Condominium Conversion

Condominium conversion is the process of dividing real estate held under one title into individually owned units that share common elements, such as exterior walls, a lobby, or recreational facilities. Almost any type of property can be converted to condominium ownership: an apartment building, an industrial building, a parking garage, commercial space, attached housing (duplex, townhouse), and more. A condominium development may be very large or may be as small as two units.

Condominium conversion “took off” in the 1960s with the amendment of federal laws to facilitate financing and the enactment of state “horizontal property” acts. Condominium developments can qualify under the National Housing Act for FHA insurance for mortgages to finance the sales of units. Horizontal property acts, also called condominium enabling laws, recognize that the ownership of space between vertical walls at horizontal levels above the ground is ownership of real estate for purposes of property taxes, recording deeds and liens, and other incidents of real property ownership. Those laws also prohibit discrimination against condominium ownership in zoning laws. For example, if a zoning ordinance permits four-unit quadro homes in a particular district, it cannot prohibit a four-unit building simply because it is a condominium rather than held under a single title.

Similar concepts include cooperative ownership and time-share ownership. In an ownership cooperative, a legal entity, usually a corporation, owns a building. Members purchase shares, which entitle them to occupy a specific unit and use the common elements. Like condominium owners, the members pay monthly fees and elect a board to enforce rules and oversee maintenance. Co-op members may also screen and select who may live in the cooperative. Since a co-op member owns a corporate share, rather than real estate, a traditional mortgage is not available, and financing can be a challenge. Similarly, time-share ownership is usually not real estate ownership but a right to occupy a unit, usually vacation property, for a limited time.

Preliminary Concerns

Condo conversion must comply with state and local laws. Before proceeding with conversion, the prospective developer must consider the market for condominiums, the cost of the legal process, the cost and time required for physical modifications to comply with local building codes and establish separate utility service for each unit, and state and local laws that protect the rights of existing tenants. In many areas, existing tenants must be given a specific period of notice, relocation assistance, and even an option to purchase. Financing to accomplish all of this is another major consideration.

The Process

Accomplishing the conversion generally requires preparation of a plat that shows the physical division into units and a declaration of condominium ownership, both of which are recorded with the land records for the area. The declaration includes a description of the common elements, such as the lobby, recreational facilities, and shared walls and roofs, and a formula for determining each unit’s share of those common elements. The developer will generally also file articles of incorporation for a homeowners’ association (HOA) to govern the community, record bylaws to dictate the operation of the HOA, and set covenants, conditions, and restrictions (CCRs) to bind the individual unit owners to important limitations on use and alterations. Many jurisdictions also require that the developer make specific disclosures to prospective buyers.

After the documents are recorded, the developer can begin selling units. State or local law will dictate that when a certain percentage of units is sold or after a specific time, control of the HOA must be transferred from the developer to an executive board elected by the owners. That board will be responsible for the budget, for setting and collecting assessments, for enforcing rules, and for maintenance and repairs.

During the “housing bust” that began in 2008, many condominium projects failed. State law also dictates the process for taking property out of condominium ownership and reestablishing a single title. If a developer decides to reverse the process before units are sold, the re-conversion is generally relatively simple. If units have been sold, the process can be complicated.