Washington Real Estate Law © Copyright 2010 Rockwell Publishing, Inc. Lesson 14: Condominiums

© Copyright 2010 Rockwell Publishing, Inc. Introduction In this lesson: condominiums, timeshares, cooperatives, and real estate securities.

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Individual ownership of separate floors or “flats” in a building first became common in Paris and other French cities in the 1920s. Laws governing this form of ownership began appearing in Europe in the 1930s and 1940s. History

© Copyright 2010 Rockwell Publishing, Inc. Condominiums In the U.S., condo ownership rare until 1960s. National Housing Act of 1961 provided federal mortgage insurance for condominium units. By 1968, all 50 states had adopted some form of condominium law. History

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Washington’s current Condominium Act was passed in It’s based on the Uniform Condominium Act. It applies to all condominiums created in Washington after July 1, Washington law

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Condominiums can be created in two ways: property initially developed as condominium, or existing building (usually apartment building) is converted into condominium. In either case, condominium status is established by recording a condominium declaration. Creation

© Copyright 2010 Rockwell Publishing, Inc. Creation Condominium declaration must contain: name of the condominium, legal description of the property, description of entire development, including land and buildings (must include specific information about each unit: square footage, number of bathrooms, bedrooms, fireplaces), Declaration

© Copyright 2010 Rockwell Publishing, Inc. Creation Declaration contents, cont any restrictions on the use, occupancy, or alienation of the units, provisions concerning ownership and use of the common areas, and whether developer (declarant) is reserving any special rights. Declaration

© Copyright 2010 Rockwell Publishing, Inc. Creation When declaration is recorded, declarant must also record a survey map of property plus building plans for the project. Plans must show vertical and horizontal boundaries of each unit and establish the position of the unit in relation to the land. Declaration

© Copyright 2010 Rockwell Publishing, Inc. Creation In Washington, local zoning ordinances and other land use laws may not prohibit the condominium form of ownership. Land use laws may not impose requirements on condominiums that do not also apply to identical developments under a different form of ownership. Land use laws

© Copyright 2010 Rockwell Publishing, Inc. Creation Conversion: When owner of a rental property converts the existing building to condominium status. Condominium Act has rules that apply when residential rental property is converted to condominium. Conversion

© Copyright 2010 Rockwell Publishing, Inc. Creation If tenants are living in building when decision to convert is made, owner is required to take certain steps to protect tenants’ interests. Owner must give each tenant 120 days’ advance notice of conversion to condominium status. Tenancies cannot be terminated before 120- day period expires, unless tenant is otherwise subject to eviction under RLTA. Conversion

© Copyright 2010 Rockwell Publishing, Inc. Creation Steps to protect tenants’ interests, cont Owner must give each tenant a public offering statement (if residential). Tenants must be given 60-day right of first refusal on their unit. Conversion

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Condominium’s common areas include every part of property except individual units. Ownership of common areas shared by all unit owners as tenants in common. Declaration must assign a specific fraction or percentage of interest in the common areas to each unit.  Each unit may have equal interest in common area, or interest is proportionate based on value of individual unit. Common areas

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Limited common areas: Parts of the property that may be used only by the owners of specific units, rather than by all the residents. Example: A patio shared by the unit owners in Building C. Owners in Building D would not be entitled to use that patio. Declaration must list limited common areas and specify which units may use each of the areas. Limited common areas

© Copyright 2010 Rockwell Publishing, Inc. Condominiums A condominium must have a unit owners association. Association controls affairs of the condominium as a whole; its primary concern is regulation and maintenance of common areas. Association must be registered as profit or nonprofit corporation. Every unit owner is automatically a member of the association. Unit owners association

© Copyright 2010 Rockwell Publishing, Inc. Association Most decisions are made by the association’s board of directors. The board is elected by the association’s members. The directors are required to exercise ordinary and reasonable care in performing their duties. Board of directors

© Copyright 2010 Rockwell Publishing, Inc. Association The owners association has bylaws that govern its management. The bylaws: provide for the election of the board of directors, specify the powers and duties of the directors, and outline the schedule and procedures for association meetings. Bylaws

© Copyright 2010 Rockwell Publishing, Inc. Association Association has power to collect assessments from each unit owner to pay for expenses, including: common area maintenance, repairs, insurance costs, and special assessments for certain projects. Assessments

© Copyright 2010 Rockwell Publishing, Inc. Association Owner’s share of common expenses is based on percentage of interest in the common areas, as is her voting power in the association. Example: If unit owner has a 3% interest in the common areas, she must pay 3% of the common expenses, and her vote is counted as 3% of all the association’s votes. Percentage interest

