RE85C13: Commercial Condominiums

Approved Sept. 25, 2013

A. What is a Commercial Condominium? A form of individual ownership with a jointly owned undivided interest in a common area in a commercial building or buildings.

1. Examples of Types of Commercial Condominiums:
   1. Industrial
   2. Office
   3. Retail
   4. Mixed Use Commercial
   5. Medical
   6. Flex
   7. Other

B. Property Interests in Commercial Condominiums:

1. Real Property Interests
2. A commercial unit or suite which is described in condominium documents.
   1. Unit – space that the business is operating based on square footage and method used to measure the space
   2. Common Areas:
      1. Examples - Lobby, foyer, hall, cafeteria, stairwell, elevator, restrooms, utility closets, mechanicals, etc.
      2. Need to define within the documents the areas, ownership and cost to operate
3. Personal Property Interests: Common area
   1. Lobby furniture, wall prints/pictures, sculptures, directory, fitness center

2. Unit Deed: The individual Unit Deed is the document that provides the unit business with the following basic rights and obligations:
   1. Right of ownership and percent of interest
   2. First time conveyed, has floor plans attached

3. The Declaration of Trust (The Bylaws): This is the document that establishes the Commercial Condominium Association and its legal authority. Many residential condominiums in Massachusetts are set up as trusts with trustees and same concept with commercial. If the association is to be incorporated, the Articles of Incorporation will establish the commercial condominium association and its organizational structure.
   1. Once unit owners become dominant owners, the developer steps away.
   2. Bylaws establish a Board of Trustees and the number to serve, terms and voting rights of the owners. Board will have President, Treasurer and Clerk and file with the State. Board of Trustees to have E&O. Bylaws will address pet policies, uses, renting units versus ownership-occupied, restrictions on certain tenants such as food related with rodent issues, allowed uses by zoning.
   3. Describes obligations and powers of the Trustees, procedures for maintenance and repair of the unit and common areas, insurance requirements, association meetings, and voting rights, handling of common area expenses, reserve funds, and assessment of unit owners. Third party property management firm may be hired by the owners and they establish a budget for the project.

4. Rules and Regulations: Summarize important provisions of the trust which govern the conduct of business owner-occupants, guests, and/or tenants. Discussion on who will enforce the rules and regulations such as pet policies.
5. Amendments

D. The Commercial Annual Budget:

1. Reserves
   1. Capital - allocation of funds for maintenance of the common area. A properly funded reserve fund can affect bank financing on units in a negative or positive manner.
   2. Contingency-reserves that cover emergencies that aren't foreseen or in the budget. Can be part of the monthly condo fee.

   1. i. Note: language typically included in the P & S explaining that the conveyance of the condo shall be deemed to include the Seller's allocable share of reserve funds held by the organization of unit owners. This is explained to Seller when a listing is taken.

       

2. Commercial Condominium Fees - Determined by the annual budget; usually paid monthly. The fees will cover all expenses including Property Management and Reserves. Some bylaws state that a monthly invoice will be sent to owners while other complexes expect the owners to remember to send in payment. Non-payment can lead to a lien.
   1. Commercial owners are typically assessed expenses according to their percentage interest.
   2. The percentage interest is the relationship of the commercial unit to the total of all the commercial units. The law states that this shall be the relationship of unit fair market value to the total of all market values.
3. 6 (d) certificates - refers to section of M.G.L. 183A, verifies owners payment status of fees and assessments.
4. Special Assessments - Funds needed above and beyond the current budget and reserves to replace a capital item. Such capital items could be roof replacement, elevator and parking lot. A reserve fund could be established with a certain amount taken from the condo fee and held until needed. Or a special assessment might be addressed.

E. Insurance Policies:

1. Master Insurance Policy – Commercial Property and liability coverage for common areas. The unit owner/business might not be covered for certain items such as business equipment, furniture or fixtures through this policy.
2. Unit Owner's Policy - Real and personal business property and liability for unit owner. Owners carry their own business content and liability insurance.

