When most people hear the word “condominium,” they tend to think about a traditional condominium project in which units are separated by a common wall. They may also think of a site condominium in which the unit consists of vacant land. Rarely do they think of a mom-and-pop fishing resort comprised of small, detached rental cabins. The truth is, however, that any existing facility can be converted into and sold as condominiums. A conversion condominium is simply a condominium in which the units existed in some other form of ownership prior to recording the Master Deed.

The conversion condominium is something with which any person involved in buying and selling real estate should be familiar. The conversion condominium may present an alternative way to market an operating resort (for an aggregate sale price which greatly exceeds the price/value of the resort operation). It also may provide potential purchasers with an opportunity to own lakefront property in an area that is otherwise outside their price range. This article will briefly discuss the conversion condominium from these two perspectives: from that of the REALTOR® with a listing agreement for an operating resort, and from that of the buyer’s agent assisting a buyer in obtaining a second home or cottage.

Representing the resort owner who wants out

If you represent a resort owner who is looking to get out of the business, you and the owner may want to consider converting the resort into a condominium for two reasons. First, oftentimes the sum of the parts is greater than the whole. In other words, it may be more profitable to convert to a condominium and sell multiple units rather than to sell the resort as an ongoing business. Second, small resorts can be difficult to market. The reasons for this are many, but typically involve long hours, low gain on investment and the uncertainty involved with operating a seasonal business.

What is involved in converting a resort into a condominium? For the most part, creating a conversion condominium is like creating any condominium. The developer must record a Master Deed, Condominium Bylaws and Subdivision Plans. In those documents, the developer must define the units, the general or limited common elements, and the responsibilities for maintaining and insuring each. The developer must create a condominium association to govern the common elements. Upon creation of a Purchaser Information Booklet with the recorded and filed documents, a Purchase Agreement and a Disclosure Statement, the developer is ready to sell units.

There are four unique issues that arise with developing a conversion condominium, however, of which you and your clients should be aware. First, the Condominium Act does restrict a developer’s right to evict those tenants renting from the developer at the time of the conversion. In the typical resort conversion, these restrictions are not at issue because few resorts have long-term tenants requiring eviction in order to sell units. Still, it can be an issue.

Second, a conversion can involve tricky zoning issues. Some zoning boards have argued that a conversion is a new use and is subject to zoning approval. My law firm has argued successfully just the opposite, namely that a conversion is just a change of ownership. In our lawsuit, the court found that a conversion condominium is a change of ownership but not a change of use, and is therefore not subject to zoning approval. Until the Michigan legislature and appellate courts clarify this issue, however, it is one that conversion condominium developers should be prepared to face.

Third, some DEQ and local health department officials believe they have the same review authority with respect to conversion condominium water and septic systems that they have with traditional or site condominiums. As a result, such officials want to be involved in reviewing those systems and in suggesting modifications to the systems. The problem with conversion projects, of course, is that these officials are reviewing and attempting to modify existing systems.

The legislature could clarify the Condominium Act by stating that the DEQ and/or local health departments have review authority with respect to any new septic or water system. Until such legislation, conversion developers should be prepared either to work with the DEQ/health department, or to challenge the DEQ/health department authority in court.

Finally, some resort owners would like to keep a hand in the resort as they sell units. In such cases, we typically set up rental management programs whereby the developer serves as rental agent for the resort. In the standard rental management program, the developer and the unit owners divide the rental income for the units. Consequently, a rental program may provide a developer with additional income while units are selling.
These issues are addressed best by obtaining legal counsel experienced with conversion condominiums. Furthermore, the developer can save money and prevent headaches by hiring an engineering company that has prepared subdivision plans for and dealt with water and septic systems of conversion condominiums.

Representing the potential unit purchaser

Obviously, the REALTOR® representing a potential purchaser of a conversion unit will have a different focus than the REALTOR® representing the developer. Since each conversion condominium project is different from every other project, there is no exhaustive list of issues a buyer’s agent should consider.

The best advice from a legal standpoint is to read all documents carefully with your clients. Make sure he understands what he is buying, what are the association’s responsibilities, what are the restrictions on rebuilding after a fire or other catastrophic event, what restrictions are placed on use of the unit, etc. Future problems can be averted or lessened by a careful review of the condominium documents prior to purchase.

A second piece of advice is to talk to the developer regarding any potential problems you and the buyer have with the documents. Condominium documents contain a great deal of boilerplate language that the developer may be willing to amend, especially where the language is not statutorily required, to close a sale.

As with any real estate transaction, a potential purchaser of a conversion condominium unit may want to seek legal advice during the document review period prior to closing.

Conclusion

The conversion condominium may provide resort owners with the best returns upon sale of the resort. When determining the value of a resort, the sum of the parts may be greater than the whole. Additionally, conversion condominiums may be easier to market since the responsibilities for taxes, maintenance and operations are shared by multiple owners rather than by one resort owner.

The conversion condominium also may provide potential purchasers with unique opportunities to own lakefront or other recreational property in areas otherwise outside their price range. Make sure you and your client read each document carefully, and do not hesitate to approach the developer if you have problems with the documents.

Like any real estate transaction, the development, sale or purchase of a conversion condominium should be entered into with caution and with knowledge of all material information. The services of an attorney experienced with conversion condominiums can be invaluable in protecting a REALTOR’S® clients, resolving problems, and avoiding pitfalls.