partner in the firm’s commercial real estate practice. Specializing in all areas of commercial real estate development, Jane represents builders, developers, investors, and lenders in the acquisition, disposition and development of real property. She also assists with the formation, management and operation of ownership entities, drafts real estate documentation, advises developers and builders in their sales and marketing activities, and provides advice regarding compliance with statutes, including the Georgia Condominium Act, the Interstate Land Sales Full Disclosure Act (ILSA), as well as the FNMA, FHLMC, FHA, VA guidelines. Contact her at janekotake@weissman.law or at 404-926-4542.
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Buckhead One Alliance Center, 4th Floor 3500 Lenox Road Atlanta, Georgia 30326 404-926-4500 Fax: 404-926-4600 email: buckhead@weissman.law
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Cumming 1080 Sanders Road, Suite 300 Cumming, Georgia 30041 404-279-4080 Fax: 404-279-4180 email: cumming@weissman.law
♦ East Cobb 1225 Johnson Ferry Road Suite 100 Marietta, Georgia 30068 404-279-4020 Fax: 404-279-4120 email: ecobb@weissman.law ♦
Gainesville 322 Oak Street, Suite 1 Gainesville, Georgia 30501 678-971-4664 Fax: 678-971-4662 email: gainesville@weissman.law
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McDonough 1935 Pennsylvania Avenue McDonough, Georgia 30253 770-632-2715 Fax: 770-632-2716 email: mcdonough@weissman.law
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Midtown 999 Peachtree Street, NE Suite 525 Atlanta, Georgia 30309 404-279-4075 Fax: 404-279-4175 email: midtown@weissman.law
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North Fulton 11675 Rainwater Drive, Suite 150 Alpharetta, Georgia 30009 404-279-4040 Fax: 404-279-4140 email: northfulton@weissman.law
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Peachtree City 500 Westpark Drive, Suite 150 Peachtree City, Georgia 30269 770-632-2715 Fax: 770-632-2716 email: peachtreecity@weissman.law
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Perimeter 5909 Peachtree Dunwoody Road Building D, Suite 820 Atlanta, Georgia 30328 404-926-4990 Fax: 404-926-4871 email: perimeter@weissman.law
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Sugarloaf 1745 North Brown Road, Suite 100 Lawrenceville, Georgia 30043 404-279-4050 Fax: 404-279-4150 email: sugarloaf@weissman.law
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West Cobb 3475 Dallas Highway, Suite 510 Marietta, Georgia 30064 404-279-4015 Fax: 404-279-4115 email: westcobb@weissman.law
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Woodstock 1198 Buckhead Crossing, Suite B Woodstock, Georgia 30189 404-279-4010 Fax: 404-279-4110 email: woodstock@weissman.law
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85 North 6750 Highway 53, Suite 105 Braselton, GA 30517 404-926-4698 Fax: 404-926-4898 email: 85north@weissman.law
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