The Land Only Condominium: Little Known and Less Understood

 

                      

Some time ago I was walking a development project with the chief surveyor for a large engineering company, showing him the unit boundaries I wanted established for a client’s proposed land only condominium project.

After about a half hour of pointing out boundary and overhang issues to him and discussing the location of common elements, he asked: “So what’s a land only condominium anyway?”

And this was a surveyor and engineering firm that had done extensive condominiums projects!

I have had similar questions from lawyers, even experienced real estate lawyers.

The land only condominium is indeed neglected.

Defined

It is not surprising, as the Rhode Island Condominium Act makes little mention of land only condominiums, beyond their definition. R.I.Gen.Laws 34-36.1-1.03(17)

“Land only units shall mean units designated as land only units on the plats and plans which units may be comprised entirely or partially of unimproved real property and the air space above the real property. The boundaries of a land only unit are to be described pursuant to Section 34-36.1-2.05(a)(5). Land only units may, but need not, contains a physical structure. The declaration may provide for the conversion of land only units to other types of units and/or common elements provided the conversion shall be effective only upon the recording of an amendment to the declaration which amendment will include new plats and plans identifying any portion of the land only unit converted to another type of unit and/or common element.”

Essential Attributes

There you see the essential attributes of a land only unit:

  •      It need not contain a physical structure, but it may
  •      It may subsequently be converted to a conventional condominium or common elements
  •      The air space above the land is included in the unit

Land only units are also mentioned in the section of the Condominium Act addressing the creation of condominiums, R.I. Gen. Laws 34-36.1-2.01( which will be discussed in more detail below) and they are mentioned sporadically elsewhere in the Act.

For all its obscurity, it is a powerful and versatile tool for real estate development.

Consider two representative projects where I have found land only units extremely useful.

Representative Project—Mill Site

A client purchased a large mill site it wanted to develop, but was unsure it had the interest in developing the entire project. The site consisted of numerous buildings, some connected but most stand-alone structures, and some open space for new building construction. The client was looking for a way to have the flexibility to develop the site in part and perhaps sell off the site in part for development. However, the local land use regulations prohibited subdivision of the property.

A land only condominium was the solution. 

First, under Rhode Island law a condominium is not a subdivision. McConnell v. Wilson, 543 A.2d 249 (RI 1988)

Secondly, each building and buildable parcel was designated as a land only unit. Unlike a conventional condominium, which cannot be declared until the buildings are substantially complete, the land only unit can be declared as it stands, and buildings either later constructed on the unit or rehabilitated on the unit become part of the unit. ) R.I. Gen Laws 34-36.1-2.01(b)  The owner could develop three or four units and sell off the remainder of the  units to other developers for development.

Representative Project—High Rise Urban Development

A client was interested in buying an unimproved parcel in a downtown condominium project and constructing a high rise office building. However, the condominium was designed as a conventional condominium, meaning the client could not “buy” the condominium until after it constructed the building and it was substantially complete. That’s a risky situation to structure, particularly given the vagaries of conventional financing for such an expensive project. Complicating the issue was the fact the condominium was a leasehold condominium—meaning it was subject to a long-term ground lease.

Again, the solution was restructuring the condominium regime to have the portion being purchased by my client  be a land only condominium, which can coexist in the same condominium regime with a conventional condominium. R.I. Gen Laws 34-36.1-2.01(b)

Under the new structure, financing was provided and the project successfully completed, with the client having ownership of the condominium pad site from day one.

A Little Respect Please

So, the next time you hear someone reference a land only condominium, please treat it with a little respect!

 

 

Minimum Housing Standards--For Condominiums?

 

Prospective purchasers and owners of investment rental property, including condominium developers renting units they can’t sell, may not often think of minimum housing standards, but perhaps they should.

Rhode Island’s Housing Maintenance and Occupancy Code, R.I. Gen. Laws 45-24.3-1 et seq., may contain not more than a few surprises, from the mundane to the more serious.

Is It A Crime Not To Do Window Treatments?

For example, owners may be surprised that it is their responsibility for “the providing and hanging of shades or other devices on every window of every room used for sleeping and for every room equipped with a flush water closet or bathtub, affording privacy to persons within these rooms”. 

So if you are thinking about leaving the windows “au naturel” so the tenant can install their own designer window treatments, you probably want to reconsider that.

The good news? “Once window treatments are installed in any one rental  by the owner, replacements become the responsibility of the occupant”!

When Quaint May Be Illegal

The maintenance and occupancy code is detailed and very specific, and it has provisions that could get owners and investors in trouble, particularly when dealing with historic structures, where room configurations may be “quaint”, ceilings may be “charmingly low” and doorways may be “petite”.

