CONDOMINIUMS THROUGH THE AGES - Community …cltnetwork.org/wp-content/uploads/2014/01/Condo-Presentation.pdfCLTs and Condominiums ... Condominium History ... housing and land led

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CLTs and Condominiums

Amy Demetrowitz & Greg Rosenberg

2012 National CLT Conference

Burlington, VT

Workshop Overview

•  Condo History •  Basic Condo Concepts •  Condo Documents •  Why should CLTs Do Condos? •  CHT Part 1: Condo Program Overview •  CLT as Condo Developer •  MACLT: a Cautionary Condo Tale •  CHT Part 2: Tour of Condo Projects

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CONDOMINIUMS THROUGH THE AGES

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Condominium History

•  Babylon: there is at least one record of the sale of part of a building in ancient Babylon during the First Dynasty (200 BC).


Condominium History

Middle Ages: walls constructed to enclose cities – made for scarce building space – led to individual ownership of parts of a building (even single rooms), in cities such as Orleans and Paris


Condominium History

Lack of clear rules in many cities regarding repair and maintenance of common areas – leading to disputes among owners.


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Condomium History

•  Code Napoleon (1804): Article 664: provided for separate ownership of floors and the regulation of maintenance and repairs of the common parts of the building.


Condominium History

•  United States – The Early Years – 1929: first speculation about owning “castles in the air many stories above the streets” – and whether it was possible to own space as opposed to owning land


Condominium History

“A conveyance of the air lot with a right to support is obviously better adaptable to the mysteries of the future.”


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Condominium History

•  Puerto Rico: model for American statutes on condominium law

•  Major shortage of housing and land led to approval of condominium form of home ownership in 1951.


Condominium History

•  In 1961, a Puerto Rican delegation lobbied Congress to enact Sec 234 of the National Housing Act to extend FHA mortgage benefits to condos, so that people of modest means could get an affordable mortgage.


Condos As Affordable Housing

Articulating the Need “The need for the condominium grows out of the pressing necessity to provide adequate housing in large urban areas where the high cost of land, coupled with construction and financing expenses, practically excludes the erection of single family homes and where rentals on available units are prohibitively high for the masses.” (1962)


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BASIC CONDOMINIUM CONCEPTS


Basic Condominium Concepts

•  The condominium concept established the creation of a set of vertical boundaries separated into horizontal apartments, units, floors or stories.

•  Each condominium purchaser acquires a fee simple ownership in the unit, together with an undivided tenancy in common interest with other unit owners in the common areas.


What Is Individually Owned?

•  The condominium owner has exclusive ownership of the interior of his or her apartment or unit – the apartment space.


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The Paint Inwards

•  It is the space enclosed or bounded by certain, determined, vertical and horizontal boundaries - the interior surfaces of the perimeter walls, floor and ceiling of the apartment.


Common Elements

•  Ownership also includes a fractional ownership in the common or general facilities, usually referred to as the common elements – which are the areas of the property outside the individual apartment spaces. – Owners share expenses for these common

elements, such as maintenance of the grounds and buildings and amenities.


CONDOMINIUM DOCUMENTS


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Condominium Documents

All these documents intertwine •  Declaration •  Bylaws •  Master ground lease •  Deed restriction/affordability covenants •  Land use restriction agreement •  Construction loans •  Long-term financing

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Disclosure Materials

•  In Wisconsin, we are required by statute to provide condo documents with an executive summary which provides each buyer with essential information about the condominium documents.

•  This includes articles of incorporation and annual operating budget, as well as the following documents.

•  Goal: informed buyer 20 www.cltnetwork.org

Declaration of Condominium

•  This establishes and describes the condominium, the units and the common areas, and permitted uses of property.

•  Key exhibits are: •  the condo plat, which is a map that shows

where everything is, and which labels private spaces versus common elements;

•  Floorplans and elevations, which clearly describe what each individual unit looks like.


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Public versus Private Spaces

•  Common Elements: those areas within the condominium that are owned/controlled by the owners association –  Walkways, streets, greenspace, hose bibs, public

lighting, building exteriors, attics, etc. •  Limited Common Elements: owned/controlled by

the association for limited use by unit owners –  Porches, patios, designated backyard areas, etc.

•  Condo Units: The private space owned by the individual condo owners: –  From the drywall paint inward.


Declaration - Table of Contents

•  Definitions •  Descriptions (bldgs, units, common elements, etc) •  Percentage Interests and Voting •  Easements (for utilities running to units) •  Option to Expand •  Assessments for Common Expenses •  Use Restrictions •  Amendments (need lender approval) •  Mortgages •  Design Review Committee (for anything not inside) •  Insurance (coverage requirements)


Condo Bylaws

•  These are the rules which govern the condominium and effect the rights and responsibilities of unit owners.

