By Joseph E. Tierney
As medical office, multi-family, retail, and mixed-use development continues to remain strong throughout southeastern Wisconsin, developers should keep in mind the potential benefits and drawbacks of structuring their projects as condominiums.
Skillful drafting at the outset of your condominium project can impact a number of key issues facing developers such as ownership, financing, and design. The ability to sell condominium units to tenants or investors – instead of being tied to lengthy lease terms in normal developments – offers a quicker turn of your investment, allowing you to move on to other projects. With respect to financing, carefully drafting the release and removal provisions in your loan and condominium documents respectively will ensure that you are able to exit your investment in a timely manner. As to design, creative and precise drafting of the condominium declaration gives developers the ability to address practical site issues and allocate certain maintenance costs in an efficient fashion. Likewise, paying particular attention to the expansion provisions in the declaration will make your project flexible and permit it to cater to a changing market. From a marketability standpoint, condominiums engage those tenants who desire to own, which is inherently attractive to more stable, long-term tenants such as medical groups. The opportunity to customize and build-out a condominium unit with complete autonomy may appeal to those tenants that require a more unique build-out.
With the benefits to condominiums also come potential drawbacks. Amending the condominium declaration and the condominium plat once recorded may be problematic to accomplish. After units are sold, the requirements for unit owner and mortgagee approval for amendments are often difficult to meet. Condominiums also require associations, which give a number of people the ability to impact the operation and management of a condominium. Precise crafting of the declaration should flesh out, for example, how many seats the declarant has on the association’s board and how votes are weighted with respect to different issues. Missteps in drafting association documentation may impact critical areas such as the condominium budget. As developers well know, pitfalls in management and budget computation are often the difference between success and failure of a condominium project. In a bearish market, selling condominiums may be more difficult than leasing because condominiums commit owners to a fixed amount of space for a long time. While condominiums may appeal to stable, long-term tenants such as big-box retailers, medical groups and non-profit organizations, they may not appeal to businesses that need to be agile and adjust in size. That type of uncertainty alone may cause developers to shy away from the condominium structure and puts a premium on drafting decisions.
If a condominium is not the appropriate structure for your project, other options may be attractive. Depending on the size of a development, structuring a project as a “master planned community” – which is not governed by Wisconsin’s condominium laws – may be a better route. For master planned communities, the Wisconsin Supreme Court has held that developers can retain indefinite control over the architecture and use of an entire community by recording a community-wide declaration of covenants and restrictions.¹ For smaller projects, a well-developed declaration of easements and restrictions may also be sufficient. These options may also be used together. If a condominium is developed as part of a larger development, a developer may use a general declaration to impose architectural and use covenants on the overall development that affect condominium as well as non-condominium properties.
When considering the appropriate structure for your development, evaluate the applicability of a condominium as a tool to achieve your goals. Structuring your development project with the appropriate level of control and ability to exit your investment increases your chances of success in your project. Careful drafting will mitigate risk and limit the chances for pitfalls down the road.
If you have any questions regarding this article, please contact your Davis & Kuelthau attorney, or the author, Joseph E. Tierney at 414.225.1471 / jtierney@dkattorneys.com.
¹ Solowicz v. Forward Geneva National, LLC, 2010 WI 20, 323 Wis. 2d 556, 780 N.W.2d 111.