Commercial Condos

By Thomas B. Ericksen and Tara A. Aarnio

The Pearl district in Portland exemplifies "condoizing" — creating condominiums in renovated commercial buildings and in new commercial and mixed-use developments. The trend has continued in other areas of Portland as well. But seasoned developers and new builders may be surprised to see substantial differences between a typical commercial development and a commercial condominium project. All those contemplating condoizing their commercial projects should be aware of the pros and cons and do the necessary research to determine whether the time and money spent will pay the expected dividends.

Advantages of Condoizing

1. Shifting Management Responsibilities
   A condominium shifts the management responsibility from the developer/owner to the condo owners' association. Under Oregon law, an owners' association must be established when the condominium is created. Once the developer/owner transfers control to the owners' association (a formal process called "turnover" under the Oregon condominium statute), the owners' association assumes responsibility for collecting assessments, maintaining the common elements and common areas, and dealing with any disputes between owners. This relieves the developer/owner of many typical property management responsibilities.
   
   
2. Flexibility
   Condominiums provide the developer with flexibility and options. A developer/owner of a condominium can sell, lease, or choose a combination of the two. Selling units will provide the developer with a quick return of its capital. Leasing condominiums provides the developer with the benefits of ownership, a steady stream of income, and condominiums that are likely to increase in value and that can be sold for a greater profit at a later date. A developer can also opt for a combination of selling and leasing to accommodate its own financial needs and the market.
   
   
3. Favorable Climate
   The Portland metropolitan area is ripe for redevelopment. A revitalization process usually means more community and local government support for condominiums and condominium-like projects, especially projects that involve mixed-use buildings and sustainable features. Such support can mean easier and potentially less costly land use approvals for the developer than it would find in a climate that is not keen on redevelopment.

The Disadvantages

1. Increased Liability Concerns
   Condominiums seem to breed litigation and liability concerns for both the developer and the contractor — perhaps because it is more cost-effective for the unit owners, banding together through the owners' association, to bring suit for real or imagined construction defects than for an owner or tenant to bring such an action individually. It is not unheard of for the owners' association to file a construction-defects claim against the developer and contractor shortly before the statute of limitations expires, primarily to obtain settlement funds to pay for routine common-elements maintenance requirements.
   
   
2. Additional Regulatory Hurdles
   In addition to the usual local land use approval process necessary for a development, a condominium project also requires approval at the state level by the Oregon Real Estate Commissioner. Condominiums, as an additional form of property ownership, are highly regulated by the Oregon law. To obtain state approval, a declaration and a plat must be prepared and submitted for review and approval. The declaration is a legal document that delineates the rights and responsibilities of the condominium unit owners with respect to individual units, as well as the general and limited common elements of the condominium. A Disclosure statement must also be prepared and approved for condominiums containing residential units. The disclosure statement provides potential purchasers with detailed information about the project, allowing them to make an informed decision regarding whether to purchase a unit. If the project is the conversion of an occupied existing building to a condominium containing residential units, the requirements of the conversion laws must be met. Developers should also seek professional advice on the effects of House Bill 3186B, which amends the conversion laws.
   
   
3. Additional Costs
   Developing a commercial condominium also involves additional costs that may not otherwise be incurred in a development project. In addition to the declaration, disclosure statement, plat, etc., bylaws must be prepared, setting forth the condominium's rules and how the owners' association operates. For mixed-use projects containing residential condominiums a reserve study must also be performed to estimate maintenance costs and determine the monthly assessments necessary to establish sufficient reserves to repair and replace major building systems. Although a reserve study is not required for purely commercial condominiums, a reserve study may still be a good idea depending on the type and size of the development. Insurance costs are also likely to be higher due to increased litigation and liability concerns. During construction an owner's wrap policy may be the only way to provide insurance coverage because individual contractors and subcontractors may not be able to obtain coverage for their participation in a condominium project.

There is no "one size fits all" answer when deciding whether to condoize a commercial building or project. Often it is necessary to proceed through the design stage before obtaining all the information necessary to make an informed decision. By carefully analyzing the advantages and disadvantages of condoizing a commercial project, the developer can help ensure the success of the project.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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