Most condominium boards are struggling, to some extent, with delinquent common area fees, budget shortfalls, rising foreclosures and other collateral damage from the economic downturn. Many condominiums will also confront, if they haven’t already, another problem –stalled developments.
Some developers who began large-scale, multi-phased projects in happier times earlier in this decade have hit an economic wall. They successfully completed the initial phases, but are now unable to find financing or prospective buyers for the rest. So they have either moved on to more promising ventures or disappeared entirely, leaving the communities they created with fewer units than anticipated, the land designated for the remaining buildings vacant, and the permits for the remaining phases approved but unused.
It is difficult for those living in a crisis to envision the solution. But however dismal the current picture seems, real estate is still cyclical. It will change. When it does, many condominium boards will have to decide what to do about their unfinished communities: Complete them as planned; remove and sell the vacant land; sell the development rights; plant corn and raise chickens, or some combination of those options.
These are complicated questions, requiring careful analysis and an informed decision-making process. One of the biggest mistakes many boards make is failing to recognize that the land and development rights the association owns are potentially valuable assets. In some cases, the development rights conferred by the permits the original developer obtained may be more valuable than the land itself. But after staring at open space and yellowing blueprints for years, boards sometimes assume a new developer is doing the community a favor by completing the project, failing to recognize the value of a project that has infrastructure improvements in place and permits in hand.
Boards can err in the other direction too, by failing to consider other factors, such as market conditions and the quality and strength of the condominium community that will also affect the value of development rights. The opportunity to complete a stalled development will look considerably less enticing to developers if the project was ill-conceived to begin with, or is competing with higher quality developments in the area.
Boards contemplating the removal and sale of undeveloped land or development rights must be able to view the package they are offering through the eyes of prospective developers, understanding its strengths and weaknesses and making sure it is priced appropriately. This requires the advice of competent professionals – real estate brokers or appraisers – who know the market, understand condominiums, and can provide an independent, educated assessment of the development potential.
Boards must exercise the same caution in selecting a new developer they would exercise in selecting a contractor for any major construction project; the developer’s reputation and track record are crucial. Like the contractor offering the lowest bid on a roofing project, the developer offering the highest price for your land or development rights isn’t necessarily the best choice. The $500,000 the developer paid your community up front won’t look like such a good deal if the buildings produced have $1 million worth of construction defects and trigger a five-year legal battle.
While a bird in hand, in the form of an interested developer, is always tempting, some boards may decide their development rights will be more valuable in the future when market conditions are even better, and they may be right. But boards adopting a “hold for later” strategy must consider the risk that market conditions may not improve as much or as quickly as they assume. They must also make sure they understand the terms of and any restrictions on the development rights they are planning to sell. A key question: what is the expiration date for the assignment or reservation of development rights in the Condominium’s declaration of covenants?
In Colorado, the statutory framework for community associations requires that the declaration of covenants contain a description of any development rights and the time limit within which those rights must be exercised. This provision of CCIOA, found at § 33-33.3-205(h), has been found to be mandatory by the courts, and failure to include a time limit will make any reservation of future development rights void. (See Silverview at Overlook, LLC v. Overlook at Mt. Crested Butte Ltd. Liab. Co., 97P.3d 252 Colo. App. 2004)
If the development rights are not exercised within the time limits, those rights lapse until and unless the association, upon request of the Declarant or the owner of the real estate subject to the development right, agrees to an extension of time. This extension of time can only be made by amendment to the declaration pursuant to CCIOA § 38-33.3-210(5). Such an amendment will require the approval of anywhere from 50% to 67% of the members in the association, depending upon the amendment process and requirement set forth in the association’s declaration. As many boards are aware, getting the consensus of 50% to 67% of their association’s members can be a difficult process, especially on an issue as potentially divisive as further construction and development of the neighborhood. Thus, it becomes crucial that boards review the time restrictions found in their declaration for future development rights and make a timely decision as to how to proceed on the issue.
Review the Plans
The developer’s plans for completing a phased development also require close scrutiny both by engineers or other construction professionals (to monitor and ensure construction quality ) and by the association’s attorney, to make sure the plans comply with applicable requirements and to make sure the community’s interests are protected. Boards may be able to add new protections for the association — for example, creating new specifications for buildings in the remaining phases or requiring the developer to escrow funds to guarantee timely completion or as security against potential construction defects.
Of course, boards can go too far. Imposing too many costly requirements up front may reduce the value of the association’s development rights, limiting the amount for which they can be sold and/or increasing the risk that the only developers willing to complete the project are those who will cut costs, leaving the association with poorly constructed buildings and all the problems that go with them. This is why the advice of professionals – construction experts and attorneys – is so important.
What Could Go Wrong?
A common fault – developers don’t calculate the percentage ownership interests correctly when they add new units, or they aren’t as precise as they should be in describing the rights of new owners. How would you like to be on a board trying to sort out the dispute among the owners of five units that have been assigned the exclusive right to use the same parking space? Even less enviable is the position of the board that discovered its developer had added more units than the phasing right allowed, exceeding the threshold limits for the existing septic system and requiring the association to install a $1.8 million private waste treatment facility to comply with applicable regulations.
The owners in these associations and others where development projects have gone awry aren’t going to be happy — with the legal battles they will end up fighting and the bills they will have to pay, as the valuable development assets they thought would generate welcome revenue turn out to be costly liabilities creating a strain on association finances and headaches they don’t need. These pitfalls can be avoided, however, by careful planning and a well-thought-out approach. Boards have considerable control over the revival and granting of development rights; they should exercise that control to minimize the association’s exposure and maximize its returns.