2011 Legislative Session Update Builder Profile: VERITAS Custom Homebuilder. July/August 2011

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1 July/August 2011 Winner Winner 2009 Association Excellence Award for Best Communication to Members Official publication of the Texas Association of Builders 2011 Legislative Session Update Builder Profile: VERITAS Custom Homebuilder

2 Legal Opinion Condominium Primer Issues Involved with Residential Condominium Formations in Texas by William P. McLean and Kristi Stotts of McLean & Howard L.L.P. Condominium Regimes are used in Texas to cover a multitude of real estate project types. Condominiums offer considerable flexibility in the establishment of horizontal and vertical ownership boundaries and owner responsibilities within the project. Condominiums can be used to legally structure and define real estate projects ranging from a residential duplex to a downtown mixed-use, high rise. Condominium Regimes are normally used as a necessary alternative to dividing ownership by platting property into lots. This can be the case in high-rise or stacked projects, where divisions of ownership are vertical and above ground. The formation of Condominium Regimes can be complicated and must comply with applicable Texas law governing their creation and administration. Because of their broad range, the condominium form of ownership can be encountered or utilized by Texas builders and developers of any size. This article is written to provide primer to Texas builders and their counsel on some of the major concepts involved with residential Condominium Regime formations in Texas. This article should not be considered adequate to equip the reader with enough information to form a Condominium Regime a task which should always involve consultation with an attorney who is well qualified in Texas Condominium law. The Texas Condominium Act The Texas Condominium Act was enacted in Subsequently, in 1993, Texas adopted a Condominium statute based on the model Uniform Condominium Act. Texas Uniform Condominium Act TUCA became effective Jan. 1, 1994, as Chapter 82 of the Texas Property Code. Condominium Regimes created on or after Jan. 1, 1994 are governed by TUCA as set forth in Chapter 82 of the Texas Property Code (the Act ). Section of the Act imposes a strict requirement for Condominium Regimes to adhere to the provisions of the Act without the possibility of waiver of those provisions by owners (except in limited circumstances mostly applicable to commercial condominiums). The provisions of the Act further limit the ability of the developer to amend the main governing documents in a Condominium Regime without the requisite vote of the non-developer owners. Items such as transfer of control of the owners association from developer to Unit owners, budget requirements, and other provisions are specifically regulated by the Act. This additional regulation of Condominiums represents a key distinction between condominiums and traditional homeowners associations. Core Documents in Condominium Formations A Condominium Regime is created through a set of documents which establishes the division of ownership, maintenance and assessment responsibilities, restrictions and all other necessary matters related to the private governance of the project. The documents are normally created by the attorney for the developer of the project. A brief summary of those core documents follows. Declaration A condominium is created by recording the Declaration in the official public records for the county where the project is to be located. A Declaration is the most critical document within the Condominium Regime. It will usually be comprised of a lengthy narrative portion, appendices and exhibits. The Declaration, among other things, describes the division of property ownership into units and common elements, defines rights and obligations of ownership, and sets forth provisions for management and administration of the condominium. Condominium Information Statement The Condominium Information Statement, also referred to as the CIS, is the document required by the Act to be provided to purchasers of Units prior to closing of their Unit. The CIS is intended to provide a summary and copies of the governing documents for the condominium. The narrative summary of the CIS supplies purchasers with information such as the name and address of the Declarant, a general description of the condominium including the number and type of units, information about the association and management of the project, insurance coverages and requirements, warranty information and a description of the Development Rights reserved by the Declarant. Copies of the Condominium formation documents including the Declaration, Certificate of Formation, Bylaws, Rules and Regulations, Management Certificate, the Association Budget and copies of amendments to any of the forgoing are provided to purchasers in the form of exhibits attached to the CIS. Rules and Regulations The Condominium Regime may include Rules and Regulations or Policies in addition to those laid out in the Declaration and Bylaws. The Rules are specific guidelines applicable to the Condominium Regime that can usually be amended by the Board of Directors of the Association. The developer will set up the initial Rules based on the developer s or market preference for a particular project. Rules can regulate a number of subjects typical of similar, planned communities such as use restrictions, parking regulations, fence materials, building and design standards, paint colors, number of pets, etc. Management Certificate The Management Certificate contains contact information for the Condominium Owners Association and property manager. Certificate of Formation Condominium Owners Associations in Texas must be incorporated. Initially, the association will be controlled by the developer who will have the authority to appoint the members of the board of directors. The Act regulates when control must be transferred from the developer to unit owners. The Certificate of Formation forms the Association and is filed with the Secretary of State s office. Each Unit Owner is required to be a member of the association. Bylaws The administration and operation of the association is controlled by the bylaws. The bylaws will include details about administration of the association such as information related to the board of directors, the officers, elections, qualifications, and meetings. 26 July/August 2011 Texas Builder

