While not all Office Condo Associations (COAs) are the evil, dictatorial entities we hear about in the small business media, their involvement in an office condo purchase adds another layer of difficulty to the process – an increase in the chances that something may go wrong and the deal will fall apart.
Remember, the COA is just one entity with its fingers in your Charlotte office condo-buying pie. Your commercial lender is always there, in the background, scrutinizing every last slip of paper that floats its way. And, when it comes to office condos in managed communities, lenders require lots of scraps of paper.
There are three common ways a COA can mess up your commercial real estate purchase and they all have to do with loan denial. They are all out of your control as well, but we believe that knowledge is your most effective weapon, and that if you know what to look for, you can avoid dealing with certain COAs.
What is a Condo Owner’s Association?
A office condo owner association is a governing body of a office condo development. Most, if not all developments have active COAs, and office condo owners in those are obligated to abide by the rules and regulations set forth by the COA.
Membership in the COA is compulsory and automatic when you purchase a office condo in a condo development.
The association is governed by a board, populated with volunteers from among the community’s office condo owners or elected by office condo owners.
The COA board members make decisions on how to enforce the rules (known as “covenants, conditions and restrictions,” or CCRs) and the penalties for violations. They also manage the organization’s budget, ensure fees or dues are paid, maintain the common areas and decide when special assessments are required and in what amounts.
1. They Dropped A Lien On It
If the owner of that office condo you have your eye on is in arrears on his COA dues, the COA may have no choice but to slap a lien on him. Yes, they do have that power. In fact, liens are often attached automatically to the property when an office condo owner becomes delinquent on payments of dues or assessments.
The cost to remedy the lien can sometimes be exorbitant, with late charges, collection costs, interest and fines added to the amount originally owed. If the debt remains unpaid, the COA can begin foreclosure proceedings and seize the property.
But those are the office condo owner’s problems. Yours is that you want this office condo but there’s a lien against it. You’ll be unable to get title insurance until the lien is lifted and without title insurance your loan will be denied.
The only way to save this office condo purchase is for the seller to pay what he owes and request that the COA release the lien.
2. Pending Litigation
If the COA is involved in litigation, either against it or if the board is suing someone, it may be almost impossible to get a loan to buy an office condo in the development.
Common COA litigation cases include:
Failure to perform maintenance – If the COA fails to repair roof problems and the roof leaks, damaging the office condo’s contents, the condo owner may initiate a lawsuit against the COA. An injury on the property that occurred because of shoddy maintenance practices may also spur litigation against the COA
Violations of the rules – Yes, the COA can violate its own rules and condo owners can, and will, sue.
Building defects – An example of this is the COA suing a roofing contractor for substandard work.
Office condos in communities involved in pending or ongoing litigation are known in the finance industry as “non-warrantable,” and most commercial lenders will deny a mortgage application for them. Yes, there are some who will, but they typically charge far more than you’ll pay for a conventional commercial mortgage. You’ll find information about litigation in the COA documents that will be supplied to you by the condo owner.
3. Trouble With The COA’s Finances
Earlier, we reminded you that a COA introduces one more finger in the office condo buying pie and, when it comes to finances, it isn’t just yours that the commercial lender will scrutinize. It will also take a hard look at how the COA deals with its money.
With conventional loans, Fannie Mae and Freddie Mac guidelines prevail. They have a list of conditions a community must meet before a loan will be approved. Those involving the COA’s financial health could include:
10 percent of COA dues must be set aside in the reserves fund.
No more than 15 percent of condo owners are delinquent in their dues or fees.
The property’s insurance must meet Fannie Mae and Freddie Mac guidelines.
Any financial problems, regardless of how small, may slow down the loan process, but they may result in a denial of your application.
As soon as you know for certain that you’ve found an office condo in Charlotte you want to buy and it’s located in a governed community, begin your research. Ask your buyer’s broker for the COA contact so you can make inquiries to determine if there is ongoing litigation.
When you receive the COA document package, run them by your NC licensed commercial real estate attorney. These are legal documents, full of important information but littered with complex terminology. You are expected to understand them all and sign off that you accept the terms outlined within them. It’s worth the money you’ll spend for an attorney to help you understand the contents of these documents. Remember, once you sign off on them, you are obligated to adhere to the terms.
I hope this information will be good discussion starting points for you and your NC licensed attorney, CPA and additional professionals. This information is not to be used or considered as legal or tax advice.