By John R. Blake, Jr., Esq.
Use of the condominium form of ownership can be a
creative solution for problematic real estate development. A typical
condominium regime vests ownership of a "unit" in the owner, and the
places ownership of the common elements in a unit owners association.
This arrangement can, in some cases, be employed when developing real
estate by subdivision is problematic.
The condominium regime is created by submitting the
land and any buildings thereon (or any to be constructed thereon) to
the provisions of the applicable state's condominium statute. The owner
creates the condominium by executing and recording an instrument
which submits the land and buildings to the jurisdiction of the
applicable condominium statute, which instrument describes the land,
building, units, common elements and appurtenant rights which make-up
the condominium. The master deed also sets forth the percentage
interest attributable to each unit in the common elements. Governance of
the unit owners association is spelled-out either in the master deed
creating the condominium, or in a separate document such as a
declaration of trust.
The condominium unit is typically described referring
to planes, surfaces, and appurtenant rights. The actual fee ownership
in the unit does not usually include the underlying land on which the
building is situated, and frequently it does not include the structure
of the building of which the unit is a part. Appurtenant to the unit
is a percentage interest in the common areas of the condominium,
ownership of which is vested in the unit owners association.
Unit ownership may also include "exclusive use" areas
within the common elements, made up of portions of the structure or the
land which comprise the common elements. As the name implies,
exclusive use areas are akin to easements, while fee ownership remains
in the unit owners association.
A condominium regime can also be structured so as to
provide unit owners with real estate interests similar to those of a
separate parcel. If the condominium contains several single use
buildings, each building can be designated a separate unit in the master
deed. The land surrounding each unit and necessary for the owner's
use and operation of the property (such as parking areas) can be
designated as part of the unit, or remain part of the common area and
designated as an exclusive use area appurtenant to the unit in the
condominium documents. Driveways within the condominium would be left
as common areas. By including the necessary interests for the use of the
property as appurtenant elements, the "unit" has the character of
separate parcel of land created by a subdivision, but the property does
not go through the subdivision process.
Condominiums can also be phased, such that
construction of the buildings happens in stages. The condominium's
creator (sometimes referred to as the "Declarant") reserves to himself
the right to construct future buildings and to add them to the
condominium either as units or common areas.
One important note: in some municipalities zoning laws
may limit development of property to one principal structure per lot.
In such a case use of the condominium regime is not possible without
zoning relief (if available).
In some cases, a real estate development project
would, on the surface, make sense to follow the conventional form of
ownership where individual parcels of land improved with buildings are
conveyed in fee simple absolute (outright ownership), but because of a
problem with zoning, subdivision control law, or private restrictions,
the end result cannot be achieved through the subdivision process. Use
of the condominium form of ownership may provide a way around such an
This was the case for an owner who sought to develop a
large parcel of land with single family dwellings in several phases.
The parcel had an existing commercial building on it which had access to
public utilities which were not generally available to all parts of
the municipality. The landowner intended to raze the existing structure,
and build single-family houses on the land. Due to the construction
financing requirements, the owner and the developer structured their
arrangement so that the project was built in two phases over several
years. Also, the construction lender sought to finance the project in
several phases, with separate mortgages covering separate and distinct
real estate interests. However, phasing and financing the project in
this fashion posed several challenges.
A local bylaw restricted the ability to extend the
municipal utilities to more than the lot which they currently served.
To achieve the desired result of phasing the development, and at the
same time addressing the local bylaw restrictions, the owner and the
developer created a condominium, whereby each unit consists of the land
for each phase of the development. Appurtenant to each unit would be
development rights to build the individual houses.
As required by the condominium statute in the
applicable state, the landowner constructed a small out-building on
each of the "units," even though that building would later be removed
as it was not be part of the ultimate development plan (each state's
condominium laws will vary in certain respects; however, at least one
title insurance company has taken the position that land-only
condominiums are permissible). Despite the transitory nature of the
buildings, an architect was engaged to prepare a set of floor plans for
recording along with the master deed, as required by the statute.
The condominium documents provided for the future
construction of the dwellings by including development rights for the
houses appurtenant to each unit. The construction phasing was also
addressed, with particular attention to preserving the right to extend
the municipal utilities. The mortgage securing the construction
financing included the appurtenant development rights as part of the
The foregoing development plan and the condominium
documents required the construction lender's prior approval, as its
mortgage would be subject to the condominium documents. Also critical
to the success of the development plan was its blessing by the title
insurer, as the institutional lender required a title insurance policy
insuring its mortgage on each of the condominium units and the
appurtenant development rights. The policy also insured the validity of
the condominium regime. The developer consulted the title insurer
early in the process as to the form of the condominium documents, and
the insurability of condominium created in this manner so as to meet
the lender's requirements.
Through creative drafting of the condominium documents
and consideration of future development and financing objectives,
condominiums can be a valuable development tool where a typical
subdivision is problematic.
For ease of reference herein, I refer to such instrument as a "master deed."