January 30, 2019
Best Practices: Commercial Condominium Purchases
by Michelle Sergent Kaas
When financing a commercial condominium purchase, lenders should carefully review all condominium documents and title documents and obtain all necessary title endorsements and insurance. Pertinent condominium documents may include the current deed, the declaration of condominium, the condominium bylaws and all related amendments and documents of record. Some condominium documents contain provisions regarding rights of first refusal. Oftentimes, the developer, the condominium association, and/or the other unit owners are given the first right to purchase the unit. Lenders should confirm that the parties comply with any and all notice provisions regarding the right of first refusal and obtain all necessary waivers of the right of first refusal. This article will review some considerations when financing a commercial condominium.
First, lenders should review the condominium documents to determine if there are any restrictions regarding the use of the property. The condominium developer may place restrictions which may inhibit the unit owner from using the property as desired. For example, the developer may prohibit the property from being used for automotive purposes or it may place more general restrictions such as prohibiting businesses which emit loud noise or create a nuisance. You may also have non-compete restrictions, whereby a new unit owner may not establish a business similar to one already operating in the condominium development (i.e. where there is a certain professional practice in the condominium complex, such as a doctor or dentist, and the developer prohibits any other professional in that field from purchasing units in the condominium complex).
The condominium documents may also contain rules and regulations regarding mortgage approvals and lease approvals. The condominium association may have the right to review and approve a unit owner’s mortgage. The condominium association may also have the right to approve any lease that the unit owner intends to enter into with its affiliates or with third parties. The parties should provide the proposed mortgage and any proposed leases to the condominium association as soon as possible in cases where approval is required.
The condominium documents may also contain insurance requirements or describe how insurance proceeds will be allocated. Lenders should be added onto the master condominium policy as a mortgagee, and listed on the borrower’s personal property insurance policy as a mortgagee, with a lender’s loss payable endorsement.
In addition, it is important to make sure that the seller does not have any open violations, any outstanding liens or any condominium fees due and owing as the borrower could be held liable for these if they are not resolved before or at closing. The borrower should request an estoppel letter from the condominium association which sets forth the seller’s open violations, liens and fees. Oftentimes, the condominium documents will state that the buyer will not be held liable for any association-related items which are not reflected on the estoppel letter. It is therefore imperative to obtain the estoppel letter to protect the interests of the lender and borrower.
When obtaining title insurance for a commercial condominium, lenders may request an ALTA 4 endorsement in conjunction with an ALTA loan title policy. Generally, the ALTA 4 endorsement insures against loss or damage caused by, inter alia, (i) failure of the unit to be part of a condominium within the meaning of the state statute; (ii) present violations of restricted covenants contained in the condominium documents or forfeiture or reversion of title due to violation of the restrictive covenants; (iii) priority of liens for assessments provided for in the condominium statues; and (iv) the failure of title by reason of a right of first refusal that was or could have been exercised as of the date of the title policy. Of course, lenders must confirm exact coverage with the issuing title agent, along with reviewing the endorsement to be issued with the final title insurance policy, which may vary depending upon the property and jurisdiction.
For more information on transactions involving commercial condominiums, contact Michelle Sergent Kaas at 267.470.1167 or email@example.com