Condominium Conversions in Oregon
By Caleb A. Williams
SAALFELD GRIGGS PC
The market for condos in the Willamette Valley and Central Oregon has grown significantly in the last few years as the price for a traditional detached single family dwelling has increased substantially. An owner of multiple occupant rental property may be able to achieve a healthy profit by converting the rental property to owner-occupied property. This article discusses the basic steps necessary to convert property to the condominium form of ownership.
WHAT IS A CONDOMINIUM?
A condominium can generally be described as a real property development in which the interior occupied portions of a building are separately owned, but the land and exterior of the buildings are under common ownership. A condominium may be residential or commercial in nature, although this article will focus on the conversion of a residential property. The portion of the condominium that is separately owned is defined under Oregon law as a “unit.” The boundaries of the unit vary with each development, and are defined in the condominium documents and the survey. In addition, each development will have different types of common elements which are maintained by the condominium owners’ association. The most basic types are parking areas, driveways, landscaped areas and the exterior of all buildings. However, it is not uncommon for condominiums to also include recreational facilities, meeting rooms, parks, and other amenities as common elements. By owning a unit in a condominium, an owner has an undivided percentage ownership in the common elements.
PARTICIPANTS IN THE CONVERSION PROCESS
The creation of a condominium in Oregon is controlled by statute (primarily ORS Chapter 100). The legislature has focused its legislative efforts on enacting laws to protect the residential condominium purchaser. The law places a number of obligations on a condominium developer that are intended to give a potential purchaser full disclosure of the purchaser’s rights and obligations in owning this unique type of property. But these efforts to protect the residential condominium purchaser also results in the need to engage the assistance of a number of professionals.
There are a number of participants in the condominium conversion process, and each play a role that impacts the cost and the length of time it takes to complete the conversion. The primary players include:
- Engineer; Contractor, and/or Home Inspector;
- Escrow agent;
- Oregon State Real Estate Commissioner’s office; and
- Local government officials.
A condominium is governed primarily by state law, a Declaration of Condominium Ownership and the Bylaws of the Condominium Owners’ Association. These documents, among many other things, govern the operation of the owners’ association, describe the rights and obligations that each owner has in the condominium, and govern the sale of units to purchasers. State law requires that certain provisions be included in sale agreements and escrow instructions for the sale of a residential condo unit, and that certain provisions be included in the sale agreements to protect a purchaser. The attorney will typically prepare the sale related documents. An experienced attorney will carefully draft the legal documents to comply with the law and address all statutory requirements in order to avoid delays in receiving approval from the Real Estate Commissioner.
State law also mandates that a Disclosure Statement be provided to all potential purchasers of a residential condo unit. The Disclosure Statement describes the features of the condominium and the purchaser’s rights and obligations under the condominium documents. Typically drafted by the attorney, the Disclosure Statement also includes a description of the physical condition of the property and the anticipated cost to maintain the common elements. The attorney works with an accountant and the engineer, contractor, and/or inspector to prepare these documents for State approval.
A relatively new obligation of a developer as part of the Disclosure Statement, is to prepare a “maintenance manual” for the condominium owners’ association. The maintenance manual generally discusses the routine maintenance and repair suggested for each feature of the common elements, such as the roofs, sidewalks, gutters, siding, etc. The maintenance manual is typically prepared by the developer’s engineer, architect or a licensed contractor.
The accountant and the engineer or contractor can also assist in preparing the budget for the owners’ association, which must be determined in advance of any unit sales. The budget must include an allocation of a portion of the owners’ monthly assessment to a reserve account. The reserve account funds the replacement or repair of the common elements that have a useful life of greater than 3 years, but less than 30 years. As you can imagine, this is a very comprehensive report and budgeting process, and it is important to include experienced professionals in developing this budget.
A condominium must be surveyed by a licensed surveyor. The survey can be a very involved process, depending on the number of units that are to be created in the conversion, as each individual unit must be measured and platted. The exterior of each building must also be measured and platted.
Once the survey, governing documents, disclosure statement and budget have all been prepared, these documents must be submitted to the Oregon Real Estate Commissioner’s office for review and approval. The Commissioner’s office does a thorough review of each document, cross-referencing them to ensure consistency and compliance with State law.
Once this State agency has approved the condominium documents, the survey and Declaration of Condominium Ownership must be submitted to the local government, just as any partition or subdivision would be, for review and approval.
SALE OF UNITS
State law prohibits the sale of a condominium unit until the Oregon Real Estate Commissioner’s office has reviewed and approved the Declaration of Condominium Ownership, Bylaws and Disclosure Statement, and the survey and governing documents have been recorded. It is, however, possible to enter into sale agreements prior to the survey being recorded, but in order to protect purchasers of condominium units, the State has required that all condominium documents be reviewed before they are provided to a potential purchaser.
COST AND TIMELINE
As it is likely clear from the discussion above, it may be costly and time consuming to complete a conversion, but both cost and time requirements depend largely on the size of the project. A 10-unit conversion will not require the same amount of cost or time as a 60-unit conversion would require, primarily because of the time it takes to conduct a survey and a physical inspection of each unit.
Another factor that impacts the timing of the project is the mandated review by the Real Estate Commissioner. The Real Estate Commissioner’s office has 45 days to review and approve the condominium documents, and their workload is such that it often takes the full 45 days. Any requested modifications or revisions to the documents by the Commissioner’s office will further delay approval of the condominium. Although the condominium conversion process can be costly and time intensive, it can result in a significant return on the developer’s initial investment in the project. For example, if a developer spends $45,000 converting a 30-unit apartment complex into condominiums, this is only an investment of $1,500 per unit. In this real estate market, many developers believe this is a worthwhile investment if it results in the creation of 30 units.
If you would like to discuss the conversion process, please do not hesitate to contact our office.