In this article, I am going to discuss vertical phasing in a condominium. First, I will discuss the concept in general terms and then give some examples.
We are all familiar with the concept of a phased condominium. The typical example is a suburban condominium development. My developer client wants the right to expand the condominium horizontally by the addition of a series of buildings over a period of time. An example of this is Olde Village Square Condominium in Medfield, Massachusetts, which I am working on currently. I draft phasing amendments bringing new buildings into the condominium from time to time. This is a multi-phased residential condominium, a typical example of horizontal phasing.
Vertical phasing, on the other hand, is ideal for a developer of a condominium who wants the right to expand the condominium vertically by adding additional floors to the building. These expansion rights are a good example of vertical phasing.
The tremendous current demand for condominiums in Boston makes the issue of vertical phasing rights important.
Vertical phasing can be simple or complex. Vertical phasing can be above an existing building, within the building, or a combination of both.
An example of simple vertical phasing would be a four (4) unit condominium building with a retail unit on the first floor, office units on the next couple of floors, and a residential unit on the top floor. Appurtenant to the residential unit, there would be expansion rights, allowing the addition of one (1) or two (2) more floors with several new units to be built on these floors, by one (1) or more phasing amendments. The roof would be limited common area for the exclusive use of the developer as the owner of the residential unit. Subject to obtaining the required zoning approvals (such as variances for height and density) and the consent of the construction lender, this type of vertical phasing can be accomplished by correctly drafting the master deed to allow vertical phasing above the existing building. Expansion rights are sometimes called “air rights” or “development rights.”
Financing for the development and the exercise of expansion rights must be coordinated. Therefore, review by the construction lender is essential. The construction loan documents must reflect the expansion rights.
The exercise of expansion rights requires that the master deed be amended by one (1) or more phasing amendments to include the expansion floors and expansion units into the condominium. The percentage interests of all of the units are adjusted downward in the amendment to reflect the addition of the expansion units.
The developer, in addition, must have the unilateral right to amend the master deed to include the expansion floors and expansion units in the condominium and to provide for the following:
(1) Temporary rights and easements through the common areas and existing units to allow construction of the expansion floors and expansion units, provided that any damage is promptly repaired, and further provided that the developer uses reasonable efforts to minimize interference with the use and enjoyment of the sold units by the owners and occupants of the sold units;
(2) Rights and easements in common with the unit owners to access the expansion floors by means of the existing stairways and elevators; and
(3) Rights and easements to extend elevators, utilities and stairs into the expansion area.
While the developer will reserve the unilateral right to develop the expansion area, the developer will have to calm any fears of existing unit owners that the structure of the building will not be impaired and that they will not be unreasonably disturbed during construction. The developer must have proper builders risk insurance.
The roof of the building often presents problems in vertical phasing. For example, in the event there is mechanical or air conditioning equipment on the roof of the building, the master deed must give the developer the unilateral right (without the consent of the unit owners or their mortgagees) to relocate this equipment in order to be able to exercise the vertical expansion rights reserved to the developer.
Another type of vertical phasing would be the adaptive reuse of a church, such as an abandoned church with a large open parking lot. The main building could be converted to a residential condominium and the air rights above the parking lot could be developed as additional residential condominiums. The parking lot itself can be preserved for the parking of automobiles for the residential owners in the main building and the residential units built in the air space above the parking lot. A well drafted master deed can provide for this without any problems, as long as the developer is able to obtain the zoning approvals (e.g., variances for height and density) required and the consent of the developer’s construction lender. While zoning is often a problem, the consent of the lender is made easier because air rights are an interest in real estate and the lender will therefore be able to obtain title insurance for the air rights.
Another example of vertical phasing would be a large mill building. A particular mill building had been converted to a mixed use condominium with forty-nine (49) residential units and one (1) commercial unit, all in one (1) building. I prepared the documentation adding additional residential units in the building and reducing the size of the commercial unit. This is vertical phasing within and above an existing mill building, an example of much more complicated vertical phasing.
There are mill buildings and other buildings throughout Massachusetts that can be converted to the condominium form of ownership with vertical phasing within the existing structures, above the existing structures, or both.
Neither horizontal nor vertical phasing are described in Chapter 183A, the Massachusetts Condominium Statute. In fact, the entire concept of phasing is mentioned only once in Chapter 183A (i.e., in Section 5(b)(i)). As Chapter 183A is merely an enabling statute, I have been able for over four decades successfully to push the envelope in drafting both horizontal and vertical phasing, in order to give my developer clients what they want.
In my opinion, it is good that our first generation condominium statute, Chapter 183A, does not go into detail about “expandable condominiums.” Phasing, whether horizontal or vertical, is really all about expandable condominiums. Unlike Massachusetts, the condominium statutes in other states go into great detail about expandable condominiums. Unfortunately, in going into such detail, some states with second or third generation statutes eliminate the possibility of vertical phasing because the statutes describe horizontal phasing as the only permissible type of phasing. Therefore, our simple first generation statute in Massachusetts is clearly the better statute. What is not expressly prohibited is permitted. Unlike in some other states, in Massachusetts both vertical and horizontal phasing are legally permitted.