Patrick T. Sharkey of Jackson Walker, LLP writes of ten issues to be considered in a condominium conversion project:

1. All existing leases must be honored after the conversion, regardless of the length of the lease.

2. Every tenant/subtenant must be given at least 60 days written notice to vacate their premises. The failure by the developer/investor to provide proper written notice may constitute a defense for the tenant/subtenant in the action for possession.

3. The developer/investor shall pay all of the operating expenses for the condo until a condo owners association makes a common expense assessment and imposes assessments against the individual unit owners. Furthermore, until the developer/investor’s control over the condo association terminates (or three years from the date of the developer/investor’s first conveyance of a unit – whichever comes first) the developer/investor will generally be responsible for the portion of the association’s operating expenses not covered by other unit owners.

4. Tax-exempt entities that own the offices in which they operate do not have to pay ad valorem taxes for the portion they occupy. Moreover, if there is no third-party ownership in the building, then there may not be a need to form a condo association.

5. Limitations to insurance coverage for damage to the condo building may lead to high special assessments being imposed on individual unit owners. Condo by-laws may require the approval of 80-100 percent of the unit owners in order to terminate a condominium – a consensus that may be difficult to achieve. Developers/investors should be aware of such limitations and plan accordingly, particularly in regions that may be prone to catastrophic events.

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7. Local law will supersede the condo declaration in the event that the two contradict each other. A developer/investor must be aware of the laws pertaining to condominiums and understand that there are limitations to the powers that can be drafted into a condo declaration.

8. In an effort to protect consumers purchasing condo units (during a conversion or otherwise), most jurisdictions require some sort of condo information statement. The condo information statement may require disclosures related to the condition of all structural and mechanical components in the building including an estimate of the useful life of such components. It may also list the building code violations received by the condominium.

9. Condo conversion is a complex process involving input from numerous types of professionals. Among those involved is the engineer/surveyor. Detailed drawings and measurements of each unit and the percentage interest of each unit owner is the critical to the successful completion of the declaration of condominium regime. The more sophisticated and experienced is the condo conversion team, the higher the likelihood that the conversion will progress smoothly and without complications.

10. If the seller is the original developer, s/he may contractually prohibit the condo conversion in order to avoid construction defect claims under a statute of repose. A claim against the original developer of the property for injury may be barred if brought past the statute’s stipulated amount of time after completion of improvements.

Mr. Sharkey’s analysis is based on Texas law but the aforementioned points also apply to most other jurisdictions.

Last Updated on September 28, 2012 by Ramin Seddiq