The Real Estate Law Podcast

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

April 30, 2021 Jason Muth + Rory Gill Season 1 Episode 12
The Real Estate Law Podcast
12 - Condo Conversions Explained - Everything You Need To Know, Part 2 of 2
Show Notes Transcript

This is part two of our two-part conversation about condo conversions.

If you haven't listened to part one yet (Episode 11), go back and check that out first! You'll learn a few of the basics there - What is a condo conversion?  Why would you undertake a condo conversion? How do you plan for condoizing a building?

Here, we dig into some additional details, such as:

  • 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:

Well with condo conversions, I think it's important to realize that there is a process that has to be followed.

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 the conversation and discover more@realestatelawpodcast.com.

Speaker 1:

Welcome once again to the real estate law podcast. My name is Jason Meuth and we are here with attorney broker Rory Gill from next home Titletown real estate and urban village legal in Boston. Hello, Rory. Great to see you, Jason. Excellent to see you again. Uh , I feel like we just did this, but that's because we did this as part two of a two-part podcast series on condo conversions. So we decided to split it up into two little easy to digest doses because who wants to listen to our long podcasts? I think shorter is better

Speaker 3:

So we can continue on with the last part of it. And we talked last time about condominium conversions , um, what they are and when they make sense. And we had a lot of great news for property owners who are interested in doing a condo conversion. The process on one hand is, is not as intimidating as it sounds. And it's also a great way to get lots of value out of a great number of properties, certainly in the Boston metropolitan area. And we also ended with great news because under, at least in Massachusetts, the process is pretty straightforward and something that anybody can do, it takes a couple of professionals. It does take some work. The process itself is not a barrier for , uh , for most people who want to do a condominium conversion. And we're going to quickly end that great mood today. We're going to talk about some of the restrictions that are out there that make the process a bit more difficult. And we'll talk about some of the municipalities that are known to be , um, very difficult to work in with condominium.

Speaker 1:

So, you know what, we'll end up a down note with all the legal stuff that everyone's got to worry about. Yeah .

Speaker 3:

So we'll end on a down note here and we're talking, we say download from the perspective of people who own multi-family properties that they're interested in converting it to condominium units,

Speaker 1:

Right? There's actually rules. Yeah. There's actually rules . They have to follow. Yes .

Speaker 3:

There were rules that have the problems and limitations and times when they can't , um, do a condo conversion. Um, and this happens just because, you know, when condominiums were illegal innovation, they were great for lots of potential buyers out there who are interested in purchasing property in urban markets and neighborhoods , um , where there were not a great number of single family homes available. So it was a great innovation, a lot, a bunch of buyers to enter the market, but that came at the expense of the existing tenants of the multi-family projects. And there was a wave of massive evictions , um , to make way for condo conversions. I mean, it became pretty quickly apparent that the condo conversion creeds needed to be curtailed a little bit. And then we have the cost. We had the economy, minium conversion act of 1983 that , um, reigned in some of the accesses and gave , um , protections to tenants , um, that, that are in the way of some of these condo conversions.

Speaker 1:

So the conversion act of 1983, which I learned is just a few years before a condo conversions really aggressively happening near here. They started in Puerto Rico, which I learned in the previous episode as well. I had no idea, but I thought this was something that's been going on for decades and decades, but it apparently it's only been going on for the past, you know , three, four decades , uh, if they just passed a law in 1983, which was probably a couple of years after it started to rain in some of the craziness that the developers had shown for the first years of converting condos.

Speaker 3:

We know what we're talking about with these protections are very Massachusetts specific. So that's a Massachusetts specific app, but there are regulations that exist in a number of States, especially where there's competitive , um, housing inventory in urban areas , um, to protect tenants , um, and give them at least a fair shot at home ownership or just having a place to stay

Speaker 1:

Right now in the episode that proceeds this one , uh , we talked about what is a condo conversion? Why would you want to do it? What kind of planning is involved and then the basic items that are needed for a condo conversion. So if you haven't had a chance to listen to that just yet, go back and go find that episode. It's probably the one proceeding this in the podcast feed. Or if you're watching this on YouTube, it should be relatively easy to find we're wearing the same stuff, right? Because we recorded it the same day, my plants over there, you can see them right there. Those are my seeds starters for, for out front. Those are going to be in this episode as well because we're recording everything all at once for these two episodes. But , uh , with condo conversions, I think it's important to realize that there is a process that has to be followed. And you know, one of the , when the basic elements of all condo conversions, at least here in mass here, new England, other States, things might be a little bit different, but you know, the three items that I learned that you need for every condo conversion is you need a master plan, which you know, is when you hire the architect and surveyor, and they figure out exactly what you have going on here. And they divide up the property , um, you know, in , in the best way that they see fit. And then that gets filed. You have the master deed, which is the description of the units and who owns what , uh , and that's where an attorney comes in to help prepare that. And then you have the declaration of trust, which is how the condominium is managed and the rules that are involved. That's also prepared by an attorney. I know that those things are pretty common when you're looking for condos here in the city. Like if you're working for a real estate agent and you are out there shopping for condos, you know, one of the very first things that people will ask for is can I see the condo docs, right? And the condo docs collectively, is that those three things.

Speaker 3:

Yep . Those are the foundation. And depending on the age of the condo, you may have additional amendments. I'm adjusting though . So if you're doing a search to the registry of deeds, be on the lookout for amendments and additional rules and regulations that have been added over time, but yes, those three documents form the basis of the condo docs.

Speaker 1:

Yeah. And the condo docs are important because they, you know, they'll spell out everything. They'll talk about the percent ownership , um , you know, for each unit within the building, which will , uh , lead toward votes that the building has to take should also be reflected in the percentage of the condo fees that are paid by each unit. No things about pets, you'll know things about renting. It you'll know things about subleases , uh, you'll know things about, you know, what else is in there. I mean, it can be anything right,

Speaker 3:

You know, for roof decks. Um, if the roof needs to be repaired, who's responsible for tearing up the roof deck and who has to pay to re-install the roof deck, who is responsible for the exterior balconies. How does parking work , um, for the facility , um, in case of emergency who has access to the interior of your unit , um, can you smoke in your unit? All of these are rules that can be enforced in the condo documents, which is why it's always important to make sure that if you're buying a condo to live in, it's compatible with how you live your life. And if you're buying a condominium unit to rent to make sure that there are no restrictions, that'll get in your way , um , in renting out the unit.

Speaker 1:

Right? And I bet you that the way that condo docs are written actually might affect resale value because if you're in a market that is a high rental market or high vacation rental market, like on the Cape , um, if you're owning a unit in a condo association, and for some reason there's a massive restrictions on rentals, like let's say you could only rent to people for 30 day periods, you know, or for you can't rent to them on a nightly basis. You know, that might, they do that on purpose, you know, because they might not want units to be rented out on a short-term basis, but that could affect resale because it might take a lot of people out of a buyer pool.

Speaker 3:

So it may limit certain buyers from being interested in purchasing their property. But some of those rules actually are there to allow for more lending options on units in the buildings. Some lenders will not issue mortgages to people in buildings where they allow short-term rentals , um, because lenders are concerned about the additional risk , um , that opposed us to them, or just under underwriting, that's been imposed on them. So these things, these things do cut both ways. So it's important to make sure it's in line with what your interest is and even where , um, that's not necessarily , um, a restriction, many people don't want to live in a building where there are high number of renters and it also limits lending options. So there are constraints that exist , um, to increase value and there are constraints that may depress value. Um, and it's important to , to get a close look just to make sure it's compatible with your intent,

Speaker 1:

Right? I'll give, you know , personal stories once again. Um, I remember our, our place here, Boston, this was not a condo conversion , uh, where we're living now. It was a new construction building, but I, there was a certain loan product I couldn't qualify for because no units had closed yet in the building. And I didn't fully understand why. Um, and I ended up refinancing within a year or two anyway, but like I had to get like an adjustable rate loan at the very beginning that they they're keeping on , like as a portfolio loan. And for some reason since there was nothing was, it was all owned by the same person, right? Like all the units were owned by the developer. And there was some issue as to why they couldn't give me the 30 year fixed , um, off the start

Speaker 3:

In some of these rules and regulations , um, though they have been modernized , um, many of the existing federal underwriting requirements imagine a condominium complex out in the suburbs , um , which just no favors to smaller condo complexes, three unit buildings in the city they've many of the rules are written to, you know, we just that big box of a hundred units in mind. Um, and they just don't apply. For example, sometimes there are restrictions on loans. If one person owns more than a certain percentage of units in the building, but if there are only three units, it's pretty easy for somebody to , uh, reach a 40 or 50% ownership stake in one particular building.