Consider these requirements:

  • every habitable room must have at least one window or skylight facing directly outdoors, unless connected to a room used seasonally, such as a porch, but in that case “adequate daylight must be possible through this interconnection”;
  • minimum window area must be at least 10% of the floor area of the room;
  • a bathroom or water closet compartment must not be used as the only passageway to any habitable room or hallway;
  • at least 75% of the floor area of every habitable room must have a ceiling height of no less than seven feet;

Violations of the code range from low level fines to criminal sanctions. And once a notice of violation has been filed against a property, it is “unlawful….to sell, transfer, mortgage, lease, or dispose of the building to another” unless the conditions have been remedied or unless the mortgagee, lessee, or transferee have been notified of the violations, whereupon they are bound by the violations.

Perhaps a Look-See May Be In Order

Building officials, who are generally both pragmatic and busy, are unlikely to be focusing on well-maintained rental properties in search of minimum code violations.

That being said, tenants do complain and accidents do happen.  

Accordingly:     

  • Prospective buyers may want to have an experienced building code consultant make an inspection before the purchase.
  • Owners may want an inspection to identify and fix problems before they become an issue.

After all, when no window treatments can be a crime…………

 

Buyers and Sellers Need Protection at Auction

as published in the Providence Business News, February 15-21, 2010

Selling property at auction has become increasingly popular, particular for condominiums and some high end residential properties, given the shattered real estate market.

Sellers include owners of single family residences, usually high-end properties that have sat on a stagnant market for some time, given the limited buyers who can afford a multi-million dollar purchase price. But the largest group of sellers is owners of multiple units, usually condominiums. They may be developers unable to sell in a difficult market, investors who have taken over the developer's position in the project, or lenders who have either taken the property by foreclosure.

Buyers may be investors but are more likely than not ordinary purchasers who are attracted to auctions by the promise of a bargain.

And while auctions may result in owners finally selling properties they have unsuccessfully marketed for months, or even years, and buyers getting their dream house, perhaps at a substantial bargain, auctions are not without risk for both buyers and sellers.

The first question for a seller is whether or not an auction is the most advisable way to sell the property. Often the market answers that question. Months of unsuccessful conventional marketing often lead a seller to try an auction.

Sellers must then decide what type of auction to hold:

  • an absolute auction, where the highest bid wins, with no minimum required;
  • a minimum bid auction, where bids below a disclosed minimum will not be accepted;
  • the reserve auction, where the seller has ultimate control, with the right to accept, reject or counter the highest bid.

The absolute auction appears the most risky for the seller, as the property could sell for far below its market value. However, many auctioneers say absolute auctions attract the most bidders and the most excitement for just that reason—the possibility of a spectacular bargain. And that excitement and enthusiasm among more bidders can lead to higher bids and a better sale price for the seller.

John Hodnett, who specializes in high end properties for Lila Delman's Narragansett office and whose firm has its own online auction service, claims absolute auctions are the most successful, although the seller obviously does not know what its selling price will be.

Stephanie Wilkinson, Executive Vice President of Boston's Accelerated Marketing Partners, which handles auctions across the country, favors the published reserve or disclosed minimum price auctions.

Selecting the right minimum reserve is critical, according to Wilkinson. It must be low enough to get buyers off the sidelines, but fair to the owner if the units do not sell above the minimum.

Auctioneers often set minimums at below what they believe the market will be.

Her company markets and auctions multiple unit projects, today almost all condominiums. In the past year her company has sold approximately 700 units at auction and another 700 units following the auction. She believes the published reserve method gives the best indication of market value, which is important for a seller in seeking to sell the remainder of the units that do not sell at the auction.

Sellers must also be careful to select the right auction company. As Accelerated Marketing Partners' Wilkinson notes, the success of the auction depends on careful and detailed pre-marketing of the auction, including several weeks of access to the units before the auction. The goal of the auctioneer is to drive a year's worth of traffic through the project in 3-4 weeks.

Buyers have their own risks. They must do their homework. They must read and understand the auction terms and conditions, as this will govern the sale. They must read and understand the purchase and sale agreement, as if they are the successful bidder they will be expected to sign it on the spot.

Buyers should decide whether to have an inspection of the unit done before the auction, which is an additional expense.

Since most of the auctioned properties are condominiums, it is critical that the buyer investigate and understand the financial health of the condominium association. Certain unit owner delinquencies may affect the ability to get an appraisal of the unit, which may adversely impact financing.

Buyers must also understand what rights the developer retains. Can the developer withdraw property from the project? Must all improvements and amenities shown on the project plan be built?

And both the seller and buyers must be concerned about whether or not the units can be financed through conventional sources.

All that being said, Accelerated Marketing Partners Wilkinson believes that auctions are good for sellers and buyers.

"There is a stalemate in the market today over what is market value", she says, explaining why it is so difficult to sell properties in this market. "Because of the uncertainty of where the market is, auctions give buyers confidence because they are bidding against other real buyers, in $1000 increments. Value is being confirmed by the other bidders."

With auctions, the watch words may be" Caveat Emptor" and "Caveat Venditor"—Let the buyer beware and let the seller beware. In which case, both may do well.