The Real Estate Law Podcast

11 - Condo Conversions Explained - Everything You Need To Know, Part 1 of 2

April 29, 2021 Jason Muth + Rory Gill Season 1 Episode 11
The Real Estate Law Podcast
11 - Condo Conversions Explained - Everything You Need To Know, Part 1 of 2
Show Notes Transcript

What exactly is a condo conversion, you ask? You have come to the right spot!

We have a two-part conversation about condo conversions.

  • What is a condo conversion?  
    • Dividing up existing real estate into different pieces (not by lot line) so that they can be sold or owned separately.
    • It’s not a physical difference - just a legal one.
  • Why would you do a condo conversion? (Hint - If it’s more profitable to sell units separately).


  • Some planning is involved for marketability - Separate utilities, Level of finishing, Sensible layouts and amenities


  • How to do it: three items needed
    • Master Plan - as built drawing by architect and surveyor
    • Master Deed - description of units - who owns what - prepared by attorney in conjunction with architect’s plans
    • Declaration of Trust - how the condo is managed, rules - prepared by attorney
  • Legal limits, such as 4+ units, Extra municipal rules, and Taxes


  • Other considerations - Registered land approval and insurance


 Learn all of this and more!

Join Jason Muth and Attorney / Broker Rory Gill of NextHome Titletown and UrbanVillage Legal in Boston, Massachusetts for another episode of The Real Estate Law Podcast! 

Support the show (https://www.urbanvillagelegal.com)

Speaker 1:

Condo conversions are tricky. They require attorneys. They require a lot of paperwork. Uh , they require permitting and they require probably having a good degree of financial smarts. If you're actually going to undergo this process,

Speaker 2:

You found the real estate law podcast because real estate is more than just pretty pictures. And law goes well beyond paperwork and courtroom argument . If you're a real estate professional, looking to build real estate expertise, then welcome to conversation and discover more@realestatelawpodcast.com.

Speaker 1:

Welcome to the real estate law podcast. Once again, we're here with Turney broker Rory Gill. My name is Jason. Meuth . How you doing Rory? Hey, good day.

Speaker 3:

I'm doing great. Happy Monday to you.

Speaker 1:

It is a Monday. We're recording this on a Monday. Um, we're actually recording this , uh , Monday, just before St . Patrick's day here in Boston. And this is the second year in a row that all the festivities , uh, have been canceled. Um , we're really looking forward to St. Patrick's day, once again here, and you know, it wasn't that crazy of a neighborhood , uh, this past couple of days. Like I , I thought people still would have kind of skirted the rules and been out and about , but I didn't see that much of that going on. Did you?

Speaker 3:

No, it was quiet and it's a shame we missed the best weather we would have had in years for St . Patrick's day parade. But yeah ,

Speaker 1:

Yeah. I mean , we're , we're even saying that yesterday. I mean, it was this picture perfect March day here in Boston where no rain, you know, 40 degrees outside, nice and brisk bright sun. It was exactly the type of St. Patrick Sunday that we usually have around here, but , um, no celebration this year. Uh, we're just going to punt that to next year, once again, and forge forward into this crazy real estate world that we have among us. Uh, I , I swear it things changed by the day. I mean, we're probably gonna re release this , uh, this episode in a few weeks. So I don't think people are really going to be hearing this until , uh , sometime in April, maybe may, but you know, maybe people are going to hear it , uh , far down the line as well, because we have a great topic. That's going to be super applicable , um , for months and years to come. Um, and , and that's condo conversions, and this is something that happens all the time, you know, and condo conversions , uh, are tricky. They require attorneys, they require a lot of paperwork. Uh, they require permitting and they require probably having a good degree of , uh , financial smarts . Um, if you're actually going to undergo this process, you know, if done correctly and , and a lot of developers really do know how to do this well, it could lead to , uh , some fantastic investments. Uh, if you're looking for a way to really kind of win in this real estate market today. So just where you've been involved in some condo conversions, like over the years, like, you know, before really jump into what it is and how to do it, like just what are some reasons why people convert to condos? Like what are some things you've seen in the past?

Speaker 3:

Yeah . So I'm glad we were picking this topic just because the market seems to change so quickly. We'll pick a topic that won't go up sleet in three weeks. Um, and that's just the general process of a condo conversion. We see it all the time. In fact, some neighborhoods in the city are defined by it. Um, the wave of condo conversions that started really in earnest around 2000 and have swept most of South Boston, East Boston Dorchester, and a number of places. So it's something that we see everywhere and it's not as complicated or choose to some people imagine it is strictly speaking. It's just taking an existing piece of real estate , um, dividing out , but in a different way, not along party lines, but , um, just dividing up an existing piece of real estate so that it can be sold off , um , in different units. As simple as that.

