Common Compliance and Governance Issues When Establishing a Large Condominium Development
Throughout the Commonwealth of Massachusetts, condominium developments are spreading across communities, offering new real estate opportunities for both developers and buyers. According to realestate.boston.com, condominium sales in Massachusetts have jumped 33% from March 2020 to March 2021, setting a new record for the commonwealth with the highest number of condo sales since 2007.
Especially for large condominium developments, developers must ensure their project meets compliance requirements for both the establishment of the condominium and the ongoing management. Failure to monitor and adhere to legal requirements presents liability risks in addition to delays in sales of the individual units.
In this blog post, we cover the basics for establishing a large condominium development and the common compliance issues that can arise.
Steps to Establishing a Legal Condominium and Creating an Association
To legally create a new condominium complex there are three main steps:
- Unit and Site Plans: The first step is to review both the Unit Plans, which outline the floor plans of the respective units and the Site Plans, which outline the lot of land and the building(s), which make up the condominium premises. These plans are reviewed for accuracy, ensuring exclusive areas such as decks and parking spaces are depicted correctly and that they are done in conformance with Massachusetts General Laws Chapter 183A, enabling them to be recorded.
- Master Deed: Utilizing the review of unit and site plans, the Master Deed is then drafted, which functions to create the individual condominium units as legal entities that can be either purchased or transferred.
- Declaration of Trust: Next, a Declaration of Trust is created to establish the Condominium Trust and the organization of unit owners. Typically in a smaller condominium, the Trustees manage themselves, and in a larger condominium, the Trustees often delegate the management of the condominium to a professional condominium management company.
Common Compliance Issues:
After reviewing the site plans and creating a Master Deed and Declaration of Trust, several potential compliance issues can still arise. Many of the common compliance issues are rooted in assumptions about state requirements and a lack of knowledge on factors such as financial partners. Compliance issues can impact everything from the sale of a unit to the activities of a condo association.
Recorded land is the most common title system that processes documents within the Registries of Deeds. Alternatively, there is also the registered land system. Properties that are governed by the registered land system have a title that is certified by the Massachusetts Land Court. If the condominium property is governed by the Massachusetts Land Court (registered land system) and not the recorded land division of the Registry of Deeds, it can slow down recording.
The condominium property may be withdrawn from the Massachusetts Land Court system and put forth in a regular recording system, making it easier to record the Master Deed, Declaration of Trust and respective units. However, in the event the property cannot be withdrawn, the Massachusetts Land Court must approve the Master Deed, the Declaration of Trust and Plans before registration. This process of obtaining Land Court approval of the Massachusetts Land Court must approve the Master Deed; the Declaration of Trust and Plans can take upwards of an additional four to six months longer than the regular recording process.
Appointment of Trustees
The Declaration of Trust outlines the requirements for how to appoint trustees. It usually involves the following:
- A notice to the unit owners regarding the meeting to appoint the trustees (provided in advance of the meeting).
- An explanation of what constitutes a quorum at the unit owner meeting; generally there must be a quorum present at the meeting of unit owners in order for the vote/appointment of trustees to take place.
- A total of how many votes it requires to elect a trustee (usually a majority vote in a meeting where a quorum is present).
Once a vote is taken in the formal meeting to appoint the trustees, generally, a formal written document called an “Appointment and Acceptance of Trustees” must be crafted and recorded at the local Registry of Deeds.
If a condominium development does not comply with the regulations set forth, there will be issues down the line when the condominium units are eventually placed on the market for sale. Attorneys for potential buyers of the units will conduct “due diligence” on the condominium, a standard and common practice.
Due diligence will:
- verify that the condominium was legally established
- ensure that their client will have clear title to their condominium unit
- prevent their client from inheriting any unnecessary legal risks with respect to their purchase.
Similarly, if any unit owner is unhappy with a trustee’s decision, that owner can use the lack of compliance as a means to challenge the validity of the trustee’s authority, creating conflict and delays in changes.
All condominiums in Massachusetts are legally required to maintain an adequate replacement reserve fund. The Declaration of Trust outlines the duties of the trustees, which include a duty to collect reserve funds and to establish a separate reserve account. Trustees are also required to maintain or repair the common areas and facilities of the condominium. While the Commonwealth of Massachusetts does not have any compliance regulations on the minimum amount in reserve funds to handle these duties and requirements, nearly all financing partners (i.e. mortgage lenders who will finance purchases of units in the condominium) require a minimum amount, which can be used for repairs, assessments, etc.
For conforming mortgages, the Fannie Mae and Freddie Mac companies require at least 10% of the condominium budget to be allocated towards the replacement reserves. If at least 10% of the monthly condominium fees are not allocated toward reserves, potential buyers will have problems getting a mortgage to buy a unit in the condominium while unit owners will similarly have problems trying to sell their unit.
Beneficial Interest of the Respective Units
Each condominium unit has a certain percentage beneficial interest in the condominium, which is determined by the approximate relation that the fair value of the unit has to the aggregate fair value of all the units on the date of the Master Deed. The beneficial interest determines the condominium fee amount, the amount to be paid toward a special assessment, and a vote in a matter put forth in the condominium association.
It’s commonly confused that the square footage of each unit alone will determine the beneficial interest of the unit. While square footage is a factor, beneficial interest is determined by the value of the unit to the condominium as a whole, per Massachusetts General Laws Chapter 183A, Section 5. When determining the fair value of each unit and the corresponding percentages of beneficial interest, many factors may be considered by the developer. Developers should consider describing the factors used in determining the value of each unit in the event the percentage beneficial interest is questioned by potential buyers based on the square footage alone.
Once a condominium has been legally established through the recording (or registering) of the Master Deed, Declaration of Trust, and Site Plans and Unit Plans, which comply with all legal requirements, developers will be ready to sell the individual units. Upon selling units, there are several additional documents that are required for closing the sale of a condominium unit. We will visit that topic in a future blog post.
Contact Ligris + Associates today to help ensure your condo development is in compliance with the applicable laws and regulations.
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