Condominium: A shared apartment with a leaky roof.
That's a definition heard at a recent conference on condominium conversions, a phenomenon that has been sweeping a country in recent years.
Whether in Washington or in any other urban area, landlords are finding that they make more money-with fewer headaches-by selling the apartment complex to a condominium developer. Our tax laws generally prohibit the landlord from converting because the sale of individual units would be taxed at ordinary income (rather than capital gain) rates. Thus, the landlord sets a price for the building and sells it to a developer who turns the complex into a condominium. The landlord is happy because he never imagined selling the building for the price he got; the developer is happly because condominium units are selling very well in most major urban areas. And the tax authority in which the condominium is located is happy because real estate taxes jump dramatically upon a conversion.
But what of the tenant-the mainstay of the apartment complex? That is not a happy situation.Too often, the tenant does not have the money needed for a down payment on a condominium unit, and thus is evicted from the place in which he or she has lived in for many years. And too often, the tenant is a senator citizen with nowhere else to go but to an old-age home.
Often, however, tenants are able to raise the down payment and can meet the monthly mortgage and maintenance charges. The developer is offering a substantial discount to the tenant who decides to buy early-and there remains that big question: "Should I buy?"
Let's try to analyze this. A condominium is a legal concept which recognizes individual unit ownership within an overall apartment (or town house) structure. Thus, in every condominium there are at least three basis elements:
Units: your own apartment. You own if yourself, can mortgage it, sell it and generally do anything in your unit so long as you do not affect the peace and quiet of your neighbors.
Common elements: the halls, stairs, elevators, roof, swimming pool, etc. Everyone in the condominium owns the common elements, and the expenses needed for the upkeep of these elements are shared by all condominium owners on a percentage basis, each unit owner paving a share proportionate share to the size of this or her individual unit.
Limited common elements: parking spaces, balconies. Although these elements actually are owned by all the unit owners together, limited common elements are assigned specifically to the use of an individual unit owner.
A condominium association is the ultimate governing body within any condominium. If there are only a few units, the association itself can run the show, plan the budget and make the daily decisions needed for the continued success of the project. But in larger condominiums, the function of carrying on the operation of the condominium is delegated to a smaller board of directors-usually ranging between three to seven members. These directors are elected yearly by the entire membership, and have a strong legal duty to operate the condominium properly and efficiently.
Often, because condominium management requires full-time, active participation, the board of directors further delegates the day-to-day operations to a management company. Let's face it: Directors in a condominium are usually busy people who do not have the time - or the expertise - to get involved in the many aspects of condominium management. Payrolls must be met, trash must be collected, the lawn must be mowed and the snow shovelled. Few directors in a condominium want to get involved in these activities, especially because they rarely receive any pay for serving on the board.
Thus, one begins to get the picture of condominium living. Clearly there are advantages. You own your unit and obtain the same tax benefits permitted any owner of a single-family unit. By sharing overhead costs with other condominium owners, you can afford that swimming pool and other amenities which often are found in condomimium complexes. When you take a vacation, your unit is protected and your mail and newspapers can be stored. And, most importantly, your apartment will appreciate in value, hopefully keeping one step ahead of inflation.
But there are disadvantages. Unlike a private home, condominium living means cooperative living. You must share the common elements with the other owners. You may not be able to keep your favorite large dog or noisy cat; you may be asked to turn down your stereo or your television when your neighbors start getting ready for bed. You may find that a small group of owners take over control of the association - just because no one else wants to spend the time and effort getting involved.
And, unlike a tenant, you cannot give notice to the landlord and move out; you are the landlord. Your options are to sell or rent the unit if you become dissatisfied. Therefore, there must be a set of rules and regulations governing the activities of the unit owners and the association.
Decision-making in a condominium ultimately rests with the association itself. At least once a year, all the unit owners meet to elect directors, approving the budget, plan activities and conduct any other business which is presented for consideration.
Unfortunately, the theory of condominium living does not always work. Unit owners do not want to get involved in association business, and thus - perhaps by default or through apathy - the job of running the condominium falls upon these few owners who remain interested. The annual meeting, at which major policy and financial decisions are made, is poorly attended - thus permitting a small cabal of unit owners to control the majority.
What are some of the major issues affecting condominiums? Although every condominium has different concerns, here is a sample of the kinds of problems most association ultimately face:
Budget. No one wants to pay any more money than necessary, yet we all recognize that the cost of living is spiraling upward daily. Certain essentials of the condominium - such as fuel, labor and insurance coverage - cannot be overlooked, and thus careful consideration must be given to developing the annual budget. On the one hand, the monthly assessment to each unit owner must be high enough to permit the accumulation of a reserve account to avoid the necessity of imposing heavy special assessments to meet emergency situations such as a faulty elevator or a leaking roof. Yet, on the other hand, the budget must be set realistically so as not to create a heavy financial monthly burden on the unit owners.
House rules. Here is one of the must troublesome areas of condominium living. We are all individuals with our own tastes, likes and dislikes.Yet group living requires some element of compromise - and the end result is a set of house rules to which every unit owner must adhere.
What controls are imposed on noise? On pets? Can you install window air-conditioning units in your apartment or is permission needed from an architectural control committee?
Can anyone park in the garage or are the spaces reserved exclusively for unit owners? And what should be done to separate motorcycles and motor homes from the rest of the automobiles?
And perhaps the most difficult house rule deals with the issue of ownership or rental of units. Some unit owners want to keep their condominium owner-occupied, on the theory that tenants in rented units do not have the same incentive as owners to keep the condominium in good shape. Other unit owners want the freedom and the flexibility to rent their apartment - on the theory that a condominium is a good investment and why sell just because you move out?
Collection procedures. Condominium owners often forget that they are dependent on everyone in the complex to assure that the monthly expenses are met. If the unit owners do not pay the monthly maintenance charge (the condo fee) on time, this creates a drain on the entire association budget. Thus, the association must be prepared to be a collection agent - and a harsh one - if payment of these maintenance fees is not kept up to date. Yet, this is difficult. No one wants to dun a neighbor and, indeed, the ultimate remedy available to the association is to sell the unit of the delinquent owner to satisfy the outstanding debt.
Thus, we ultimately get back to the question: "Should I buy?" No one is a fortune teller. We cannot predict with any accuracy whether condominiums will raise in price in the years to come. We cannot assess the impact of the large number of condominium units which are coming into the market because of conversions of rental apartments - the so-called "condominium glut." Resales of older units may be hampered by developers selling newer units with attractive financing and favorable warranties.
And, we still have to assess the impact of communal living on our own life styles. It is really too early to predict whether condominium associations can withstand the challenges from individual unit owners. More and more condominiums are finding it difficult to attract competent members to serve on the boards of directors; the pressure is great and the rewards small.
In effect, condominium living reflects democracy - at its best and at its worst.