•  It covers things such as: – Maintenance responsibilities; – Condo dues and special assessments – Voting procedures; – Etc.


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Table of Contents

•  Plan of Unit Ownership •  Owners’ Association •  Board of Directors •  Officers •  Assessments (paying the bills) •  Repair, Improvement and Use (who is responsible for

what) •  Alienation of Units (resale, lease, etc) •  Insurance •  In the Event of Fire •  Compliance and Default


WHY DO CONDOS?


Why would CLTs do Condos?

•  Affordable purchase prices

•  Maintenance regulated

•  Good choice for people who don’t want as big a maintenance burden.


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Disadvantages of Condos

•  More affected by market volatility

•  In some cases, resale restriction secured by covenant only

•  Potential for conflict: noise, management, pets, etc.

•  Rising condo fees erode affordability


CHAMPLAIN HOUSING TRUST


CHT Condo Experience

•  First condo in 1991 •  Vermont allows Affordability Covenants •  Of 511 units in portfolio 297 are

condominiums •  Buyer demand is 70% Single Family and

30% Condominiums


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CHT Condo Portfolio

•  Buyer-initiated Program: 104 •  Inclusionary Zoning: 35 •  Turn-Key Purchase: 60 •  CHT Developed – New Construction: 33

(29 mkt) •  Conversion of Rental Apartments: 34 (10

mkt) •  Other (NSP, Habitat, Dalton Drive): 39


Buyer-Initiated Program

•  Most homes came into our portfolio through this program.

•  Most homes lost from our portfolio came in this way too!


Balance Mission with Market

Think like a realtor not like a community developer!

•  Location, location, location! •  Net Price (20% below market value) •  Product (layout, construction quality) •  Strength of Association/ Association

Rules – (pets!, # of units, reserves)


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INCLUSIONARY ZONING


Inclusionary Zoning

•  Where a local zoning ordinance requires or gives a density bonus to a developer to include a certain percentage of affordable units in a market-rate project.

•  The developer often turns to a CLT to steward the affordability requirements.

•  The CLT may purchase units or just steward the resales.


IZ Challenges

•  CLT homeowners are vulnerable when they constitute a minority of condo association – Condo dues – Special assessments

•  Key is to get involved in the drafting of the ordinance to assure reasonable affordability calculations. Need adequate subsidy and require homebuyer ed.


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CLT AS DEVELOPER

CLT as Developer

•  Risk of real estate speculation – potentially high fees in a hot market, and possibly huge losses if you can’t sell units.

•  Much more work/risk -- and much more control.

•  Need to design, permit, build and sell.


Don’t Worry – They’re Easy

•  When a lawyer tells you condos are easy – and mentions in the same sentence that doing an LLC is easy too – be prepared for big legal bills

•  Don’t worry – the third time you do a condo project – it really will be easy – Mess up the 1st one (hopefully nothing tragic). – Do better the 2nd time (get a passing grade). – Really know what you’re doing the 3rd time.


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What kind of a community do you want to create?

Condo documents should reflect your goals/values as a developer •  Decision-making process

– Consensus or not? •  Protecting homeowner interests

– Particularly in an IZ situation •  Knowing your market

– Who will be buying these homes? – How tight-knit will this community be?


What Are the Different Ways to Structure CLT Condos?

•  Depends on your circumstances – Are you the lead developer? –  Is this an Inclusionary Zoning situation

where you have a minority of units? –  Is this a mixed-income project?

•  Your document structure should flow of your project goals -- there is no one-size fits all.


Master Ground Lease

•  All the land is leased to the condo association in one big chunk.

•  Advantages: – One lease versus lots of leases

•  Disadvantages – Harder to account for variety between units

(mixture of market-rate and resale-restricted, for example)


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Individualized Ground Leases

•  CLT leases the land under each unit to the condo owner, with common areas leased to the condo association

•  Example: Thistle in Boulder, CO •  Advantages

–  You can really tailor the lease to the needs of each unit.

•  Disadvantages –  Lots and lots of leases to keep track of. –  Requires land under each unit (townhouses) –

doesn’t work for stacked units.


Hybrid Approach

•  Master ground lease with individualized restrictive covenants to cover resale restrictions.

•  Example: •  Troy Gardens, Madison, WI

•  Advantages – Works well for mixed-income projects

•  Disadvantages – Restrictive covenant not totally bullet-proof --

requires monitoring/active involvement at resale


MADISON AREA CLT


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The Cautionary Tale -- MACLT Condo Project #1 - Anniversary Court


Background Information

•  14 duplex-style condos (1997) •  Lots of construction problems – brutal site

conditions, cost overruns, shaving costs on things like patios, porches, driveways that came back to haunt us later

•  Poor marketing: pro bono marketing by realtors simply didn’t work at all. No homebuyer education component.

