Colorado Real Estate Journal - February 18, 2015
As we all know, residential construction in Colorado has been largely limited to apartments and townhomes owing to developer and investor fears of construction defect litigation. However, market demand for condominium for-sale product is so high that developers are beginning to stick their toes in the water; a few sizable condominium projects in the metro area are heading to construction in the coming months. Still, until we see real movement legislatively on the defect issue, we are not likely to see near the pace of new condominium development as the market can sustain. Back in the day, another popular option for bringing condominiums to market was to convert existing apartments and other built assets to for-sale residences. As with new construction, very few if any conversions of 20 or more units have been undertaken in recent years. Gary Kujawski at the Colorado Real Estate Commission, who is charge of registration of condominium conversions, confirms that he has seen none in the last several years. But, that is likely to change very soon. This article highlights certain legal requirements unique to condominium conversions. Statutory/Regulatory Requirements. There are three principle Colorado statutes that govern condominium conversions: the Colorado Common Interest Ownership Act, certain provisions of the old Condominium Ownership Act, and the Subdivision Developer’s Act and its regulations. Any condominium project created after July 1, 1992, whether new construction or a conversion, must fully comply with CIOA. Therefore, the documentation required by CIOA for a condo conversion is the same as that required for a newly constructed condominium (i.e., a condominium declaration and condominium map and associated homeowner association articles, bylaws and policies). The rights and duties of a declarant/ developer in projects involving new construction and conversions are essentially the same under CIOA. In addition to the requirements of CIOA, the Old Condominium Act (which was largely supplanted by CIOA in 1992) still requires that upon recording the condominium declaration converting apartments to condominiums, developers are required to mail a special notice of the conversion by certified or registered mail to each existing rental tenant. While the statute does not require that the developer offer tenants a right of first refusal to buy their unit (as required by other states such as Nevada and Florida), the statute permits the tenant to continue to reside in the unit until the later of the expiration of their lease or 90 days after delivery of the notice, unless otherwise agreed to in writing by the parties. The challenge created by this notice requirement is to balance the developer’s desire to terminate the leases on a phased basis so that the units can be sold with the developer’s need for rental income until the units are sold. Unlike new construction, the Subdivision Act views a condominium conversion in which 20 or more units are created to be a “subdivision” requiring special registration of the project and the developer with the Colorado Real Estate Commission. This registration involves filing a detailed application with the commission that discloses background information on the developer and the intended project and paying an application fee (currently $1,200). All individuals with at least a 24 percent financial interest in the developer must be disclosed, including whether any of those individuals have been charged or convicted of a felony or theft-related offense, and the application must list in what states those individuals are licensed/registered to sell, broker or develop real estate and any enforcement actions taken. Along with the application, the conversion developer must submit its draft condominium organizational documents, its unit sales contract and reservation forms, and a quite lengthy disclosure statement concerning the project to be given to each buyer before signing a sales contract. The unit sales contract must include several special provisions required by the commission, including a prominent statement of the buyer’s right to rescind the sales contract for a period of five days after the later of the buyer’s execution of the sales contract and the receipt by the buyer of the disclosure statement. In any event the disclosure statement must be provided to buyers before they sign a sales contract. The disclosure statement contents are akin to the old HUD ILSDA disclosure statement (which is no longer required for condominiums). Among other matters the disclosure must include a general description of all amenities and accommodations within the project along with a description of the homeowners association and the services and related fees that come with being an association member. The challenge is to include the information that the commission requires, making sure that the statements made continue to be accurate as the project unfolds and evolves, and working in disclaimers of representations and project conditions where possible. The commission is to issue or refuse to issue its certificate indicating final approval of the application (or ask for additional information) within 60 days from its receipt of the developer’s application. You must submit a fully complete application if you have any chance of receiving final approval in 60 days. Although the developer cannot sign contracts until it receives a subdivision developer’s certificate from the commission, it may (with the consent of the commission) enter into approved reservation agreements during the pendency of its application so long as any funds collected from reservees are held in trust by a third party and are fully refundable. Conversion certificates are site specific and developer specific and are not assignable. They also must be renewed each calendar year for so long as unit sales continue. For those of you who have completed conversions in the past, the commission’s regulations have been updated since but remain substantively similar to those that were in place when conversions were active. Local Affordable Housing Requirements. In Boulder, condominium conversions are not subject to the city’s affordable housing ordinance unless the conversion increases the total number of units at the site, or the original development paid cash-in-lieu to meet the city’s affordable housing requirement when first constructed and then the conversion to condominiums occurs within five years of the payment. In Denver, it is clear in listening to council hearings when Denver’s Inclusionary Housing Ordinance was adopted that the ordinance was not intended to cover a typical conversion of apartments to forsale condominium units. However, if the conversion involves substantial rehabilitation of the existing building and creates 30 or more condominium units, then the project will likely need to satisfy the IHO’s requirements for providing affordable housing; this is an issue that the next round of conversions will need to face and get clarified. Construction Defect Implications. Finally, the conversion of an existing building that is at least 6 years old potentially can avoid some construction defect claims because it falls outside the statute of repose for defect claims in Colorado. But keep in mind that even in those cases the developer will remain liable for defects associated with the rehabilitation work it undertakes, and for misrepresentations that it or its agents make to buyers concerning the condition of the project, as well as for failure to disclose defects of which the developer knew or reasonably should have known. Providing clear, written disclosures to buyers and keeping on file evidence of the buyer’s receipt of the disclosures is still the best practice. The next wave of conversions is inevitable. While they may offer a bit of relief from defect exposure, be aware of the additional regulatory requirements and oversight involved.