Recent news articles have discussed the rising popularity of development and ownership of residential condominiums. This trend is not restricted to residential development; businesses also are finding that condominiums can meet a variety of commercial needs.
Commercial condominiums offer business owners, developers and real estate investors maintenance conveniences similar to those enjoyed by residential condominium owners, as well as tax, marketing and ownership advantages that may not otherwise be available.
Under Ohio’s Condominium Act, condominium units are created when a property owner or developer files a “declaration” with the relevant county recorder. Under current law, a condominium “unit,” commercial or otherwise, consists of “one or more rooms on one or more floors,” and may be created in new construction or buildings.
A unit is, essentially, an enclosed space owned and controlled exclusively by the unit owner. The buildings and the common areas within the development, both internal and external (corridors, public restrooms, elevators, stairways, parking facilities, green space and landscaping), are owned in common by all of the unit owners and administered by a condominium association.
Proposed amendments to Ohio’s Condominium Act include a specific definition of “commercial unit.” If adopted, this will eliminate the requirement that each commercial unit consist of rooms, instead relying on condominium declarations to define commercial units project by project. As a result, the creativity of the developer and drafter of the declaration, as opposed to statutory definitions, will be primary limiting factors in creating commercial condominiums.
Commercial condominium units may be combined with residential condominium units in a mixed-use development. Some examples of commercial condominium developments include newly constructed medical office parks, street level retail condominiums created in a refurbished urban building with residential condominium units created in the upper floors, and an existing office park or strip mall converted to condominiums to sell space to existing tenants or investors.
Marketing and sales flexibility may be the greatest advantage that condominiums offer the commercial developer. Upon creation, each condominium unit becomes a separate, independently transferable tax parcel and may be sold without seeking local lot split approval.
This allows a developer to sell small portions of a larger development over time, broadening the developer’s range of potential purchasers and allowing the developer to realize a portion of its total return on investment at each sale. Developers can further expand the pool of potential purchasers beyond owner/occupiers by pre-leasing units to make them more attractive to investors.
Commercial condominiums also provide significant investment opportunities. Condominium units that constitute only part of a building or complex may appeal to real estate investors who are unable to purchase an entire building or complex. Additionally, condominium owners or investors may be able to avoid all obligations to perform maintenance of the unit or pay for maintenance of the common areas.
In many cases, an investor or owner can require tenants to maintain their entire units in good condition and repair. Owners and investors can also require that tenants pay, as part of their rental agreements, any maintenance assessments charged by the condominium association that would otherwise fall to the owners.
Finally, condominium units provide businesses that cannot afford to purchase the entire building or office park they occupy an opportunity to enjoy tax advantages on the part they do own — advantages that would not be available to them as tenants, such as deductions for property taxes and interest, as well as assessments, utilities, insurance, repairs and depreciation.
The bottom line is that developers, investors and business owners will be well-served to consider the advantages of commercial condominiums as they seek to satisfy their development, marketing, sales and ownership goals. J. Theodore Smith is an associate in the Columbus office of Vorys, Sater, Seymour and Pease LLP where he concentrates his practice on condominium law, real estate acquisition and sales, real estate development, leasing, liens, evictions and real estate secured finance. Reach him at (614) 464-6232 or at www.vssp.com.
