What’s Old Is New: The Basics Of Condominium Conversions
The often politically controversial condominium conversion craze has been booming throughout Montgomery County for the last several years. With the scarcity of available vacant land in the close-in Montgomery County suburbs and record high property values, the trend of converting existing rental properties to condominiums appears here to stay, for at least the near future. A recent Washington Post article reported that in November 2005 there were approximately 30 apartment buildings being converted into condominiums throughout Montgomery County, adding an estimated 4,000 condominium units to the local housing market. In the early 1980s, the Maryland legislature and the Montgomery County Council created laws which imposed significant legal requirements on those attempting to convert rental properties to condominiums.
Reorganization of Ownership Structure
In Maryland, a condominium conversion is the process whereby the owner of a rental property essentially reorganizes the ownership structure and management of the property. Instead of the owner/landlord owning and maintaining the entire property and leasing portions to tenants, those same leased portions are sold to individual “unit” owners, who will then share in the ownership and responsibility of the common elements, e.g. the hallways and lobby.
While garnering headlines today, the State laws governing condominium conversions were codified approximately 20 years ago with the adoption of the Maryland Condominium Act. Aware of the potential impact on tenants within residential rental buildings slated for conversion, the Maryland Condominium Act sets forth a rather detailed process that those interested in converting a rental building to a condominium must follow.
Notice of Intention to Create a Condominium
An individual intending to convert a rental facility (the “developer”), such as an apartment building, to a condominium must first file and receive approval of a Public Offering Statement with the Secretary of State. Once approved, the developer must forward the Public Offering Statement along with a Notice of Intention to Create a Condominium to all current tenants under valid leases. The notice informs the tenants of their various rights during the conversion process, of which the following four are of interest:
The existing residential tenants may stay in their leased residence under the current terms and conditions for 180 days after receiving the notice, or for the length of their current lease, whichever is longer.
Option to Purchase
The developer must offer all current tenants the option to purchase the unit before it is offered for sale to the public. The purchase offer must be for a price no greater than that offered to a third-party during the 180 day period. Though not required, developers frequently offer lower prices to the current tenants than those offered to the general public, hoping to entice tenants to stay on as owners.
If the tenant’s annual household income does not exceed 80% of the median household income for the county, and the tenant chooses not to purchase the unit, that tenant is entitled to receive $350 to move out and up to $750 for moving expenses. If the annual household income exceeds the 80% mark, then the tenant is entitled to up to $750 of moving expenses.
The developer must offer additional extended leases of up to three years to certain qualified households, which include those containing a senior citizen and/or a handicapped individual, provided certain additional requirements are met. However, the developer is only required to offer these three year extended leases for up to 20% of the units, with those who do not receive an extended lease or elect not to sign one entitled to compensation equal to up to three months rent.
Montgomery County Requirements
The Montgomery County Code adds several significant requirements to the conversion process. The right of first refusal and extended lease requirements stand out. Prior to the sale of any rental facility of ten or more units, the County has a right to purchase the rental facility based primarily on the developer’s terms and conditions. If the County purchases the rental facility, the property must remain a rental facility for at least three years. In addition, prior to the sale of individual units, the County is given the right of first refusal to purchase the individual units under terms no less favorable than those offered to the tenants.
The recently amended Section 11A-5 of the Montgomery County Code also increases the scope and length of the extended lease requirements. For example, households with handicapped citizens and/or senior citizens, who have been part of the house for at least 12 months and meet certain annual income requirements, are entitled to an extended lease for the lifetime of the handicapped or senior citizen, instead of the three years required by the Maryland Condominium Act. Additionally, disabled persons (as distinguished from handicapped) are also offered the three-year extended leases.
The above is only a summary of some of the many conditions and rights imposed by the State of Maryland and Montgomery County for the conversion of condominiums.
Jeremy Tucker is an attorney in our Community Associations Practice Group. For more information regarding condominium conversions throughout the DC Metropolitan area, contact him at (301) 657-0157 or firstname.lastname@example.org.