Speaker 1:

Yeah. And you know, also in terms of lending it's , it's probably good to look at local lenders for reasons like this, because they do the local markets better than some of the national companies. This isn't to disparage anybody, obviously. I mean, there's, you know, this large banks that offer great loan products, but, you know, speaking personally, you know, we were working with a mortgage broker , um, on , uh, our condo Provincetown and , um, you know, during the due diligence process, like there was something caught very late in the process that they actually couldn't end up extending financing. So, you know, we had to scramble , uh, and we actually got financing with a local bank , um , on the Cape that understands , uh, the local rental markets a little bit better. I think that they were keeping the loan in house as well. So they were able to be a little more forgiving for rental properties, which literally everything on the Cape is basically a rental property. So going with a local company might have helped , uh, get that loan closed and then eventually, eventually refinanced. I know that sometimes you and I will talk about , uh, you know, closings that you're doing. And , uh, you'll be working with some lenders that insist that certain, certain, certain neighborhoods within Boston or their own towns. Right. And you've had situations that they just don't fully know the local neighborhood. And there there's some things that you have to file paperwork that says the Dorchester in Boston are basically the same thing, right?

Speaker 3:

Yeah. So, I mean, yes, I've, I've definitely encountered lenders who think everything is a special case and they need an attorney affidavit attesting under the pains and penalties of perjury. Dorchester is not a separate municipality from Boston, a little completely absurd. I want to send them a link to a Wikipedia article, but it accomplishes much the same. And with the condos, I don't want to overstate the underwriting, complexity, not every Congress, a special case, but sometimes the , the rules and regulations of a particular condo may make it more difficult to get a tradable loan. And you may be better served with a variable rate mortgage or a mortgage with a local lender.

Speaker 1:

Yeah. And like anything there , you know, there's a starting point, like if you're going to do a condo conversion or you're an attorney that works in the condo association, you know, just kind of like the starting point, that's the basis for everything. And there's going to be some variants for, you know, to whatever extent , uh , that you, you need to work with a neighbor or work with another property or work with the city on, and that's where attorneys come in, because that's where you guys understand all the legal limitations and all the things to watch out for , um, in each of these situations, because nothing is ever as standard as we all kind of wish that it should be in going down that road. Talk about some of the legal limits to condo associations. Like if you're going to do a conversion, or if you live in a condo where you live in an apartment that's getting converted, like what are some limitations to how that conversion could happen?

Speaker 3:

Sure. So this is kind of getting back to the thrust of what I wanted to leave the listeners with today, and that is the, the restrictions exist to protect the existing tenants. So whatever reference , really the condominium mat of condominium conversion act of 1983 , um , that covers the entire state for buildings of four or more units. So for now, if you're thinking about converting a duplex or three family, you can pay attention to something else for the next three minutes, but buildings that are four or more units have special rules , um, it give instantly , um, uh , additional rights to the current tenants. I mean , it starts with letter of intent. You need to inform the existing tenants in writing , um, at least a year before you do the condo conversion that you intend to do the condo conversion, this invest them with an awareness of what's going on and with certain additional rights. So for that year, you cannot evict them unless they accept for non-payment of rent or a violation of their lease. So their lease terms will be automatically extended , um , to at least a year from when you give that notice. And you also, can't Jack up the rent more than a state prescribed formula. So you can't just try to double their rent , um, to do a backdoor eviction of the existing tenant. So they are immediately vested with certain rights , um, to, to stay where they are and certain populations get more than that. So if you're dealing with somebody who's over the age of 62 or handicap, they get two years to find a spot in that actually can be doubled up to four years. If they can demonstrate that they can not find a similar housing arrangement in the same municipality. So it's

Speaker 1:

Pause one second there. So that means that if you buy, if you buy a building and there's tenants in the building, that because sometimes people will buy a building and they'll want it vacant, right? So, but, but a seller doesn't have to deliver it that way. I mean, it could be part of the agreement like that. There's currently paying tenants that are on a lease that you're going to assume the lease, but let's say that somebody is a senior in apartment number two out of four units, and you want to convert this to condos. You take over ownership, you announce it to everybody. And in theory, what you just said there is that there might be a condo conversion might not happen for four more years. That'd be right.

Speaker 3:

It's just the conversion. May the conversion itself may happen, but you cannot remove a tenant or increase their rent by a certain amount for that period of time. So you can effectuate the conversion and do the legal, legal chopping up of the building, but that the tenant in that unit is entitled to stay. So it makes it much more difficult to sell off that particular unit to a third party.

