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Office Condo Conversions 101 | Rosalie Keszler Consultants

Commercial Real Estate Advisors

Office Condo Conversions 101

Posted by on Sep 20, 2013 in Austin, Commercial Real Estate, CTCAR |

CTCAR – August 2013 Luncheon, August 29, 2013

Maggiano’s Domain, Austin, TX

By Rosalie G. Keszler, CCIM

The Central Texas Commercial Association of Realtors (CTCAR) held its monthly luncheon to educate about office condo conversions.  The panel of experts included Robert “Bob” Burton of Winstead, Gay Ruggiano of The Kucera Companies, and Syd Xinos, PE of Doucet & Associates.

Burton started the discussion about conversion regulation.  The State of Texas has no state-level regulatory requirements per the Texas Property Code, Texas Uniform Condominium Act, Chapter 82.  The owner and developer simply need to comply with each other.

Residential and/or office condominiums are an alternative to subdivision platting.  This is vertical subdivision of a physical nature, per Burton.  One can subdivide any property through the “Condominium Declaration”.  This document tells everything you need to know for a prospective purchaser/client about the condo.

One of the most important aspect of the Declaration document is to describe the unit – a 3-dimensional space – for the ultimate end-user that will hold fee simple title.

There are two real estate components:  1) the unit; and 2) common elements, owned in common by all project owners.  Anything that is not a “unit” is common element, stated Burton.  Units are maintained by the individual owner, and common elements are maintained by the condo HOA.

Of critical importance is the description of the unit.  How has the Declarant described the unit?  In the old style, the “lazy developer” would include walls, floors and ceilings.  But if there is a dispute such as a water penetration issue, or electrical panel problem, this description fails.

The alternate and more current way to describe the unit is the “Parametrical Boundary”.  The real property interest is described in three dimensions.  Describing a 3-dimensional space in a 2-dimnsional piece of paper:

1)      Texturally describe (boundaries: upper, lower, lateral, included in the condominium declaration);

2)      Condominium map (visual representation of the unit and all common elements).

There are specific instructions on how to prepare this in the Texas Condominium Act.  When hiring a surveyor, make sure they are familiar with the specific provisions of the Act.

Syd Xinos took over the microphone to discuss conveyance.  For proper conveyance of the real estate interest, you must have the legal description.  Metes and bounds are proper to identify the property, but common now is a description that includes the lot/block, final plat recorded with the legal description.

Condominium “Plats and Plans” is addressed in the Condominium Act.  Xinos advised that in the 3-dimensional depcitions with elevations, ceiling/floor, layout, all tied very closely to the Declaration prepared by an attorney – make sure all are defined and called the same thing.   Assigned parking spaces to a particular unit should be in the Plats and Plans document.  And, warns Xinos, make sure to certify that they comply with  the Uniform Condominium Act, as certified by a surveyor/engineer.  The Plats and Plans document carefully defines what is being purchased (or sold).  The engineer uses building plans to create the Plats and Plans document.  Per Xinos, there are companies such as Dimensions Floorplans, with a nod to Mary Lawrence, CTCAR Director, that can perform the laser description and define air space.

Xinos covered “legal stuff”: The Declaration has allocations.  This tells a purchaser what their responsibilities are with respect to sharing costs incurred in the community.  Common area, exterior of bulding, major mechanical/electrical/plumbing/ costs – all allocated.  These costs may be uniform or based on square footage, and dictates the percentage of ownership in the condo.  Each individual unit owner gets a tax bill — value of unit and value of undivided common elements (theoretically the higher %, the higher the tax bill).  The Declaration will define all restrictions and special rights.  Example of office type use restrictions include no pets, hazardous activities, competing businesses, etc.

Special rights – 2 bundles:  1) Developer has the right to control the administration of the condominium association for a certain time.  The developer in control will appoint the majority of board members with respect to common elements, typically 120 days after 75% of units are sold/conveyed; and 2) Developer rights are included in the Texas Uniform Condominium Act.  The developer has the ability to create units, subdivide units, have sales office on site; these rights don’t go away unless the Declaration says WHEN these rights go away — 5 yrs, 10 yrs?

Due Diligence Homework:  Look up the Texas Property Code 82.153 and learn about commercial use restrictions on office condos.  The seller of a condo unit under contract for sale can waive the compliance with Subchapter D with purchaser protection.  If project is restricted to office use, can waive.  82.153 shows all the things you should be asking for when doing your due diligence – answers what is this condo all about?  Budget, insurance, allocations, estimate of monthly statements, primer for acquisition of office condo.  Ask for this to protect client’s interest.

Gay Ruggiano was passed the mic to address marketing:  The Good & the Bad (she left off the Ugly).

The Good:

  • Small users are allowed to have affordable ownership = BEST
  • High finish out like MOB, don’t want to put $390 psf finish-out into her lease space (over and above LL’s TI).  So if you own your space, you now own the investment in your space.
  • When you package real estate ownership with business, the return is much greater on resale side, especially with high tenant improvement needs to own their space.  The medical community is buying.
  • Cheaper to own vs rent (low interest rates).  An owner-occupied unit can get lowest inerestt rates.  Allows business owner not to have to manage the common areas; HOA/Management handles the common areas. Costs are less:  Examples, umbrella insurance policies vs stand-alone office.  Can qualify for discounts on wide variety of things.  Economy of scale:  Maintenance costs, everything goes down.
  • Condo owners take a pride of ownership. Condo projects always look good, well maintained, owners aren’t going to let management slack off on the job.

The Bad:

  • Are you a control freak?  Condos are probably not for you.  Have to share, i.e. parking lot!  What are the parking ratio requirements?  Understand the parking ratios, if unassigned parking.
  • Reserves for Replacement:  Owners are not happy about somebody else holding their money, but if it’s built into declaration, have to abide by it and you have a credit when you sell the unit.
  • Condo decs have to be amended frequently.  Mary Lawrence with Dimensions can reassess common area, unit info, etc.

Ruggiano further explained that to properly describe what is being purchased, you have to be able to understand the condo declarations.  Example, balconies should not be common element, nor should access to roofs, stairwells or types of access to get to A/C units – these should be defined as “limited common elements”.  Be sure to DESCRIBE what is being purchased.  The buyer is not paying for the balcony, but they are paying for the access ladder to A/C.

To lease the unit, Declarant will need to do BOMA standard measurement to properly charge unit owners’ share of NNN expenses.  Properly define the rental rate and any other requirements.  If you leave it vague, you’ll have problems in the future.  Brokers – need to explain and identify; liable for misrepresentation down the road.

CTCAR wants to be the go-to organization that is talking about what’s coming and how to be prepared.  In addition to special events like the annual symposium and the Power Cruz, CTCAR offers monthly MCE classes, its “PIE” breakfast on the 2nd Thursday of every month at Chez Zee, and luncheons held quarterly.   For more information, www.ctcaronline.com.