A recent trend in today’s commercial real estate markets is the creation of more and more business condominiums, i.e., the dedication of commercial buildings as condominiums, so that individual office or retail suites may be sold for occupancy or investment.
Buying a business condominium unit is similar to buying other kinds of real estate, but also involves dealing with a few more issues you don’t face in a typical real estate transaction.
1. Understanding the project. All condominium projects have master deeds, bylaws and subdivision plans that legally create the project. These documents are lengthy and may be difficult to understand. They define your rights as a unit owner and your relationship with the condominium association that manages the project.
Unlike a residential condominium project, the documents for a business condominium do not include a disclosure statement summarizing the condominium documents. The purchase agreement is not legally required to include a withdrawal period for you to read all the documents and allow you to withdraw from the deal if you don’t like what you read. Hence, it is very important for you to either carefully read the documents before signing your purchase agreement, or negotiate the right to review those documents and terminate the agreement if you are not satisfied with them.
2. Viability of the project. When you buy a condominium unit, you are casting your lot with the other owners of units in the project. Because each of you pays a portion of the operating costs of the project, you should satisfy yourself that your new neighbors have the financial strength to keep the project going.
Typically, this issue arises if you are one of the first purchasers of a unit in a new project. Much of the project may be vacant, and you should focus your concern on (A) whether the other units in the project are likely to sell, and (B) if they don’t, whether the developer has the financial strength to cover those costs payable for the unsold units. What’s more, you should ask yourself whether being one of only a handful of occupants of a virtually empty building might adversely impact your business.
3. Restrictions on use. In a condominium project, the condominium bylaws will contain extensive restrictions on your use of your unit. You must carefully review those restrictions to determine whether they might adversely impact (A) your intended use, or (B) the marketability of your unit.
4. Restrictions on leasing/transferring. Often condominium bylaws impose minimum time periods for unit leases, prohibit leases of less than an entire unit, or place other limits on leasing. Occasionally, bylaws will restrict your ability to sell or transfer your unit without developer or condominium association approval. Hence, it is very important to review the bylaws before buying to make sure the restrictions do not adversely impact your plans to lease or sell the unit, or the marketability of your unit.
5. Condominium association finances. As a member of the condominium association, you must contribute your share of the costs to run the project. Thus, before you buy you should find out what the current monthly condominium maintenance assessment is and try to judge whether it will be sufficient to cover all necessary costs, without the risk of additional assessments.
If the project buildings are old or in poor repair, you need to consider what capital replacement or deferred maintenance costs might arise in the future, and whether the association has set aside a sufficient reserve to cover them.
6. Dealing with the condominium association. Being a member in a condominium association means that you are committing to participate in a democratic process. As a member, you have a voice in making decisions regarding the project, but you might also be outvoted. Most material decisions can only be made by a two-thirds vote, but the possibility exists that your rights could be adversely affected.
Buying, rather than leasing, an office or retail suite may make good sense for your business. However, you need to address these additional issues in negotiating your purchase agreement and performing your due diligence prior to closing.
Bill Hall, a partner in the Grand Rapids office of Warner Norcross & Judd LLP, focuses his practice on real estate and condominium issues.