Speaker 1:

So the other, if it's a four unit building, you could convert the whole building to condos. If the senior is in unit two and the other three units are vacant, you've given the notice, they're having a hard time finding a place in theory, you could sell, you could convert and sell the other three units, and then you still own the unit number two, right? And you could at least, you know , make your money on the other three units and get those sold off. And then now you have a tenant in unit two for a finite period of time, until you could then sell that unit off

Speaker 3:

In most municipalities. So under this general statewide rule, there would be no problem with doing that. Um, the statewide rule just prohibits you from removing tenants, but it does the state road wide rule also gives some additional rights. So for example , um, an existing tenant has the right of first refusal for the unit that they're living in. So if you went to go sell new condo conversion with existing tenants, and you found a buyer that the existing tenant will have 90 days to match that offer and purchase the unit that they live in. So, so for the regular process, this also means that for a sales can take quite a bit longer , um, than is normal in the market.

Speaker 1:

Um, so in theory, I could, I could offer as a buyer on that property and my offers is accepted, but it's contingent upon the current tenant, not matching the offer within 90 days. So I actually, as a buyer might be waiting three months until I know if I actually have that unit. Okay .

Speaker 3:

That's correct. So any offer that's accepted would be contingent on the current tenants , um, a waiver of right. A right of first refusal , um , which can take up to 90 days unless they voluntarily sign away the rights earlier, which would be usually in exchange for something else.

Speaker 1:

Yeah. So if you're out there buying condos, just make sure that you're getting one that's vacant or if we're know what the terms are that people who live there, if they currently live there. And then if time, the time

Speaker 3:

Comes and that , that existing tenant has to go, you owe them relocation money. Um, so I think it's about $750 per tenant or a thousand dollars if they are , um, handicapper over the age of 62. And so that is like the , what I just outlined there is the bare minimum rule and applies to all municipalities for buildings that are four or more units, but that's not where the story ends because municipalities can enact stricter regulations than that. And many of them have. So Boston, for example, we'll give existing tenants that are in the protected category up to five years , um , in the car, the building that they're currently in right now. So that's five years of not being able to be evicted and not being able to raise the rent more than the state prescribed formula. But that also is kind of one of the , the light additional regulations. Um , there, there are rules in the list I see here, we have Abington act in Amhurst , Brooklyn , Haverhill , Lexington, Malden , Marlborough , new Bedford Newburyport , um, and some others have additional regulations. And the real in that could be , um, take a look at those particular towns to see if that means properties smaller than that are included, or if the timing is more complicated , um, or if the amount that's owed to them is more , um , than , than the state requires. Um, but the real killer out there right now, the T the municipality with the strictest regulations by far is Somerville . Somerville's new rules that went into effect in 2019 are actually being challenged in court, but they basically require municipal approval of every condo conversion here. So before you go ahead and even attempt to condo conversion in Somerville , you have to pass it , um, by the city and they are not likely to approve it at this time. The city is the voters of Sommerville determined that the wave of condominium conversions recently have displaced too many tenants. That's the political judgment made by , um , Somerville, but they're making it almost impossible to do condo conversions in Somerville as of 2019.

Speaker 1:

Yeah. Well, it's a clear statement. I mean, there's a lot of development happening in Somerville, but it's much more on a wider scale. Uh , but you know, they're right next to Boston, but they make their own rules. I mean, like, you know, during COVID restrictions , uh , you know, they, the, the gyms and Somerville were opening up a lot less , um, quickly than the ones elsewhere, but, you know, they , they're entitled it's , it's , they're their own city, right. Their city or town, their city, right .

Speaker 3:

A city . Yes. So you want to take a look, you want to take a look at , um, the particular community that you're hoping to the condo conversion in. I'm looking at advanced to see what supplemental rules that they have. They may just be a minor tweak from the statewide rule, or might be a major obstacle as in the case of Somerville . So take a look at that . Yes.

Speaker 1:

You can retain an attorney to do that, right. That's kind of what you get paid for when, when you're being hired to do a condo conversion.

Speaker 3:

That is absolutely the attorney's job , um , to know, and to understand. Yes.

Speaker 1:

Yeah. Let's talk about another couple , uh, legal issues. Uh, you know, is there a limitation as to how many units can be in a condo association? No, no, not at all.

