First, sorry for the slight delay since my last post, we had a naming for our new baby and I had family in town for most of last week. Affairs of state preceed the affairs of state, or some such thing…
I wanted to write today about an issue that many condo boards face at least once in the lifetime of most communities–whether or not the association should purchase property. We’ve already touched a bit in other blogs about the decision to foreclose on non-paying owners and own their property, but the decision I’m talking about today is a bit different–should condo associations ever purchase auxiliary property to expand the common elements for the benefit of the owners?
Now, based on my discussions with owners, I can assure you that there are a significant number of readers who already think they know the answer to this question, and each is as certain of their polar-opposite conclusion to the other. Some owners are currently thinking “of course the association can buy property, how else could we expand our parking, or build a tennis court or a clubhouse?” And then there are a significant number of owners who are saying “Are you crazy? Why would we want to take on the responsibility of owning more property, especially with times being so tough financially?” As is always the case, the truth to the situation probably lies somewhere in the middle.
With most condominiums (and I’m specifically leaving out HOAs on this one, because they operate differently and frequently the association does own its own property), the initial common elements are owned by all the owners, collectively, and they are managed by the association. But any property bought after the creation of the association would have to be purchased by the association (ie, the corporation or trust that counts every owner among its members), and it is actually owned by the association itself; not by the owners. So to try to explain this step by step:
Every owner in a condominium is a member of a mandatory membership association (the “association”), run by a board of directors elected by owners;
Every owner in a condominium jointly owns an undivided share of the common elements;
In addition, the association may, depending on its documents, purchase property for the benefit of owners. That property would be owned by the association, not directly owned by the owners.
I know, it’s extremely confusing, but it makes sense legally, which is really what matters. And yes, in a totally unrelated vein, I know that a lot of people would like legal issues to be instantly understandable to laypersons, but frankly that’s as unrealistic as asking doctors to stop using medical terminology and latin words. But that’s a different blog for a different day.
Suffice it to say that your association may be able to purchase property, and just like any corporate decision, there are a lot of times when such a decision will make sense. For example, what if your community has run out of parking? It may be that the developer simply didn’t plan well, or perhaps you simply have more guests than were anticipated. But parking is a basic need of our modern, transportation-oriented and car-obsessed society, and a lack of parking can severely depreciate property values. So if a neighboring lot is sitting empty, and if the price is at or below market value, it would often be in the best interest of the association to purchase the lot for its own use (of course, there are zoning considerations involved as well, but that’s why you should always get an attorney involved in property purchases).
Or, what if a maturing community, with an aging population, would like to spend more time socializing without going off-property? The owners of such a community might be well served by purchasing property to build a clubhouse. In the same vein, it might enhance the property values in a community to add recreational facilities, such as a pool, park, tennis court, skateboard park or whatever might be in vogue in their particular area. The point simply being that there are perfectly good reasons that a condominium might want to expand beyond it’s original borders and mandate. And often, the only way to do so is by having the association purchase the land.
But there are significant concerns that need to be addressed by any board that considers this issue. First, can the association purchase property? Usually, this basic issue will be addressed in the documents, and not every association has the power to make land purchases and own property.
Second, is the purchase a good business deal? Is the property really needed, and will it enhance the lives of owners and maintain or increase property values? Is the property selling for a fair price, or is the premium justified by the needs of the community? For example, it’s possible that a community’s parking needs are so acute that it would make sense to even overpay for a piece of land just to ease the burden. These are decisions that need to be discussed by the board and owners, at an open board meeting.
Third, how will the association pay for the property? The easiest manner, if allowed by the documents, would be for the association to simply assess owners for the cost of the property. Even a million-dollar piece of land may be affordable if split 300 ways ($3333 a unit, in that case, not a pittance, but also not insurmountable if paid over time and in installments). Plus, the association may be able to recoup the money and pay back owners if it intends to profit off of the land use, for example by selling the parking spaces created, or charging for use of the clubhouse. For that matter, many associations might have a war chest of funds stored for just such a purpose, and may not have to impact owners at all.
If an assessment is not practical, just like any individual or business, the association may finance the purchase (either through a line of credit against assessments or through a traditional mortgage). Again, an association’s documents will often spell out whether the association can take on debt, and if so how much and under what circumstances. Sometimes, an owner vote is required to approve debt, and other times owners must vote if the debt is over a certain percentage of the budget. Either way, using debt to purchase property is no less valid a business decision than your own decision to use a mortgage to purchase your unit–it’s just in a different environment.
Finally, is there a definite plan for how the property will be used? The property across the street may be a great deal, but the board should consider in advance whether it intends to hold and sell the property (using it for investment purposes), or whether there’s a pre-determined use.
No matter what, the purchase of property is a decision that should always involve consultation with the ownership. That doesn’t mean that the board must do whatever the loudest owners demand, or even what the majority demand (as, just like in our government, the opinion of the majority does not always benefit the community as a whole, and decisions must always be informed and well-purposed). But making such a big decision by way of illegal, closed board meetings, or even through the command of one or two dictatorial board members, is a recipe for disaster. Purchasing property is a big decision, whether it’s an individual or an organization, so make sure that your board does its research and considers all the variables. If you’re not on the board make sure that you attend the meeting where such an issue is discussed, and if the board makes a decision that’s contrary to law, don’t be afraid to band together with other owners and file a lawsuit! Often, it just takes a concerted and well-organized opposition to enforce your rights as an owner.
That said, if the board has the power to purchase property, has discussed the issue at an open board meeting and followed all laws and regulations involving the issue, just because you think it’s an invalid decision doesn’t make it illegal. You need to be a strong advocate, but also accept that sometimes decisions will simply not go your way. Living in a shared ownership community like a condominium involves give and take, and you can’t always be on the winning end of an argument. So no matter which side of the argument you’re on, be informed, speak up, insist that your board follow the law (or, if you’re on the board, insist that your fellow board members do), and then support your community with whichever decision it makes.