Condo’ing Your Commercial Office/Retail Building

I recently have received several phone calls asking about the process to convert existing multi-story commercial office and retail buildings in Maryland into for sale office and retail condominium units.

Required Condominium Documents

To convert a strictly commercial office/retail building into for sale condominiums, the process includes the recording of the following condominium documents:

Condominium declaration: In this document, the property owner (the declarant) legally describes the single record lot being subjected to the condominium regime and the individual condominium units and common elements being created. The declarant also establishes the undivided common element interests with respect to each unit in the condominium. Unless incorporated into a separate recorded document, the condominium declaration may also contain easements among the units and common elements for the benefit of the condominium unit owners and the condominium association.

Condominium bylaws: The condominium bylaws govern the operation of the condominium association and contain provisions regarding the membership rights of the condominium unit owners, the establishment of the board of directors, the condominium unit assessment process, insurance requirements, and architectural control.

Condominium plat and plans: The condominium plat and plans, coupled with the language in the declaration, describe the single record lot being subjected to the condominium, and the dimensions, floor area, elevation, and location of the individual condominium units therein, and identifies the common elements of the condominium as either general or limited common elements.

Conversion Issues

Property owners should be aware of the following in commercial condominium conversions:

Existing commercial leases: Leases are likely to be in place prior to the creation of the condominium and may contain provisions that conflict generally with the condominium structure. Such issues may include:

  1. The market effect of the size of the for sale condominium unit vs. the square footage in the tenant’s lease;
  2. Expansion and contraction rights of a tenant in its lease;
  3. The transition of common areas of the property into designated legally defined general and limited common elements; and
  4. The shift in control of such common areas of the building from the property owner, as landlord, to the condominium association.

These issues can be resolved in the drafting of the condominium documents.

Preparation of condominium plat and plans: If the property owner has an existing title policy, survey and as-built plans for the improved property, it should engage the surveyor who prepared the survey and as built plans, to prepare the condominium plat and plans. This could save time and money because this surveyor will already have information in its database about the building. If the property owner is starting from scratch, then significant time will need to be added to the property owner’s schedule for the preparation of the condominium plat and plans.

Anticipating lender review and approval: If there is an existing mortgage lien on the property, the lender will need to consent and subordinate its deed of trust to the force and effect of the condominium documents. Sophisticated lenders are familiar with the condominium structure and typically accept the conversion; however, as with any modification to an existing loan, the process for approval may not be a fast one.

After Your House is in Order

Once the condominium documents are recorded, each condominium unit can be treated in the same fashion as any parcel of real estate – it can be sold, leased, financed, and taxed as a separate legal parcel. Please note that in most jurisdictions in Maryland, the foregoing process does not require State or County agency review or approval of the condominium documents before recordation.

However, if your building includes, residential dwelling units, the process to convert to condominium is much more complicated. Tenants’ rights to purchase, governmental agency rights of first refusal and similar provisions, depending on your jurisdiction, would require careful compliance in connection with the conversion of residential rental units to for sale condominiums. This is a completely different process than the conversion of commercial office and retail buildings into for-sale condominiums.

Sharon Nelson Craig is a real estate attorney experienced in the commercial condominium conversion process. For more information, please contact Sharon at [email protected] or 301-841-3836.