Speaker 3:

Nope. In cases of usually new development, if you're going to build one condo building, but you intend to build more, there are phasing rules. So if you wanted to launch a condo with a hundred units, but you have a grow to 200, there's a phasing process there that is usually not talked about very much in the condo conversion aspect, where we're talking about existing buildings that are being made into condo units. Um, but new developments have phasing rules, maybe some additional fees based on the municipality. So what do we mentioned the master deed , um, master plan and declaration of trust. Um, the fees are pretty modest to record them with the registry of deeds, but Boston, for example, charges a supplemental tax of $500 per unit. Um , not excluding the first unit, which in the grand scheme of things is not a terribly big payment , um , in real estate, but for a larger project that can add up to , um , and an additional cost,

Speaker 1:

Everything can add up. It should not be a make or break. I mean, if you're worried about $500 fees for your four units and the condo building that you want to convert , maybe you should be

Speaker 3:

Yes. If the $500 is the tipping point, your budget's a little too narrow and a little too tight and thin. Um, yeah, so, but that's just a temper for Boston to recover a bit of the cost.

Speaker 1:

What are shocker? What are some other considerations as we kind of wrap this up and talk, we've been talking about the legal considerations of a condo conversion .

Speaker 3:

Um, some of this is in the weeds, but if your property you're working on is registered land about , um , 10% of land in Massachusetts is registered land. Um, then you need to submit it, submit your plans for condo conversion , to the land court for approval. Um, they take several months to do this and they have a knack for losing the file. So you need to stay on the court to get approvals if you're unfortunate enough, or to be registered land, or you could withdraw your property from registered land, all that you need to discuss with your attorney. Um, because there are some considerations in there as well. And then

Speaker 1:

What's registered land. Tell us what that is.

Speaker 3:

Registered land , um , is a quirk that exists in Massachusetts and only a few other States where your land ownership to your land is actually certified by the state where the whereas recorded land at the register of deeds. Um, you , you could record almost anything. And that's just a reference point to determine who owns the land. Registered land is run by through the registry of deeds by the land court affirmatively declares that this person is in fact, the owner. So title's a little bit more secure. That's the benefit of registered land. Um, but everything that happens to register land needs to be , um, approved and scrutinized , um, as a result. So for a condo association, I recommend withdrawing it from registered land. Also, if the future owners ever wanted to make an adjustment to the rules and regulations, they have to have everybody sign it and submit it to the, the land court. And hopefully they'll review it within the six months before you have to go back and get new signatures for everybody else. Again, I've had that happen to me. That's pretty terrible too . Um, so registered land, just , just not functioning compatible with condo associations, talk to your attorney about withdrawing your, your condo conversion from where just Atlanta , before you go, go ahead and do the conversion and just the other odds and ends. The timing of the conversion also matters for some costs. Once the building is now divided into condominiums, the insurance on it needs to be a master policy instead of a multi-family policy, which can be more expensive. So if you have a vacant building and you're want to do a conversion rates the last possible moment, just so you're not incurring that extra D uh , extra insurance costs before you sell it off, right?

Speaker 1:

It's a lot to think about conduct conversions. You know, it seems really simple. Uh , it seems like you're just taking a couple of apartments in a building and just say, now they're condos and selling them off, but , uh, there's obviously a lot more to it. Hopefully if everyone's gotten to the point of this podcast , if you have not listened to the first part of the podcast, which is the previous episode, once again, I encourage you to go back and listen to that one as well. Cause we talk more about what a condo conversion is. Um, and if you have any questions about any of this stuff, like how can , uh, how can someone come find you've already?

Speaker 3:

So for condo conversions, come talk to me at urban village legal , um, or if you wanted to do a market analysis, come talk to me, an exome title town.

Speaker 1:

Great. So hit Google type in those words, urban village legal or type in next home, Titletown find the website very easily, or what does it, is it rory@eachofthose.com

Speaker 3:

Worry that everything comes to me, everything's set up that way. It's, I'm pretty easy .

Speaker 1:

Okay, great. Rory , thank you. Once again , uh, you know, we've learned a ton about conduct conversions , totally . You know, a lot about this stuff, because you've done , uh , plenty of them. And I encourage anyone listening to this. Uh, if you're working in mass or New Hampshire , uh, reach out to worry if you have questions , uh, and I'm sure that he could figure out a way to get your projects , uh , moving along , uh, the best way possible. So once again, I'm Jason Meuth , uh , this is the real estate law podcast. Uh, Rory, thanks so much again for all your time today. And thank you for listening to this podcast. Please subscribe to it, please like it. If you're watching this video on YouTube and we will look forward to talking to you next time, thank you. See you next time.

Speaker 2:

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. Titletown 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, urban village legal.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.