Speaker 1:

Now my first place in Boston was a conduct conversion. Um, I don't know when they did the conversion. I mean, I , I bought the place in 2003 and they were already condos. Uh , they , they were probably apartments beforehand. Uh, and just a funny story , uh , a coworker of my many years later when I was mentioning that place , uh, she said, Oh, the place that burned down, I said, what, that's it ? You have to tell me this story. So, you know, sometimes there's a lot of history of these properties that you have no idea that you're moving into, but as it turns out, my old co-worker actually, she's a current coworker . She lives , uh, she used to live across the street from that building. And I guess there was a big fire that gutted it. And at some point , uh , they decided to rebuild the building and somewhere along the line, they decided to convert to condos. Uh , not to say that a building has to have a massive fire before you wanted to go undergo a conduct conversion. Uh, but I suppose that's one reason why, if you're going to rebuild it, you might as well, you know, rebuild it the way you want to rebuild it. So, you know, condo conversions, tell us a little bit more about, you know, what's involved with that . Why would somebody want to do a condo conversion?

Speaker 3:

So when you think about a condo conversion, strictly speaking, we're not talking about physical changes. Although usually it comes in conjunction with a renovation or rehabilitation of a property, but strictly speaking is carving it up individually. Um, and it's as simple as deciding that a property is going to be worth more if it's sold off in different pieces , um, than being sold off altogether in the most concrete situation, if you have a three family triple Decker, and you know that you would get more money selling off each unit as a separate unit versus turning around and selling it as a three family altogether, then you want to go ahead and do the work, create the condo conversion so that you can legally sell off each piece each piece separately,

Speaker 1:

Right? So it's not necessarily the footprint of the building doesn't have to change for a condo conversion, right?

Speaker 3:

That's correct. So you may want to do it for other reasons, but you're taking an existing piece of real estate , um , and splitting it up when the worst more separately. And that's going to be true in a lot of high demand markets across the state. So of course we think of Boston, but pretty much the entire metropolitan area of Boston , um , is a strong op market for condo conversions. Just because individual units are very much in demand. If you go far enough away from the city, you will actually see the math work in the opposite fashion, where there , the single family market is much stronger. There's a weak demand for condominium units. In those cases, property owners often prefer to keep those units intact as a four family rental property where , um , we're ownerships in comment and you've rented out, but it's a, it's a math equation and it's a math equation that can change based on the market and what you believe the market's going to do in the next 10 or so years.

Speaker 1:

What types of buildings are right for condo convergence ? Like if someone's looking to start somewhere, what should they be on the lookout for

Speaker 3:

Best condo units? Um, the best opportunities out there. Um, why does that could be quite a range? So you can take, you can be creative and you can have properties that are mixed use that have some commercial space in them. Um , some residential space, you can actually have a condominium that's entirely commercial where you just , um , chopping it off and selling up each office space , um, independently. But w what I look for when I see opportunities for condo conversion are buildings that have separated utilities , um, because that's a major project to go ahead and separate utilities. They don't strictly need to be separated, but it makes it a lot more accessible to buyers. If they know that their utilities are separated. Um , you're looking for buildings that don't have an excessive amount of common areas that would be , um, wasted and not valuable as part of the resale. Um, you're also taking a look at buildings that can be divided up logically without too many quirks or bizarre entry and exit arrangements, for example, or just physical impossibilities , where you have , um , too many common elements running through individual units. So it's a very, very much a case by case basis, but I'm taking a look at buildings that , um, can logically to be divided up

Speaker 1:

And well , here in Boston, you know, the , the triple Decker is kind of a classic , uh , new England style property. You know, you see them in Worcester , uh , you see them in Chelsea, you'll see them in Salem. You'll see them here in Boston, you know , Dorchester East Boston, South Boston throughout, throughout the area of Roxbury. That's, that's a pretty logical condo conversion. They triple Decker is exactly what it is. It's three stories. And, you know, back in the day, did it , didn't a lot of these used to be single family homes back when they were built, or were they all apartment ?

Speaker 3:

It just depends on what your particular neighborhood. I think the, what we picture in our mind is the classic triple Decker of South Boston and Dorchester. Those were multi-family properties at the time. Other properties stand out, maybe some of the brownstones were in fact, single family is that we're divided up into multi-families and then later converted into condominium units, but frighten much of the housing stock especially built around 1900, 1920 in the city where multi-family properties. And they are prolific in many of the neighborhoods where I think of the iconic triple Decker.