3 Establishment of Property Rights in Condominiums Condominiums involve an ownership structure broken down into units and common elements. A unit is the real property interest owned in fee simple by an individual owner or owners. Everything in a condominium project that is not a unit is a common element. Common elements can be further divided into general common elements and limited common elements. General common elements are normally for the use of all owners while limited common elements are used to create areas for the exclusive use and\or maintenance responsibility of one or more, but less than all of the owners. For example, the exterior patio or assigned parking space adjacent to a unit might be a limited common element, whereas a community swimming pool would be a general common element. Units and common elements are defined in Section of the Act; however, the Declaration is where the units and common elements are normally described with a greater detail of specificity. A common misperception is that common elements are owned by the association. All common elements in a condominium are owned in undivided interests by the individual unit owners. The ownership percentages of the common elements for owners are usually set forth in an exhibit to the Declaration. While the unit owners own the common elements, the association normally has all the authority and control over matters involving the common elements. This is another area of distinction between condominiums and traditional planned community developments where the homeowners association customarily owns the common areas within the project. Unit Descriptions Section of the Act requires that the Declaration include a description of the units. However, the Act does not severely tie the drafter s hands on the limits or confines of unit boundaries. Consequently, the unit description is part of the Declaration where there is allowed a great deal of flexibility. It is very important to appropriately describe unit boundaries depending on the nature of the project and the developer s desired effect. The author groups unit types into the three main categories of airspace, skin-in and site condominiums. Airspace Airspace condominiums include exclusive ownership and use of the interior spaces of a unit. Airspace units can include fixtures, appliances and individual mechanical equipment associated with the individual unit. Further, airspace units can be expansive enough to cover and include certain building materials associated with the interior of the structure such as sheetrock or floor coverings. Airspace units are the most common types of condominium projects and normally involve a degree of connection between units such as common walls. Apartment-style or high-rise projects will typically be formed as airspace units. Skin-in Generally, skin-in units are units that include ownership of the outer components of the building, such as the outer walls, roof and\or foundation. Skin-in units can include certain or all of these outer components. Maintenance and insurance of certain types of condominium buildings could dictate that the foundation or outer walls be part of the unit, but not the roof. Garden-home or similar projects where the grounds are maintained and controlled exclusively by the Association but the buildings are stand-alone structures may be appropriate for skin-in ownership. Site Condominiums Site condominiums are more similar to owning a subdivided lot in a platted subdivision. In a site condominium, the unit may be defined as an area similar in nature to a lot, where the owner s home or structure may be more Legal Opinion on page A V I R T U A L R E V O L U T I O N 360 HD TOURS MOBILE READY FREE HOSTING POWERFUL MARKETING MEMBER BENEFITS PARTNERS IN A VIRTUAL REVOLUTION NEWSPIN360.COM/TAB July/August 2011 Texas Builder 27