F. Unit Real Estate Taxes: Paid individually by unit owners - usually based on both the tax assessment and percentage share of common area. If valuation of common area was taxed directly to the commercial condominium association, it would be passed on to the owners through the condo fee.

G. Right of First Refusal: Some commercial condominium documents, in the Master Deed, or in the Declaration of Trust, contain an element called "Right of First Refusal" which guarantees to the association or its members the right to buy a commercial unit under the same terms and conditions as set forth in a bona fide contract with a potential purchaser of that unit, provided the right is exercised within the time period specified in the documents.

1. Letter of Declination - Waiver of right of first refusal; required at closing

H. Building Services: Discussion on utility charges, separate metering, trash removal and dumpster services, mail boxes in lobby and mail delivery, storage use in the basement, parking rights, property management hiring, etc. Discussion on property management services and what they can provide for owners.

I. Commercial Condominium Super Lien Bill (Chapter 400 of M.G.L. 183A): 

1. Priority of Lien - Signed into law in 1992 - the most sweeping revision of the Mass. Condo Law since its enactment. Gives commercial condominium associations the authority to impose a "priority" lien (taking precedence over the first mortgage on the condo unit) on owners who fail to make required common-area payments. In order for costs and fees to be a super-priority item, a notice to the condo owner and/or commercial tenant and first mortgagee after 60 days of delinquency and a separate notice to the lender 30 days before filing the lien foreclosure action. If the association were to proceed to a lien enforcement sale of the unit, the effect would be to wipe out the first mortgage. However, payment at any time of the super-priority amount will eliminate the super-priority. This provision is intended to balance the interests of associations and lenders. Important for a condo association to have legal counsel involved to serve the proper notifications and monitor the process.
2. Unit Business Owner's Liability - Explicit recognition that fines, losses and costs of enforcement for a unit business owner's (or tenant or guest's) misconduct will constitute a lien. Lien may be imposed for non-payment of condo fees or non-payment of special assessments.
3. Due Diligence Issues and Fiduciary Duties:
   1. Provision of access to condo documents and provision of information about commercial rental guidelines, other commercial covenants such as pets, assigned versus deeded parking.
   2. Fiduciary Obligations of Commercial Buyers Agents to provide analysis of market value,
      alert buyer to potential issues of concern, including financial health of the
      complex, average length of time for commercial units on market in complex, vacancy
      rates, if applicable, and percentage of commercial owner-occupied units.

4. On File Documents - The association, in the custody of the trustees or management company, must keep up-to-date copies of the recorded master deed, by-laws and amendments, a minute book of the association meetings, and financial records, contracts for work or services to be provided to the association, and insurance policies. These records must be made available for inspection by unit business owners and first mortgagees, including a right to copy at the requesting party's expense.
5. Management Obligations - Management contracts must provide for the right of the Board to terminate the contract for cause with 10 days notice (but giving that amount of time to cure) and 90 days (or less if the contract permits) to terminate without cause.

a. 6(d) Certificates must be furnished within 10 business days after a written request.

J. Condo Conversion Statute- Emergency legislation, approved in 1983 (St. 1983, c.527): 
Major Conversion Provisions- Applies to commercial condos. Review highlights of the law, including tenants have a period of time to purchase on terms and conditions the same or more favorable than those extended to the general public.

1. Items for Discussion:

1. 1. What is included in the condominium fee?
   2. Commercial Building Operating Reserve
   3. Capital Reserve for commercial buildings
   4. What are the approximate utility costs for the commercial unit?
   5. Are utilities metered separately or included in the fee?
   6. Is the parking deeded or assigned?
   7. Is there guest parking?
   8. Are pets allowed? Or just Special Service dogs?
   9. Can a business rent out its unit to another business?
   10. Are there restrictions on reselling the commercial unit?
   11. What are the arrangements for trash/refuse disposal?
   12. What are the arrangements for snow removal?
   13. Is there a security system?
   14. Is there extra storage?
   15. How is mail and parcel delivery handled?
   16. What is the percentage of owner-occupied units?

2.