It is quite common to have a condominium within a condominium in a building. An example is a building with a hotel on the lower portion of the building and luxury residential units above. The primary condominium would consist of the hotel as Unit 1 and the residential units as Unit 2. The secondary condominium would consist of the residential units. This is common, a condominium within a condominium, a dual structure in one building.
This article will discuss a condominium within a condominium on a large tract of land – a horizontal development, rather than a vertical structure. This format would be used in a situation where the municipality will not permit a subdivision. If a developer wanted Unit 1 to be rentals and Unit 2 to be townhouses, with the Unit 2 owner having a right to make Unit 2 a secondary condominium, there should be no problem to do this.
In such situations, I have provided that each Phase shall be as independent as possible from the other Phases. The Owner of Unit 2, the condominium townhouses, may unilaterally elect to submit Unit 2 to the provisions of Chapter 183A and to create a condominium in Unit 2 including all of Phase II. The owner of the rental units may want to be as independent of the townhouses as possible and may want broad power. For example, the primary condominium could be run by three directors. The owner of the rental units could select two of the three directors with only one director for the townhouses, but the “town house director” wou Id have a veto over” major decisions.” The concept of a condominium within a condominium works in this situation.
Zoning. In any two tier structure, zoning issues must be addressed.
Before an attorney can begin to draft the documents for a condominium, he should carefully review the zoning ordinances or zoning by-laws. The use clause in the condominium documents must be sensitive to the use provisions allowed in the zoning ordinance or zoning by-law. In many cases, permits from the local zoning board must be obtained before the development can go forward. In any event, a zoning/permitting analysis is necessary before creating the condominium.
Secondary Mortgage Market Considerations. By using the two tier concept for a large tract of land we can make it easier to achieve compliance with the secondary mortgage market for the townhouses.
One of the most important issues developers and their attorneys typically need to address in the development of a mixed-use condominium with residential units is Federal National Mortgage Association (FNMA, or Fannie Mae) compliance. A condominium with commercial or nonresidential space that exceeds twenty percent (20%) of the building or buildings will not be in compliance with FNMA approval requirements – special approval will be necessary. Rental apartments are considered to be “commercial,” as they are income producing. I have drafted documents for large condominiums with for-sale condominium units and developer-owned apartments. Where the apartments and other commercial units comprise more than twenty percent (20%) of the project, special approval has been required for FNMA compliance.
However, by using the condominium within a condominium approach on a large tract of land, we can treat the secondary condominium containing the residential townhouse units as a separate condominium and thereby satisfy FNMA because one hundred percent (100%) of the condominium units in the secondary condominium are for sale residential units.
If the number of townhouses were much smaller – under six (6) for example – I would recommend obtaining portfolio loans and avoiding a two tier structure. With portfolio lenders, there is no need to comply with secondary mortgage requirements such as those imposed by Fannie Mae.
Separate Condominium Boards. The primary condominium will have a board of directors or trustees responsible for general use restriction enforcement, exterior signage as well as architectural and landscape control. The apartment and townhouse owners share certain amenities and facilities that they use and work together on common issues, but each owner can control their space with relative autonomy from each other. Separate boards are created to govern their respective portions of the site. The two-tier approach separates the rental units from the townhouse units on a large tract of land more than a single tier approach.
Title Insurance. Finally, and probably most important, is title insurance. Just as title insurance is available for a two tier vertical condominium in a building, title insurance is also available in the two tier horizontal condominium I have been describing. The entire condominium will be able to obtain title insurance. Also, the townhouses will be able to get title insurance as a separate condominium. Given this, a two tier horizontal condominium within a condominium is a totally workable concept!