Article Summary
A Condo is Real Property Whereas A Co-Operative Ownership is Personal Property
Summary:
Let's unravel the often misunderstood world of condominium and stock cooperative ownership...
One is considered real property, which means the owner has a tangible, physical asset and the associated rights and responsibilities. The other is personal property, a less tangible asset with distinct ownership rights and obligations.
Understanding these differences is crucial, as they can significantly impact your ownership experience and financial decisions. Let's delve into the legal implications and responsibilities associated with each type of ownership.
Here, the procuring broker, an expert in property transactions, provides valuable insights into the complexities of ownership structures.
Article:
My client owns five condos in Florida. He rents one and leaves the others vacant on purpose. He believes that a developer will make an offer on the entire property to tear down the whole project and construct a highrise condo complex as oceanfront luxury living units. I have looked at his ownership documents and cannot figure them out. I think that he owns them in a corporation. They are valued at $500,000 each or $2,500,000. He would like to get maximum cash out. Can you help?
The funding broker, with extensive experience in property financing, responds with confidence and clarity:
I have reviewed the file that you have presented. The issue of ownership in a corporation is not straightforward. Your client's ownership is unique because they own stock certificates in a stock cooperative, not fee ownership of a unit in a condominium complex. This means there is no individual legal description but rather an agreement by the corporation board of directors for your client to occupy the unit in a corporate usage agreement. They own stock in the corporation and the right to occupy, but they do not possess fee title to the specific unit nor the airspace inside.
They cannot encumber their unit by recording a security instrument such as a mortgage or a deed of trust because there is no designated legal description or individual ownership rights.
A lender may make a loan, but there are entirely different forms of lien rights and documentation because the ownership interest is considered personal rather than real property.
Condominium Definition:
An individually owned residential unit in a real property complex of like kind units. Each unit has an assessor parcel number that is separate and distinct from others. The property owner owns the airspace within the walls, while the community association owns the walls and all outside buildings, appurtenances, and common areas. The ownership of a condominium is real property rather than personal property. A Condominium is a real estate consisting of an undivided interest in common with others and a separate interest called a unit. (Civil Code Section 4125).
https://www.davis-stirling.com/HOME/C/Condominiums-Defined
A common association requires dues to pay for management and all common area maintenance, upkeep, and capital improvements. The association bylaws are a recorded instrument from the initial track map filing. They are a senior lien encumbrance that takes priority before future loans and encumbrances.
There is an elected board of directors, a condo management company, and independent vendors who perform the maintenance and upkeep.
The condo management company and the board of directors will budget for all the necessary annual charges. Each condo owner must pay an association fee or risk defaulting and losing their union in foreclosure.
Condos are townhomes with shared party walls, low-rises with two to three stories, mid-rises with four to eight stories, and high-rises with nine to sixty stories. Parking is available in multiple forms, from carports to major parking structures.
Common Interest Developments (CIDs): Includes townhomes and condominiums
CIDs may be developed and structured in numerous ways based on the desire for ownership and occupancy composition. Examples are high-rises, mixed-use buildings, senior communities, golf course developments, equestrian facilities, and commercial buildings, including office, retail, industrial, storage, and flex space.
Regulations are defined under the Davis-Sterling Act, referenced in California Civil Code 4100. The Subdivided Lands Act- 11000-11200 of the California Business and Professions Code applies. Below are forms of CIDs.
Community apartment projects provide the fee owner(s) with an undivided ownership interest in the entire project and allow tenant occupants as non-owners to have exclusive rights to rent/lease individual apartments within the project. Title to the property may be held individually, in a partnership, limited liability company, corporation, REIT, etc.
Condominium projects provide each property owner with an undivided ownership of a portion of the project, usually referred to as a common area, and an individual fee ownership interest in a separate interest in the physical space called a condominium. The condominium space is the airspace within the particular unit's interior from the floor to the ceiling and from wall to wall. The designated location of ownership is described in a recorded final map, parcel map, or condominium plan in enough detail to locate the unit's boundaries. Areas within the development may be filled with air, earth, water, fixtures, or any combination thereof. They may only be physically attached to the land by easements for access and support. The individual unit will be purchased usually by an owner or group of owners.
The common area, land, building, and appurtenances will be owned by a mutual-benefit nonprofit or membership corporation through the use of a homeowners association (HOA), cooperative agreement, maintenance agreement, or other, all with the same purpose to recognize the rules and regulations for the multi-owner use of the property. Condos are classified as real property, meaning that the buyers own the deed of the dwelling unit. In the case of row houses, townhomes, and multi-unit single-family designs, the individual owners own the dirt directly beneath the footing of the particular unit instead of the air space. In contrast, condominium owners only own the interior airspace. Purchasers of each unit will own the condo outright, subject to conditions such as a loan, government rights, and covenants, conditions, and restrictions.
The fee owner will own the airspace within the separate unit's walls. The owners of the individual airspace or individual unit will also own a mutual-benefit nonprofit corporation referred to as the association that contains the common areas of the property, such as hallways, walkways, laundry rooms, workout rooms, pool, standard utilities, amenities, HVAC systems, elevators, and so on. Owners will elect a management board of directors to oversee all aspects and management decisions of the association.