© Copyright 2010 Rockwell Publishing, Inc. Association An unpaid assessment creates a lien against the unit owner’s title. Lien attaches automatically, as soon as the assessment is due. Lien can be foreclosed judicially or nonjudicially (if provided in declaration). Assessment liens

Summary © Copyright 2010 Rockwell Publishing, Inc. Condominium Creation  Condominium Act  Conversion  Declaration  Declarant  Common areas  Limited common areas  Unit owner’s association  Bylaws  Assessment liens

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Condominium Act establishes rules that declarant (condo developer) must follow when selling a unit to the first owner. Declarant is required to prepare a public offering statement (POS) that discloses certain information about the declarant, the condominium, and the unit. Sale by declarant

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Information that must be disclosed includes: declarant’s latest 5 condominium projects, if completed in the past five years, building code violations affecting the condo, physical hazards affecting the condo, liens against the property, pending lawsuits that might result in a judgment lien on the property, Sale by declarant

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Information that must be disclosed, cont estimate of the unit owner’s share of the common expenses, any additional fees for use of common areas, management company info, if any, copies of declaration, survey map, and plans, Sale by declarant

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Information that must be disclosed, cont copies of articles of incorporation and bylaws for association, rules and regulations adopted by association, and association’s current budget and balance sheet. Sale by declarant

© Copyright 2010 Rockwell Publishing, Inc. Condominiums For any sale that requires a POS, declarant cannot convey unit until after the declaration, survey map, and plans have been recorded. Sale by declarant

© Copyright 2010 Rockwell Publishing, Inc. Sale Declarant should give buyer the POS more than 7 days before the purchase and sale agreement is executed. If buyer isn’t given POS at least 7 days in advance, he has a 7-day right of rescission that runs from the time the statement is received. Right of rescission

© Copyright 2010 Rockwell Publishing, Inc. Sale The buyer can also move the closing date if necessary to allow 7 days between receipt of the POS and closing. If declarant fails to give buyer a POS altogether, buyer can sue declarant after closing either for actual damages or for refund of a portion of the purchase price. Right of rescission

© Copyright 2010 Rockwell Publishing, Inc. Sale When a unit is sold, declarant is required to do one of 3 things: pay off any liens affecting that unit, provide title insurance for that unit which will protect the new owner from the liens, or record a partial release for that unit. Release of liens

© Copyright 2010 Rockwell Publishing, Inc. Sale Condominium Act creates several implied warranties of quality that automatically apply to the sale of unit by the declarant, such as: that the unit and common areas are suitable for ordinary uses, and that the improvements are free from defective materials and constructed in workmanlike manner. Warranties

© Copyright 2010 Rockwell Publishing, Inc. Condominiums An owner who resells his unit must provide the buyer with a resale certificate, which: is prepared by the association or its agent, contains information pertaining to unit being resold, such as unit’s monthly assessment and fees, and any other assessments currently due or levied, Resale by unit owner

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Resale certificate, cont contains a copy of the declarations, bylaws, and rules and regulations of the association, contains detailed financial information about the association, and gives information about other units that could affect the unit being resold. Resale by unit owner

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Unit owner should give resale certificate and other documents to prospective buyer before purchase and sale agreement is signed. Purchase and sale agreement is voidable by buyer until five days after he receives the certificate, or until unit is actually conveyed, whichever occurs first. Resale by unit owner

© Copyright 2010 Rockwell Publishing, Inc. Condominiums When a unit is sold, deed does not have to give full legal description, but can simply state the unit number, name of the condominium, the declaration’s recording number, and the county where the property is located. Deed often mentions percentage of interest in the common areas that goes along with the unit. Deeds

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Developer self-dealing was once a source of problems. Example: Developer/declarant would set up long-term property management contract for himself or an affiliated company, and make ratification of this contract a condition of purchasing a unit. Consumer protection

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Under Condominium Act, any management contract, lease of facilities, or other contract arranged by the developer may be terminated by the board of directors of the unit owners association. Board must give 90 days’ notice. Consumer protection

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Townhouse ownership is similar to condominium ownership: owner has both separate interest in his unit and undivided interest in the common areas. Unlike condo owner, townhouse owner also has title to parcel of land on which the townhouse is situated. Townhouses vs. condos

© Copyright 2010 Rockwell Publishing, Inc. Condominiums Condominium Act doesn’t apply to townhouses, but townhouse developments may have homeowners associations similar to condo associations. Townhouses vs. condos

Summary © Copyright 2010 Rockwell Publishing, Inc. Condominium sales  Public offering statement (POS)  Right of rescission  Release of liens  Warranties  Resale certificate

© Copyright 2010 Rockwell Publishing, Inc. Timeshares Rather than purchasing all rights to an individual unit, a timeshare arrangement allows a buyer to purchase a time slot of ownership. In Washington, a timeshare is defined as a right to occupy a unit during three or more separate time periods over a period of at least three years.

