Heard enough about the fiscal cliff? Condominium developers should take into consideration the potential liability for assessments on developer owned condominium units when structuring condominium regimes to avoid their own financial downfall.
Upon filing a condominium declaration, the subject property is instantaneously transformed into condominium units and common elements, regardless of whether or not anything is actually built. Until either Declarant control terminates or three years after declarant’s first conveyance of a unit, the declarant has the option to pay either (1) the operational expenses of the association, less the amount paid through assessments by unit owners other than declarant or (2) regular assessments allocated to each of the units owned by declarant. However, three years after declarant’s first conveyance of a unit, declarant must pay regular assessments on each declarant owned unit. This requirement could lead to a situation where a developer is responsible for paying assessments on units which were never constructed and may never be constructed, i.e. “paper units”.
To avoid this potentially endless financial obligation to pay assessments on “paper units,” condominium developers should phase condominium regimes. In phasing, a developer should only “create” units which the developer anticipates constructing and conveying in the immediate future to minimize the developer’s liability for assessments. Then, as units are constructed and conveyed, the developer can phase in new units. While condominium projects are often phased by developers to comply with various underwriting requirements related to unit sales, developers with price points outside of FHA/FNMA lending limits are more likely to forego phasing. However, developers should also consider phasing, especially in large scale condominium projects, to avoid assessment liability on developer owned condominium units.