Condominium units may be residential, commercial, industrial, retail, office, or mini-storage and function similarly. Association dues will be estimated and billed to the individual owners, prorated to their ownership percentages. A management team will be hired to manage maintenance, utilities, insurance, capital improvements, upkeep, and payments. An association of owners will elect a management board of directors to oversee all aspects and management decisions of the association.
When an owner desires to sell and convey the title to a new owner, the new owner will take the title subject to all the provisions in the master condominium recorded documents. Each Condo has a separate and distinct legal description and an Assessor's Parcel Number (APN). Also, each state within the USA has specific laws that cover condominium requirements.
Planned unit development (PUD) is commonly utilized for single-family home communities. Fee owners have title to the individual units. A PUD has either or both the following: (a) a common area owned by the association or the property owners in common, and/or (b) a common area and an association that maintains the common area with the power to levy and collect assessments. Owners of the association will own as tenants-in-common.
Townhomes are densely stacked, single- or multi-story homes with one or two shared walls in the adjacent unit. Each has its unit, often with a small front and rear yard and garage. The footprint will be small, and the density will be significant. The unit owner usually owns the land parcel, the walls, and the unit's interior. Ownership is typically a fee or freehold. Townhouses can also be stacked, meaning each unit will have a separate assessor's parcel number and legal description. This arrangement allows individual ownership of each unit within a larger townhouse complex. Property insurance is customized to handle this type of ownership.
Condominiums are similar, but the property owner owns the unit's interior space, and an undivided interest of an entirety owns all the exterior space. The common area, sometimes called a common area or space, will be owned by a master entity like a corporation. Property insurance is customized to handle this type of ownership.
If there is land and a structure, a lender's security interest will be recorded against the individual unit of a more extensive collection of attached properties and reflected in public records to ensure adequate notice of a lien. In the case of a condominium, the lien interest is defined as the interior airspace within each unit and the undivided interest in the project's common area.
Insurance: The association will purchase a master policy covering all risk perils and liability for litigation in the common area. Each homeowner will pay for interior insurance and liability separately from their chosen carrier. The Association requires the homeowner's insurance to include them as an additional insured.
Federal, state, and local municipal codes govern condominiums. Each community has a code section, such as the Residential Code manual, County of Los Angeles, Department of Public Works, and Building and Safety Division.
There are also condo conversions where an apartment complex owner files a track map and converts it to condos for sale to the public.
Since the owners govern the condo associations, they can sometimes make decisions that have significant consequences, as was seen in 2021 when the Champlain Towers South, a 12-story beach condo, collapsed, causing 98 people to die and 35 to be rescued. The cause was basement-level water penetration and corrosion of the reinforcing steel. Engineers had issued a remediation report, but the owners had pushed back on spending money on urgently needed reinforcing repairs. This tragic event underscores the importance of proactive decision-making and the potential risks of condo association governance.
As a result, Florida immediately required annual engineering reports to upgrade all older buildings. This has caused association fees to double and triple, which has collapsed the value of resale condos.
https://en.wikipedia.org/wiki/Surfside_condominium_collapse
According to architects, 75% of the existing mid and high-rise buildings in the U.S. need to be renovated. The average lifespan of condo structures is about 50 years without significant upgrades. Renovations include:
- Building code compliance
- Structural upgrades
- Designated substance removal upgrades
- Building envelope upgrades
The same arguments apply to school buildings across the U.S.
Stock Cooperative:
It is a real estate development where each owner owns stock or certificates of membership in a corporation that owns the property. The ownership of a stock certificate is personal property and not real property. The owners do not own the individual units but have an agreement representing a right to occupy the unit. Definition-( Civil Code Section 4190 Stock Cooperative is defined)
https://www.investopedia.com/articles/pf/08/housingco-op.asp
https://www.davis-stirling.com/HOME/S/Stock-Cooperatives
A Stock Cooperative (Co-op) is a CID in which a corporation is formed to own the entire project/development. Owners purchase shares in the corporation as shareholders and receive rights similar to a lease to exclusive occupancy in a portion of the development (a unit).
The owners of the co-op's units will purchase them subject to an agreement to occupy one or more units exclusively but without fee ownership of the individual unit. Ownership of co-ops is not considered real property but as shareholders of a corporation who own the property. The owners of the stock certificates are not fee owners of their units.
If an owner wants to finance a co-op purchase, they must take out a share loan instead of a trust deed or mortgage loan. A lien on real property does not directly secure the loan. It is a personal property loan from a bank or institution based upon the borrower's financial well-being rather than charging a lien on real property. The lender could take an assignment of the corporate shares and the occupancy agreement held by the unit's owner.
A lender may not rely on customary real property foreclosure laws. The lender would depend upon the Uniform Commercial Code regulations to foreclose on personal property.
Co-ops have master associations that are responsible for all payments relating to management and maintenance. Co-cop residents are responsible for paying a pro-rata share of the operation costs. The dues are usually paid monthly but may rise as the cost of goods and services rises.
When an owner wants to convey a title, they are not conveying an interest in real property but an interest in personal property, like selling corporate stock.