Speaker 1:

Yeah. Now what about like , um, converted buildings? You know, so let's say you have an old mill building in Lowell or an old brewery somewhere, or an old paper factory, or an old, you know, you name it , uh, in many of the , uh , industrial towns, you know, throughout the Merrimack Valley , uh, in New Hampshire, you know, there's just, there's a lot of building , I mean, old schools, you know, you see things getting repurposed all the time. Would that be considered a condo conversion? If you're, you're, you're taking a building that did one thing, and now you're gonna read it all the whole thing. And, you know, the, the goal is that 18 units. Um,

Speaker 3:

It's exactly the same, you know, unless you're talking about a subdivision where all you're doing is chopping up land. If you're chopping up , um, a building it's a condominium, and it doesn't matter if we're thinking about a duplex that's divided into two units or 200 unit mill building, that's divided up the process. It's the same concept. And the process is actually the same , uh, regardless of the complexity of the project.

Speaker 1:

Okay. Now, if you're going to convert to condos, like what are some numbers you should, that , that somebody should look at? You know, let's say that somebody acquires a building and they're saying, do I keep this as apartments and then rent them out? Or do I , um , you know, convert to condos and sell them off, whether I'm going to do any reconfiguration or any work to them, what is, what's that decision process like for, for an investor?

Speaker 3:

Well, the overarching calculation you're going to do is take a look at , um , just run through the two different scenarios. If you're going to turn around and sell the property , um , as it is right now , um, under common ownership, what would you yield as your , um, for your proceeds? And then what would the condo condo conversion option look like for a classic triple Decker? It's actually relatively simple to, to look at the math, you comp out the sale of that, just like you would any other transaction , um, calculate the real estate commission , um, the transfer tax and the basic closing costs for a seller. And you'll come up with the net value that you would obtain going through that method for larger projects, you complement using the rental value method. Um, that's kind of a topic for another day. Um, but larger projects do , um, as a general matter, they use different comparables in different way to appraise all larger projects. We , you take a look at what a sale of that asset would look like, and then you weigh the math that I'll tell you now , um, for a condo conversion. Um, and that starts basically with taking the project as it is now. And what physical changes would you have to make to the building, not for legal reasons, but to make it marketable to people. So , um , what pipes, what walls, what reconfiguration has to happen in order to make it attractive to buyers in the market. Also keeping in mind that condominium unit , uh , buyers tend to expect a higher grade of finishings in this market than , uh , renters do. So if you're looking at a condo unit that is maybe C plus B minus grade , uh , renovation may be warranted in order for you to really get the best bang for your buck and reselling it as a condo unit. So you take those physical changes that need to happen , um , to the building, into account. And then you compare the resale amount for the three or the other units separately. The total difference subtract , um, the normal closing costs, but you're also going to be subtracting some additional costs for architects , um , and attorneys to actually effectuate the condo conversion.

Speaker 1:

So there's a lot that goes into the condo conversion. Do you ever see developers they'll buy a building, they'll do the condo conversion, like the legal conversion, and then they'll just sell the entire project to somebody else. Is that without redoing any of the condos

Speaker 3:

That's yes, but that also adds value to a potential buyer because now that buyer that purchased the entire building has the flexibility themselves to turn around and sell off the units separately. So there's still value in that you've created more opportunities for the buyer to do it the property as they wish. Yeah. There's absolutely value to it. And you do occasionally see that when a buyer comes out and is interested actually in taking over the whole, the whole building and the whole project , even if the, that particular buyer wasn't attractive to a converted building, when you've entered the sale process, you've opened yourself up to a greater number of buyers , um, by making the building more versatile.

Speaker 1:

Okay. We are talking with Rory, Gail , the attorney , uh , for urban village legal , uh, and broker owner of next hometown real estate , uh , here in Boston. And we're talking about conduct aversions today. So , uh , one final thing we should talk about with this episode would be how do you do it? And I'm guessing it's not going to be as simple as you download the PDF for the condo conversion and send it off to the city's condo conversion department, right?

Speaker 3:

No, in fact , um, you do need professional help when it comes to, to creating the condo conversion, but it's, the process is simpler than you would think it would be. So once you have a building that's ready to be divided up legally , uh , you start with an architect, a surveyor and an attorney, and they're going to be your team that will , um , make the transaction happen. And it, I think it starts with large part with the architect. You need an architect to come through and create a floor plan of the building as it actually exists. They're certifying , um, that, you know, the , the product that they've put together is an accurate layout of the building right now. And that's the plane that's used to, to show how the unit's going to be carved up how the building's going to be carved up, who owns what , uh, what's part of each unit , um, and that it all starts with an architectural plan. Often a surveyor comes along two and they'll divide up the pieces of the land as much as that makes sense. That's especially important for parking. Um, if you have common yards or , uh , exclusive you use yards , um, the surveyor will put together a plan as well. And then the attorney will take that information and create what's called the master deed. The master deed is a long form document that describes in great clarity who is going to own what who's responsible for, what parts of the building. And you know, that in , that comes down to who owns what pipe , um, that runs through the wall. So all of that has to be fleshed out and the attorney's going to lean very heavily on the architectural drawings of the building to put that into writing. Um, so there you go . The master plan written up by the architect , um, showing how the building's going to be carved up. You have the master deed written by the attorney describing how the building's going to be carved up. Um, and the last bit , uh, created by the attorney will be the declaration of trust in this creates the condo association and describes how the building will be managed. This is where you see a lot of the things that kind of buyers want to take a close look at what are the rules and regulations of the building , um, are the terms compatible with most , uh, mortgage loans that are out there? Um, how do the rules get changed? Um, all of that's written up , um, in the declaration of trust , um, and those three documents together form the basis of the condo documents. And once those are filed , uh, with the registry of deeds, the process is complete and now ownership has been carved up into , um , the multiple units and legally speaking, the seller's able to , um, to sell the unit separately.

