The commercial condominium is not a new concept, but it is worth revisiting in light of the current real estate market. For the builder, there are several advantages to creating commercial condominiums and offering them for sale or lease. For the buyer, there are considerable benefits to owning, rather than leasing, a place of business.
Smart Business spoke to Abe Cook and Stephanie Nation of Jackson DeMarco Tidus Peckenpaugh about why builders and buyers alike should consider investing in commercial condominiums and how a commercial condominium development is created in California.
As a builder, why should I consider creating a commercial condominium project?
There are several benefits for a builder:
- Builders can respond to market demand more readily with commercial condominiums. Commercial condominiums can be as conventional as the typical office or retail space; but they can also be used to define individual parking spaces in a parking garage, boat slips in a marina, or signage hanging from the side of a building, among other things. The builder can make the condominium as large or as small as they like, subject to local ordinances.
- Although the creation of commercial condominiums is subject to various legal requirements, it is not subject to review by the California Department of Real Estate. This provides the builder greater control and more flexibility in the creation of the governance structure for the project.
- Builders can increase the value of a commercial condominium through the use of exclusive use easements for parking and storage spaces and outdoor seating and patio areas, to name a few. These easements may be used as an alternative to creating separate condominiums for each component of a commercial project.
As a buyer, what advantages are there to purchasing a commercial condominium?
- Purchasing a commercial condominium means becoming a member of an incorporated owners association. Such associations typically own the common areas in a commercial project (such as streets, courtyards and even the commercial buildings themselves), and serve as a buffer between owners and potential claims arising from accidents on such common areas.
- In addition to the various tax benefits of owning rather than leasing (which is another subject entirely), owners are protected against excessive rent increases and do not pay separate property tax on common areas owned by the association (the association also does not pay property tax on these areas).
- As members of the association, owners have a level of control over the management and maintenance of the common areas in a commercial condominium project.
How are commercial condominiums created?
In California, there are four steps to creating a commercial condominium: (1) recordation of a subdivision map; (2) recordation of a condominium plan, or plans; (3) recordation of a declaration; and (4) formation of the association.
The map: The map must be approved for the creation of condominiums. The design of the map greatly depends on the nature and size of the project. If the project is composed of multiple buildings, consideration should be given to subdividing the land into multiple lots, each of which may in turn be further subdivided into multiple condominiums. For example, in a large medical office complex with a separate parking structure, the medical office buildings as well as the parking structure could exist on separate legal lots shown on the map. The builder could then create condominiums on each lot containing a medical office building, and retain ownership and control of the separate lot containing the parking structure. The builder would then be in a position to charge for the use of the parking structure, sell the parking structure as a whole, or even convert the parking structure into multiple parking condominiums to be sold to the owners of the adjacent office condominiums.
The condominium plan: Once the map is approved and recorded, then a condominium plan (or plans) can be created and recorded over the lot (or lots) shown on the map. A condominium plan must depict the condominium units (which are typically separate volumes of airspace), the common area (the undivided interest each owner must own under California law), and the association property (any property to be owned by the association), and may also depict any exclusive use easements.
The declaration: The declaration is a recorded document which governs the management of the condominium project. The declaration typically provides for such things as (i) use restrictions, (ii) maintenance responsibilities of the owners and the association, (iii) powers and duties of the association, (iv) collection of assessments, (v) design control and (vi) disclosures, to name a few.
The association: The association manages and maintains the commercial project and is governed by its bylaws and the declaration. Oftentimes, the association will own fee title and/or easements over the common elements of the project (such as the building, streets, parking areas, walkways, etc.), thereby shifting liability away from the condominium owners. As discussed above, this shift of liability to the association is a significant advantage of a condominium project.
The creation of commercial condominiums is a complicated and involved process. Because every condominium project is unique and faces various challenges, it is critical to engage legal and engineering professionals at the outset to ensure that the project is created in a manner that fits the vision of the builder and provides a management structure that is clear and reasonable for the owners.
Stephanie Nation and Abe Cook are associates at Jackson DeMarco Tidus Peckenpaugh. Reach them at firstname.lastname@example.org and email@example.com, respectively.