Timing of Common Area Conveyances

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Taxes!  In Texas, common area will be valued at a de minimus value, but usually only if the common area is owned by the association.  So long as the land area that will be common area is owned by the developer, the tax assessor will use customary valuation assumptions for determining the ad valorem taxes due. 

As a result, there is pressure to convey common area as soon as possible thereby moving the tax burden from the developer to the association and simultaneously (or for the next tax year) reducing the valuation. However, there are a few things to keep in mind as you consider the timing of conveyance.  In most cases, the developer will not convey the common area to the association until all improvements planned for the common area are complete.  The developer needs the unilateral right and complete autonomy to enter into contracts for common area improvements, oversee the construction process, adjust improvements as needed, and otherwise control all aspects of the design and completion of the improvements.  Conveying common area prior to completion complicates developer oversite and autonomy.  A conveyance before or prior to completion unnecessarily complicates the construction and completion process in that the association and its board own the land and will have ostensible oversite of the project.  It is possible to reserve easements and rights in favor of the developer to complete and administer the project, or appoint the developer as project manager, but there remain knotty issues, especially regarding lien rights and insurance that will need to be addressed.  In almost all cases, the costs of documenting and administering these complexities outweigh the benefits of the lower tax value. 

While completion might be a good benchmark for conveyance, the developer should also consider any warranties from contractors or sub-contractors that apply to the common area improvements.  It will often make sense for the developer to retain title to the common area for some period of time to administer warranties and ensure that any warranty claims are addressed.  This is especially true for common area which is available for public use, e.g., parks, and where the regularity or entitlement authority requires that the improvement be completed and inspected as a condition to project approval. Assuming that regularity and entitlement issues are not important relative to common area improvements, or important enough for the developer to retain title, the developer should consider transferring the common area warranties to the association, but retaining the right to administer the warranties at least during any express warranty period.  If a conveyance will occur during the express warranty period, the developer should ensure that warranties obtained from the contractor or sub-contractor are assignable to the association. 

As a final word on timing, there may be circumstances where the developer desires to retain title to the common area, but the common area improvements are complete, available for use, and maintenance by the association is appropriate.  In such circumstances, consider providing in the community covenants the right for the developer to “designate” areas of the community as common area.  Upon such designation, the association’s obligations to maintain, and right to collect assessment to discharge such maintenance, are triggered.  The developer can then determine, at a later date, when actual conveyance to the association is appropriate.  If the designation approach will be used, the developer should consult with their property tax consultant to determine whether the applicable tax assessor will consider a lower value for common area so designated.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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