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CRE Finance World, Summer 2014

Con-dos and Con-don’ts: The Financeable Commercial Condominium in CMBS 2.0 A publication of Summer issue 2014 sponsored by CRE Finance World Summer 2014 61 further represent the amount of past assessments paid by the borrower for the past three (3) years or so and confirm borrower’s voting rights and percentage interest in common elements under the condominium documents. The association should confirm that it has no right to purchase or right of first refusal to purchase the borrower’s unit. Beyond the standard representations, the estoppel can also serve as an agreement by and between the association, the borrower and the lender. Lenders should use the estoppel to mitigate risks to any lender under the condominium documents. If permitted pursuant to the association’s governing documents, the association should covenant in the estoppel agreement to, for example, not to make any major decision with lender’s consent, not to make any changes to insurance without lender’s consent and not to declare any default under the condominium documents by borrower without offering the lender an opportunity to cure. When working to make a condominium deal palatable to the CMBS market, lenders and their counsel should not shy away from using the condominium estoppel as a tool to mitigate lingering risks. However, in many cases not even an estoppel or changes in the loan documents can resolve particular issues. In these situations an amendment to the condominium documents themselves may be warranted. Understandably an amendment can be a significant lead-time item with consent and sign-off required by all unit owners. Conclusion Though some lenders may shy away from condominiums, those lenders that understand the structure and market requirements of such transactions may find themselves with a competitive advantage – winning good condominium deals that other lenders were hesitant to take. Condominiums can be effective and profitable structures for lenders and loan purchasers alike, so long as the risks and rewards are properly understood. Though each condominium transaction requires a thorough analysis of the condominium documents, even an imperfect structure can work in the CMBS market so long as lender and the lender’s counsel have worked through the possible risks and mitigated each risk accordingly — whether that be by adding recourse carveouts to the loan documents, beefing up the covenants and representations in the condominium association estoppel or even requesting particular modifications to the condominium documents themselves. 1 See Anthony DeBartolo, The First Case of ‘Condo Fever’ Rocked the 7 Hills of Ancient Rome, CHI. TRIB., August 15, 1986. 2 See 1 ALBERTO FERRER & KARL STECHER, LAW OF CONDOMINIUM 15-16 (1967). 3 Typically a site condominium consists of completely detached buildings (with no shared walls) and the condominium units consist of the entire building as well as the surrounding parking, sidewalks and air space. Site condominiums have very limited, if any, common elements — sometimes including private roads or landscaping separating the different units. Site condominiums are particularly common in Michigan where establishing a site condominium can be a quicker and cheaper alternative to formally subdividing real property. 4 In North Carolina the declaration “may not be recorded unless all structural components and mechanical systems of all buildings containing or comprising any units thereby created are substantially completed.” N.C. Gen. Stat. §47C-2-101(b). In dealing with new construction, a condominium interest will thus not legally exist until construction is substantially completed and the declaration is recorded in accordance with statutory requirements. See Berkovich v. The Vue-N.C., LLC, No. 3:10-cv-618- RJC-DSC, 2011 WL 5037124 (W.D.N.C. Oct. 24, 2011).


CRE Finance World, Summer 2014
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