REAL ESTATE LAW
BY RONALD GARFIELD
Aging condominiums approaching obsolescence eventually require major upgrades or wholesale redevelopment. This article discusses practical considerations for condominium owners and their attorneys as they take steps to upgrade, redevelop, or sell an aging project.
Many condominium projects in Colorado were constructed in the 1960s and 1970s or earlier. Even with proper maintenance, the structures, systems, and other elements of these buildings will have degraded over time due to use and exposure to the elements.1 In some projects, less rigorous building codes in place 40 or 50 years ago have contributed to accelerated condominium deterioration. And in mountain communities, additional physical stress due to greater snow loads, extreme temperatures, erosion, grade changes, and unstable soils may require special structural considerations.2 Compounding matters, a project's architecture may be dated and out of step with current design features, rendering it less attractive to prospective renters or buyers. For example, older projects may lack certain amenities considered important today, such as fitness centers.
Even though condominiums can rely on reserve studies to establish sinking funds for the repair or replacement of common elements,3 sinking funds are typically not established for or adequate to cover the cost of complete demolition and replacement of physical structures.4 Despite such issues, many condominium projects have appreciated dramatically in value, and for some, the current value of the land alone greatly exceeds the project's original acquisition and construction costs. Where the land's value has significantly appreciated, it might make sense to sell the entire project rather than redevelop it. But redevelopment might create an opportunity to add additional units that could provide a welcome source of funds to offset some redevelopment costs.
This article addresses options and practical considerations condominium owners and their attorneys should consider when condominiums are at or near the end of their useful life and have reached obsolescence or are in need of major capital improvements. These considerations apply primarily to properties located in Colorado's mountain regions; condominium projects in urban settings may present different or additional considerations that are not addressed here.
The Colorado Common Interest Ownership Act (CCIOA) does not define when a project or physical structures become obsolete.6 CRS §38-33.3-217(1)(a)(I) provides that for condominiums created after July 1,1992, a project is obsolete if at least 67% of the votes allocated to units of any project decide it has become obsolete.7 Condominium declarations often address obsolescence. But the term "obsolete" may not be the most accurate term to describe a condominium project at the end of its useful life, whether due to the potential failure of structural elements, market conditions, or other reasons, because using obsolescence and other defined terms may limit options available to owners when they might want to de-convert or redevelop. Declarations may better plan for a condominium project's future by addressing de-conversion and redevelopment (discussed below) and eschewing terms such as "obsolete" and "obsolescence."
What CCIOA Tells Us
CRS § 38-33.3-218 describes processes for owners who want to sell an entire project to a developer (de-convert) and how proceeds of the sale will be distributed by the homeowners association (HOA).8 Even though CCIOA does not address how owners can go about demolishing an entire project and redeveloping a new project in its place, it can serve as a useful first step insofar as it contemplates a vote to terminate the condominium and a sale by the HOA to a third party or a redevelopment entity that consists of the pre-termination owners.
Planning for Obsolescence in Governing Documents
Some community documents do not address obsolescence. Condominium declarations that do address obsolescence typically require owners to formally approve a plan that includes a finding of obsolescence along with details of the owners intended design for the project's future (Plan). Navigating through the condominium documents and obtaining owner approvals may be the easiest part of implementing the Plan. When formulating the Plan, the HOA should first obtain a cost-benefit study comparing the expected costs and expected benefits of major upgrades, complete demolition and redevelopment, and de-conversion.
Major upgrades might be more cost-effective than complete demolition and redevelopment, especially in light of current construction costs and building code requirements. Preliminary architectural plans are often necessary to obtain even a rough estimate of construction costs. In the case of demolition, the HOA should plan on owners being unable to occupy their units for at least two years. Any cost-benefit study for a Plan that contemplates adding units to the project should also consider the time and expense involved in obtaining land use entitlements. A tide company should be included in early planning to provide requirements for insurable title for new units when redevelopment is complete.9 Finally, the study should consider additional costs such as exactions that local governmental authorities may require (e.g., green construction, employee housing mitigation, improvements to public infrastructure), especially where the Plan includes additional density. In many communities it may be possible to have a pre-application meeting with planning staff to learn about concerns the local governmental authority may have regarding redevelopment, especially where there is an interest in added density. Informal discussions about redevelopment might initially sound promising, but a rigorous analysis may show redevelopment to be cost-prohibitive or to involve other major unforeseen obstacles.10
If a declaration contemplates de-conversion or redevelopment, the Plan allowing for de-conversion and redevelopment should allow for approval by owners without requiring lien holders' consent. Lien holders should not be able to block the Plan's adoption because liens will be satisfied or moved to encumber other collateral as part of the de-conversion or redevelopment process.
Where Obsolescence Issues Arise
Planning for a project's future must take into account various factors related to the condominium's physical structure and age and the regulatory environment.
Condominium projects may consist of a single freestanding building or multiple buildings that operate as a single condominium regime.11 Sometimes buildings are added in phases over time, which can cause earlier phases to reach obsolescence sooner than later phases. With some projects, only a single building or fewer than all buildings might want to adopt a Plan, which requires consideration of how to implement a Plan for fewer than all of the projects' buildings. In such case, the condominium declaration may provide some guidance. Some declarations allow individual buildings within the condominium regime to separate or "de-annex" to carry out a Plan and then "re-annex" after the work is complete. If the...