© Copyright 2010 Rockwell Publishing, Inc. Timeshares Ownership interest in a timeshare unit may be held in 3 different ways: Tenancy in common: All buyers are deeded an undivided interest in a particular unit as tenants in common and agree to limit their use of the unit to a specific time period. Types of ownership

© Copyright 2010 Rockwell Publishing, Inc. Timeshares Interval ownership: Buyers are granted an estate for years for a specific time period each year.  Under tenancy in common or interval ownership, owner has all the responsibilities of property ownership (such as property taxes and potential liability if someone is injured on the property). Types of ownership

© Copyright 2010 Rockwell Publishing, Inc. Timeshares Vacation license or right to use: Developer retains ownership of the timeshare unit and agrees to allow buyers to use premises for a specific time period each year.  Right to use purchasers don’t have actual ownership of property and are not liable for property taxes or injuries occurring on property. Types of ownership

© Copyright 2010 Rockwell Publishing, Inc. Timeshares The Washington Timeshare Act was enacted to protect consumers. Requires registration of any timeshare property and disclosure of pertinent information to potential purchasers. Provides for remedial measures if the act is violated. Disclosures

© Copyright 2010 Rockwell Publishing, Inc. Timeshares Any person who offers or sells a timeshare must provide buyer with a written disclosure document before purchase and sale agreement is signed. The disclosure document must contain: the official name and address of the promoter; the location and description of the timeshare property; Disclosures

© Copyright 2010 Rockwell Publishing, Inc. Timeshares Disclosure document, cont a list of all units offered; types, prices, and number of units; location of units; types and durations of timeshares; Disclosures

© Copyright 2010 Rockwell Publishing, Inc. Timeshares Disclosure document, cont maximum number of timeshares that may be created; certain financial information (maintenance fees, etc.); and copies of any agreements or leases to be signed at time of purchase. Disclosures

© Copyright 2010 Rockwell Publishing, Inc. Timeshares A purchaser may cancel any agreement for the purchase of a timeshare within 7 days after receipt of the disclosure document or the signing of the timeshare purchase agreement, whichever is later. Cancellation must be in writing and delivered or mailed to promoter to be effective. Disclosures

© Copyright 2010 Rockwell Publishing, Inc. Timeshares Those involved in selling timeshares must register with the DOL as a timeshare seller. Real estate licensees may handle certain timeshare resales without registering as a timeshare seller, if acting solely in a brokerage capacity. Exempt licensees must still comply with all other aspects of the Timeshare Act. Seller registration

Summary © Copyright 2010 Rockwell Publishing, Inc. Timeshares  Timeshare  Tenancy in common  Interval ownership  Vacation license / right to use  Washington Timeshare Act

© Copyright 2010 Rockwell Publishing, Inc. Cooperatives Stock and non-stock cooperatives are another type of nontraditional ownership of real property. Like condominiums, cooperatives are usually residential buildings, although they may also be commercial buildings.

© Copyright 2010 Rockwell Publishing, Inc. Cooperatives Title to a cooperative building (and the surrounding property) is generally held by a nonprofit corporation formed for that purpose. Person who wants to live in the building buys shares of stock in the corporation, instead of renting or buying a unit. Ownership

© Copyright 2010 Rockwell Publishing, Inc. Cooperatives Less common form of cooperative ownership is the membership cooperative. A person who wants to live in the building buys a membership in the cooperative; instead of buying stock, the owner pays a membership fee. Ownership

© Copyright 2010 Rockwell Publishing, Inc. Cooperatives A project may be developed initially as a cooperative, or an existing building may be converted into a co-op. Individual unit residents own stock in the corporation and have a proprietary lease for their unit. Creation

© Copyright 2010 Rockwell Publishing, Inc. Cooperatives To acquire the lease on a specific unit, a resident must purchase a certain number of shares of stock. Shares are allocated to each unit based on the value of the unit compared to the total value of the entire building or complex. Ownership

© Copyright 2010 Rockwell Publishing, Inc. Cooperatives Each shareholder has a proprietary lease for particular unit. A proprietary lease has a longer term than most ordinary leases, and gives shareholder more rights than an ordinary tenant. Ownership

© Copyright 2010 Rockwell Publishing, Inc. Cooperatives Lease does not state a fixed rental amount for the term of the lease. Each year the amount needed to pay the building’s mortgage, insurance, and expenses is determined, and each leaseholder is then assessed an amount based on his percentage of ownership. Lease payments

© Copyright 2010 Rockwell Publishing, Inc. Cooperatives Cooperatives are generally run by a cooperative association, which is managed by a board of directors. In Washington, board must have at least 3 directors. Directors are shareholders (unit owners) and are elected by association members. Association & bylaws

