A Block of Blue Sky Small Planned Communities in Colorado, 1220 COBJ, Vol. 49, No. 11 Pg. 52
| Author | BY BEN DOYLE AND SUZANNE LEFF. |
| Position | Vol. 49, 11 [Page 52] |
REAL ESTATE LAW
BY BEN DOYLE AND SUZANNE LEFF.
This article discusses common interest community development, with a focus on small planned communities.
Your real estate developer client wants to market vertically stacked units that are yet-to-be-developed airspace—a block of blue sky. Is this possible under Colorado law? It is, but only in limited circumstances. This article discusses the legal framework for common interest communities and factors to consider when analyzing which legal structure is the best option for a real estate project. It focuses on common interest communities formed as "small planned communities" (SPCs), with an emphasis on their utility as compared to condominiums.
Common Interest Community Basics
Development of any real estate project that includes residential units or may involve shared property requires analysis of how the Colorado Common Interest Ownership Act (CCIOA)[1] may apply. CCIOA defines a "common interest community" as "real estate described in a declaration with respect to which a person, by virtue of such person's ownership of a unit, is obligated to pay for real estate taxes, insurance premiums, maintenance, or improvement of other real estate described in a declaration."2 With few exceptions,3 all common interest communities formed on or after July 1,1992 must comply with CCIOA.
Colorado statutes recognize three types of common interest communities: condominiums, cooperatives, and planned communities. These types of common interest communities may be marketed as single-family homes, town homes, townhouses, patio homes, "zero lot line" homes, or some other name. Regardless of the label, condominiums, cooperatives, and planned communities are the only legal frameworks for common interest communities in Colorado.
While many for-sale single-family home communities with detached dwelling units are formed as planned communities and most vertically stacked, attached, for-sale units are formed as condominiums, the physical layout of project improvements does not tell the full story about the legal structure of the common interest community. A development's status as a condominium, cooperative, or planned community depends on its distinct characteristics and the recorded declaration and plat or map.
Condominiums
In Colorado, condominiums are creatures of state statute, not common law. With limited exceptions, CCIOA governs the formation, operation, and termination of condominiums.4 CCIOA defines a condominium as a
common interest community in which portions of the real estate are designated for separate ownership and the remainder of which is designated for common ownership solely by the owners of the separate ownership portions. A common interest community is not a condominium unless the undivided interests in the common elements are vested in the unit owners.5
Simply put, in a condominium community the unit owners own their units along with an undivided interest in the common elements. A CCIOA owners association (Association) for a condominium project does not hold title to the common elements.
Atypical condominium includes one or more buildings divided into multiple units. Each unit owner owns an undivided fractional interest in and shares nonexclusive, joint possession with all other unit owners of certain improvements, such as the roof, exterior facades, underground parking, stairwells, elevators, hallways, HVAC and other mechanical systems, structural components, and recreational facilities such as a pool. Condominium projects may include vertically stacked units, side-by-side units, or even stand-alone structures. Regardless of the configuration or residential or commercial nature of the project, if the elements of the project meet the CCIOA definition of "condominium," CCIOA's provisions governing condominiums apply.
Cooperatives
A cooperative Association owns real property, and cooperative members are entitled to exclusive possession of a portion of that property by virtue of their membership.[6] Cooperatives are seldom used in Colorado, and this article does not focus on them.
Planned Communities
CCIOA defines a planned community as "a common interest community that is not a condominium or cooperative."7 Perhaps the most familiar example of a planned community is a large single-family detached home subdivision with an Association that owns and operates common elements such as a pool or clubhouse (hereinafter Association SFD). Ownership of common elements is key: this same community would be classified as a condominium if each owner owned an undivided fractional interest in the common elements.
Another example of a planned community is a "town home"8 project that's structured like an Association SFD but with attached residences sharing party walls and a pool owned and operated by the town home owners association (hereinafter Association Town homes). In both Association SFDs and Association Town homes, purchasers acquire a fee simple interest in the property bounded by the lot lines and extending "from the center of the earth to the heavens above,"9 subject to mandatory membership rights in and obligations to the Association and, in the case of Association Town homes, a party wall agreement. In both Association SFDs and Association Town homes, the units are divided by vertical boundaries.
What is a Small Planned Community?
CRS § 38-33.3-116(2) defines SPCs as planned communities that contain no more than 20 units and are not subject to any development rights:
If a ... planned community created in this state on or after July 1,1998... contains no more than twenty units and is not subject to any development rights, it is subject only to sections 38-33.3-105 to 38-33.3-107, unless the declaration provides that this entire article is applicable.
Because communities that meet the SPC criteria are automatically exempted from all but CRS §§ 38-33.3-105 to -107, the recorded covenants need not state that CCIOA does not apply,10 but an express statement in the covenants helps avoid confusion on this point. By default, most of the burdens of CCIOA do not apply to an SPC. Likewise, most of the benefits of CCIOA do not extend to an SPC. At the same time, an SPC continues to meet the definition of "common interest community," which means that owners share some maintenance obligations or other expenses for real estate they do not own. These circumstances can lead to unique development arrangements, lengthier recorded covenants that restate statutory provisions, and more mechanisms for payment and enforcement than may apply to traditional CCIOA communities. While SPCs may seem, at a glance, like a typical modern homeowners association arrangement, they can function differently from other CCIOA communities because so many CCIOA statutory provisions do not apply. As with any CCIOA common interest community, the true nature of ownership rights and obligations is defined by the formation documents.
Analyzing Whether an SPC is a Suitable Legal Structure
Understanding the options for common interest community development helps identify the legal structure that best meets the developer's goals and creates a functional community for future owners. Practitioners should consider the following questions when analyzing the suitability of an SPC for a project.
Will the Project Divide Property with Portions Owned Individually and the Balance Owned in Common?
If the property is divided such that individuals own portions and the balance is owned in common and used for shared facilities or improvements, the project likely fits the definition of a common interest community under CCIOA.
If the project does not involve common ownership of shared facilities or improvements as described above and owners are not required to be members in an association, CCIOA does not apply.11 For example, consider the owner of a tract of land who subdivides it through the county or municipal regulatory process and develops it into a community of detached single-family homes, where no lot owner is obligated by a recorded declaration of covenants to pay for real estate taxes, insurance premiums, maintenance, or improvement of other community real estate. In this type of subdivision (No Association SFD), with no shared amenities, mandatory assessments, or membership in an Association, CCIOA does not apply.12 The developer of this subdivision can sell each lot with no vertical improvements constructed, subject to the recorded subdivision plat and subdivision improvements agreement.13 As with Association SFDs or Association Town homes, each purchaser acquires a fee simple interest in the property described by the lot lines, from the center of the earth to the heavens above. Of course, other title documents may affect what rights the purchaser acquires, for example mineral rights, which may have been severed long ago.
Even if the project involves what appear to be shared facilities, such as a private shared alley behind a row of attached town homes, CCIOA still may not apply. Each town home can sit on its own subdivided lot with the residential structure situated on the front of the lot, the shared walls on the lot lines, and the shared alley crossing the back of each lot in the town home project. The developer can subject all town home owners to a party wall agreement governing construction and use of the shared walls between each unit. Either in the party wall agreement or in a separate cross-easement agreement, each owner can grant to each other owner an access easement across the portion of the alley located on such owner's lot, specifying the...
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