Vincent DePillis is a founding member of Real Property Law Group, PLLC, a Seattle law firm with a practice limited to commercial real estate transactions and financing. He has a wealth of experience in working on complex, mixed-use developments, often involving condominium structures. He enjoys the challenge of working with unusual sites and negotiating business solutions.
Tips for Nonresidential and Mixed-Use Condominiums
1. Mixed Use Condominiums Are Steadily Increasing in Number
New housing starts in urban areas are now more commonly in condominium form than in fee ownership form. There just isn’t enough land for everyone to have fee ownership. Many of these condominiums include a significant commercial component. Small businesses, looking for the appreciation, security of tenure, and control of overhead, are buying the commercial units in such condominiums. These units are also attractive for passive investors, because the condominium association handles all of the building management. And in more and more cases, we see major retailers, especially grocery stores, purchasing or leasing the ground-level portion of these mixed use projects.
For the real estate practitioner, however, any kind of mixed-use condominium transaction poses quite a bit of danger, because most of us are not aware of all of the pitfalls.
2. Use Issues
One of the biggest issues in mixed-use projects arises out of conflicts between residential and commercial uses. Residential owners are often not prepared for the noise and smell issues that arise in living over a pizza parlor, a grocery store, or a neighborhood pub. When you represent a commercial buyer or tenant, make sure that the declaration does not contain vaguely worded provisions about “nuisances” that could permit the residential owners to hamstring the legitimate operations of the commercial occupants.
In large mixed-use projects, there are usually separate garages with separate security. The key issues here are whether the unit owners can charge for parking, validate parking, use parking revenue to offset expenses, and so forth—all of the issues that you will be familiar from in dealing with standard retail and office development. The difference is that you will be dealing not with the landlord, but with the condominium association. Make sure that the landlord/condominium owner will have the right under the condominium declaration to deliver the parking rights that the commercial unit owners need.
In small mixed-use projects, the problem tends to be access—there may be several spots reserved for the commercial unit owner and its clients, but no separate security gate. The commercial unit owner may want the garage to be open for its clients, the residential unit owners may want it closed for security. There is no easy resolution for this conflict. Just be aware that a commercial unit owner may not have the ability to insist that the garage remain open.
4. Cost Recovery
Form leases typically pass through 100% of landlord’s costs in connection with the property (proportionately based on relative square footage). Powerful or well-informed tenants negotiate limitations on these pass throughs—for example, for capital improvements, and so forth. In the condominium context, it is easy to overlook the exclusions, because they are buried in the condominium budget and the assessment. The lease may simply say that condominium assessments are a permitted operating cost. If the tenant does not challenge this, the condominium’s special assessment for roof repair, its legal bills for collecting delinquent assessments, the cost of replacing the defective dryvit skin—all are passed through to the tenant—a result the tenant may not be expecting.
A related issue is to determine whether the condominium documents appropriately distinguish between residential and commercial expenses. Does the commercial unit owner pay a share of the concierge for the residential owners? What about the cost of residential deck and balcony repair? Should that be a commercial expense?
5. Building Modifications
Commercial users often need to modify the building (outside the unit) to accommodate their particular use. They may need to install signage, HVAC equipment, communications equipment and so forth. All of this requires the consent of the condominium association, unless the declaration specifically permits such installations. The landlord/unit owner may not have the right to deliver what the commercial tenant needs in this respect.
6. Lease Form Issues
It may be apparent from the above discussion that standard lease forms are often not properly adapted to a condominium context. Don’t let your clients, landlord or tenant, lease a condominium unit without carefully thinking through the effect of the condominium context on the standard lease boilerplate.
7. Changing the Rules of the Game
In reviewing condominium documents for a prospective buyer or tenant in a mixed-use condominium, be aware that the documents can be amended by vote of the owners—and often the residential owners have a majority interest. Is the commercial unit owner appropriately protected against a power play by the residential owners? For instance, could the residential owners pass a regulation that probibits evening or early morning deliveries, thereby crippling the operations of a grocery store tenant? You should look for text that specifically prohibits declaration amendments and regulations that adversely impact commercial units, except with the commercial unit owners’ consent.
Vincent DePillis is a founding member of the Seattle law firm Real Property Law Group, PLLC at 1326 Fifth Avenue, Suite 654, Seattle, WA 98101, 206-625-1616; email@example.com.
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