© Copyright 2010 Rockwell Publishing, Inc. Cooperatives The association usually passes bylaws for the governing of the cooperative. Association and board of directors manage the cooperative according to guidelines set out in bylaws. They have the right to assess charges required for maintenance, repairs, and costs of running cooperative. Association & bylaws

© Copyright 2010 Rockwell Publishing, Inc. Co-op vs. condo Similarities between condos and co-ops include the individual owner’s right to possess a certain unit and an interest in the common areas. Differences

© Copyright 2010 Rockwell Publishing, Inc. Co-op v. condo But there are many differences between ownership of a condo and ownership of a co-op. Condominium owner owns her individual unit and receives a deed for that unit, while a cooperative owner merely has a lease for a specific unit. Co-op owner acquires equity in the shares of the cooperative’s stock, which can increase in value if the market value of the property increases. Ownership

© Copyright 2010 Rockwell Publishing, Inc. Co-op vs. condo In a co-op, the corporation typically takes out a single mortgage on the entire building. In a condominium, there are separate mortgages on individual units. Major disadvantage of the co-op: because blanket mortgage is used, if a shareholder defaults on payments, other unit owners must make up the difference to avoid foreclosure on the building. Mortgages

© Copyright 2010 Rockwell Publishing, Inc. Co-op vs. condo Unlike an individual condo seller, a co-op tenant generally needs approval from board of directors to sell to a new tenant. Such restrictions are necessary because of financial interdependence of co-op tenants; since they may be personally affected by a tenant with financial problems, they have the right to evaluate potential new tenants. Restrictions

© Copyright 2010 Rockwell Publishing, Inc. Co-op vs. condo Upon death of a co-op tenant, the person who inherits the co-op unit must be approved by the board or membership committee. By contrast, a condominium owner has a fee simple estate in the unit, which can be freely passed on to any successor. Inheritance

© Copyright 2010 Rockwell Publishing, Inc. Co-op vs. condo It’s easier to get rid of an incompatible resident in a co-op than in a condominium. A tenant who refuses to comply with the co-op rules can be evicted, but it is much harder to get rid of a condo unit owner. Eviction

© Copyright 2010 Rockwell Publishing, Inc. Co-op vs. condo Each condo unit owner gets an individual property tax assessment and is responsible only for that amount. In a co-op, tax is assessed on entire building and each owner pays their proportionate share. If one tenant defaults, others must pay or risk the entire building being sold at a tax sale. Taxes

© Copyright 2010 Rockwell Publishing, Inc. Co-op vs. condo Individual owner may have work done or services performed on a particular unit. In a condominium, a construction lien attaches only to the unit where the work was done. In a co-op, work ordered by one tenant could result in a construction lien attaching to the entire building. Liens

Summary © Copyright 2010 Rockwell Publishing, Inc. Cooperatives  Cooperative  Proprietary lease  Cooperative association  Blanket mortgage

© Copyright 2010 Rockwell Publishing, Inc. Real Estate Securities Real estate security: Any kind of arrangement in which someone invests money in an enterprise involving real estate, with the expectation of earning profits from the efforts of a promoter or some other third party.

© Copyright 2010 Rockwell Publishing, Inc. Real Estate Securities If transaction meets definition of security, the promoter must comply with federal and state securities regulations, which protect consumers by requiring registration of securities and disclosure of certain information. Before offering to sell anything that meets the definition of a security, the promoter must register with the Securities and Exchange Commission (SEC). Regulation & registration

© Copyright 2010 Rockwell Publishing, Inc. Real Estate Securities Normally, sale of a condominium unit is not considered to be sale of a security. However, if owners are required to rent out units and allow someone else to manage the rental operation, the arrangement will be treated as a security, and security regulations apply. Condos

© Copyright 2010 Rockwell Publishing, Inc. Real Estate Securities REIT: A real estate investment entity that qualifies for tax advantages if it meets certain requirements. Shares in an REIT are securities, so their sale is subject to securities regulation. Real estate investment trusts (REIT)

© Copyright 2010 Rockwell Publishing, Inc. Real Estate Securities To establish an REIT, a group of investors form a trust and purchase certificates of ownership in the trust. At least 75% of trust’s assets must be invested in real estate or mortgages. Trust must distribute most of its profits to the investors. Trust must have a minimum of 100 investors. REIT

© Copyright 2010 Rockwell Publishing, Inc. Real Estate Securities As long as most of the income is distributed to investors, any significant tax on REIT’s income is avoided. Profits distributed to the investors are taxed as ordinary income to the individual investors. REIT

Summary © Copyright 2010 Rockwell Publishing, Inc. Real Estate Securities  Real estate security  Securities & Exchange Commission (SEC)  REIT