•  Pricing wasn’t low enough relative to market to compensate for resale restrictions.


How We Set Things Up

•  Used model ground lease with minimal changes

•  Modified Buyer’s Affidavit to include description of resale price

•  Bare bones declaration and bylaws •  Cut condo association loose with minimal

support, no funds in maintenance reserve, and post-warranty construction issues.


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This was not good

•  Association struggled. •  Just 3 homeowners active on board over the first 7

years. •  Sale prices not low enough versus market + poor

marketing = units that didn’t sell until after construction warranty expired

•  Post-warranty construction problems created ill will between association and MACLT.

•  Overall condo doc package may not withstand an aggressive legal challenge from a seller where the MACLT does not exercise its option to repurchase and the seller wants to sell at full market value.


Let’s Show Them Some Love

•  In 2005, we made a commitment to provide staff support to Anniversary Court condo board and to provide bookkeeping services.

•  By the end of 2006, – A pretty strong board – Annual budget process –  15 year maintenance schedule – with adequate

funds set aside each month for reserves – Very positive relations between CLT and

association


Condo Project #2 - Troy Gardens - Learning from Our Mistakes


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Condo Project #2 - Troy Gardens - Learning from Our Mistakes

•  Focused on developing strong condo association from the beginning

•  Developed in-house marketing capacity •  Got best attorney in town to draft

documents – No more getting legal work done on the

cheap for us.


Still Some Challenges

•  30 unit mixed-income condo project condo: –  20 income-restricted (regular CLT units) –  10 market-rate (no restrictions at all)

•  1 Common House – Net profit from market-rate units not enough to

cover the cost. •  Appeasing nervous construction lender

happy who wanted to be sure he could get clear title to land and improvements if project failed - $35,000 in extra legal fees.


CHAMPLAIN HOUSING TRUST


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CHT – City’s Edge

•  60 units – 31 affordable/29 market •  Hit the market just right – all sold before

construction complete. •  Lots of resales in the first couple of years

and depreciated values •  Has now stabalized


Lessons Learned

•  Expect to provide training to set up the association governance.

•  Plan for professional management. •  Pre-fund replacement reserves – money is

one of the biggest areas of conflict. •  Put CLT fee in Condo budget. •  Not sure we’ll do flat style large

buildings again.


Turn-Key Project

•  CLT agrees to purchase units developed

and built by a private developer/builder •  CHT has done this with 8 projects.


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Advantages

•  No construction financing •  Sales price is typically a bit less than

market – developer owns land and is a builder – profit is in building.

•  Some input into design and amenities. •  Benefit to seller is pre-sales for financing,

no realtor fees – sometimes get density bonus for affordability.


Success

•  Checkerberry Square – 9 out of 23

townhouses •  Solid builder


Challenges – Shelburne Meadows

•  Modular construction – ongoing issues •  Inadequate construction oversight •  Very difficult/arrogant builder not willing

to take responsibility. 60 www.cltnetwork.org

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Condo Conversion

•  Convert existing rental housing into

condominiums


Benefits

•  If you have equity in the project, the sales prices can be very affordable. – Westwood $24,000/unit debt ($145,000 value) – Sold for $80,000 to existing tenants – Same housing cost as renting

•  Provides affordable homeownership to tenants.


Risks

•  May need construction financing •  tenants may be displaced if they are

uninterested or unable to purchase. – Give adequate notice – 2 years – Pay relocation expenses -- $2,000


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Westwood


Westwood

•  32 townhouse units •  Sold 8 to existing tenants •  Sold 8 market rate/ no restriction


Conversion of LIHTC project?

•  42 units – most townhouses in triplexes •  $24,000/unit debt when developed •  In 15 years the affordability will be

amazing •  But will the funders let us convert??


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On to South Meadow!

•  148 unit project with 32 townhouses in

duplexes with attached garages. •  Purchasing from private developer. •  $140,000/unit purchase price •  Average $194,000/unit value


South Meadow


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CURRENT ISSUES,

OPPORTUNITIES, AND TRENDS FOR THE

FUTURE


Today’s Challenges

•  Homes are harder to sell – Mortgage financing harder to get. –  Inability to resell reduces mobility.

•  Projects are harder to develop – Construction financing harder to get.

•  Many existing condo projects are unstable – Foreclosures, unsold units, need to rent.


Today’s Opportunities

•  CLTs can purchase unsold condo units at very favorable prices.

•  Good time for a buyer initiated condo program. –  Make sure condo

project is stable!!


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Trends for Future

•  Nationally, condo market is far from stabilized - some local markets are fine.

•  CLTs will focus on lower risk strategies: – Lead developer in robust markets, – Buyer initiated program, –  IZ program participation.

•  Multifamily housing will only get more important – BABY BOOMERS!!