Speaker 1:

So how common is this for most municipalities around the country? Because people listen to this podcast everywhere. Um, I know that, you know, you're practicing in Massachusetts and New Hampshire are these three things pretty standard to the best of your knowledge everywhere. I mean, obviously there'll be some variants around the country, but you know, is this is pretty standard recipe.

Speaker 3:

It is a standard ish recipe. Um, most of the States have similar rules. They make combine some of these features or cover them up into different , um, parts. Most commonly they'll use different language to describe what each element of this is, but , uh, condominiums , uh , largely operate the same. Um , they actually started in Puerto Rico as the first American jurisdiction to , um, formalized condominium law, but then it has since spread to all States and territories. Um , wow .

Speaker 1:

I didn't know that, like when, when did that start? Oh,

Speaker 3:

Jesus. You're gonna put me on the spot right now. Um ,

Speaker 1:

Just pick a year to who cares. It doesn't really matter.

Speaker 3:

I know. And in Massachusetts, kind of the old generation of condos that we see are in their early eighties, the condominiums may have been around , um, longer than that. But when we look back, we actually can see antiquated condo documents from the eighties that are not as well-informed , because it didn't anticipate all the issues that condos would face in the future. So condo documents today are much longer and much more , um, detailed, but that's because we write them now with the benefit of experience and knowing what are some common controversies and issues that come up in Congress associations

Speaker 1:

That is fascinating. I thought this is far older than just the past few decades. So what's that 40 years or so some early eighties

Speaker 3:

Becomes standardized. So there are ways for, you know, prior to this for , um, really ambitious real estate investors to come up with creative documents , um, cross easements and covenants that would accomplish much of the same. Um, but you know, it, wasn't formalized in to kind of a really systematized process that everybody could understand. I recognize Massachusetts chapter one 83 a, but we see it in other jurisdictions as well.

Speaker 1:

Now you're getting all legal here. So you know, which it is the real estate law podcast. But , uh , I think what we're gonna do is we're actually gonna punt some of the legal things that we should worry about into the next episode, because we designed this to be like a quick little two-parter right here. So, yeah .

Speaker 3:

Yeah . So also tune into the next episode, because while we've walked up , um, through the process of, of condo conversions and showed how ineffective easy it can be to carve up a building , uh, legally there are condominium conversion protection rules that benefit existing tenants and communities. And a lot of that , um , is where the controversy lies. So hope you join us for the next episode, we'll recover , um , the different legal limitations and the tenant protection rules. Um, that varies city by city.

Speaker 1:

I think you're taking over my job here. I'm not the one that knows this stuff. I'm supposed to keep this conversation going, but thank you for teeing that up. All right. So good. So , uh, so we've, we've brought you to this point of a , what is a condo conversion? Why would you do it? Uh , what are some buildings where you going to see condo conversions happening? What are some of the things that are needed? So the three I, what I took away right there as the three items that are needed, you need a master plan. You need a master deed, and you need a declaration of trust and, you know, rewind this episode. If you want to listen to what those three things are once again, and why don't we just leave it right there? We'll pick it up , uh, in our next episode, talk more about the legal side of condo conversions. So thank you. [inaudible] , uh, attorney broker next, some tenants have real estate, urban villages , legal. Um, we could find you , uh , probably online if you Google those things very quickly. You're right there at the top of the page,

Speaker 3:

Top of the page for both next some title town in urban village. Legal .

Speaker 1:

Excellent. Uh, my name is Jason Mueller . Thanks again for listening to the real estate law podcast. And we will talk to you next time.

Speaker 2:

Thank you. This has been the real estate law podcast because real estate is more than just pretty pictures and law goes well beyond the paperwork in courtroom arguments. We're powered by next home, greater Boston's progressive real estate brokerage more@nexthometitletown.com and urban village legal Massachusetts real estate council serving savvy property owners, lenders, and investors@urbanvillagelegal.com . Today's conversation was not legal advice, but we hope you found it entertaining and informative. Discover more@realestatelawpodcast.com. Thank you for listening.