4 legal opinion Continued from page 27 built. Site condominiums may be utilized to create the look and feel of owning a lot, however, it is important to carefully craft the definition of site condominiums to avoid the triggering the requirement to plat under city or county regulations. Certain condominium projects are readily identifiable with a certain unit type. For instance, in a high-rise or apartment-style project, the units will almost always be established as airspace units. There is simply no need or market expectation for expanded ownership boundaries because of the common understanding that comes with these types of projects. Generally, the expectation is that the association will handle any repairs or maintenance of anything outside the unit s inner walls. Condominium projects that are semi-attached or detached present more of a challenge. Building types, buyer preferences, maintenance responsibilities and insurance coverages can all influence the decision of what type of unit to employ in the project. The description of the unit boundaries in such projects is very important and can be tricky. Ambiguities in this part of a Declaration can lead to disputes over repair and maintenance responsibilities or insurance coverage for casualty repairs. Is a Condominium a Subdivision? A condominium project can be built on a single platted lot or legal tract without the necessity of processing and recording a subdivision plat. Real estate projects are often built as condominiums when the size or configuration of the ownership units would not otherwise meet local government regulations for platted lots. The author does not believe that the creation of a condominium regime alone represents a division of land into two or more parts which in turn may require the preparation and approval of a subdivision plat as set out in Chapter 212 (applicable to Municipal Regulation of Subdivisions) or Chapter 232 (applicable to County Regulation of Subdivisions) of the Texas Local Government Code. Once again, the language describing the boundaries of units is important to avoid the interpretation that the Condominium Regime creates such a division. For instance, dividing the land within a condominium project into parcels that are owned in absolute fee simple by the individual owners could be considered a division that requires platting. In the case of site condominiums, converted duplexes, skin-in or similar projects, a description of the lower boundary of the unit is important. The description should always stop short of penetrating the horizontal surface of the ground underneath the dwelling structure. This is not to say that a foundation, built into the land, can t be part of the unit s boundaries. Notwithstanding the author s belief that the formation Condominium Regime alone does not represent a subdivision, there has been serious scrutiny applied to the question of whether local governments can apply their subdivision regulations to the development of condominium projects, even if there is no legal requirement to plat. Section of the Act provides as follows: A zoning, subdivision, building code, or other real property use law, ordinance, or regulation may not prohibit the condominium form of ownership or impose any requirement on a condominium that it would not impose on a physically identical development under a different form of ownership. Otherwise, this chapter does not invalidate or modify any provision of any zoning, subdivision, building code, or other real property use law, ordinance, or regulation. Some attorneys have argued that this provision of the Act protects condominium developers from subdivision regulation of any kind by cities or counties. The Texas Attorney General s Office disagreed with that conclusion. Attorney General Opinion No. GA-0223 provided that Sec of the Local Government Code allows urban counties to require condominium or other multi-unit developments in certain cases to meet [the county s] subdivision or infrastructure planning requirements. The AG Opinion presumably applies to city regulation of projects as well. In issuing this opinion, the attorney general concluded that the intent of Section of the Act was not to take away the county s authority to regulate subdivision related issues such as infrastructure and transportation. City planners and engineers have used the AG Opinion to apply subdivision standards for publicly dedicated streets or utilities to the private utilities and driveways within condominium projects. The author believes there are flaws in this application as well as reasoning and conclusions of the AG Opinion itself. There have been no Texas appellate court cases directly addressing this issue or Section of the Act, and this is an issue that the author believes is ripe for further consideration by the Texas courts. Is a Condominium a Townhome? One of the most common questions asked of the author by clients is the difference between a townhome and a condominium. Developers often want to refer to their project as townhomes, city homes or similar descriptions to avoid the condominium label. As is clear from this article, a condominium is a very clearly defined and regulated type of real property ownership in Texas. The term townhome or townhouse is a term of art and is normally used to describe a type of structure. That structure is typically a multi-level dwelling which shares adjoining walls with the neighboring dwelling. Townhome structures are often located on their own platted zero lot line lot. For this reason, the author advises against using the term townhome to describe a condominium project. Additionally, Section of the Act requires inclusion of the word condominium to be included in the name of the condominium as stated in the Declaration or the project name must be followed by the words a condominium. Consequently, if a developer cannot resist the urge to spice up the name of its project, they will need to comply with the minimum requirements of the Act by, for instance, naming the project Lakeside City Homes, a condominium. Importance of Development and Declarant Rights The Act allows for certain Special Declarant Rights and Development Rights to be written into the Declaration and held by the developer of the project or its assignee. These rights are critical Condominium Formations Master Planned Communities Barton Oaks Plaza Building II, 901 S. Mopac Expressway, Suite 225 Austin, TX P (512) F (512) William P. McLean, Attorney Partner bmclean@mcleanhowardlaw.com 28 July/August 2011 Texas Builder

5 in the case of a phased project. Special Declarant Rights can include things such as the right to complete un-built portions of the project, the right to maintain a sales office on site, the right to use easements through the project for completion of the project, and the right to appoint members to the association s board of directors. Development Rights can include things such as the right to add units or real property to the project, the right to modify units, or the right to withdraw property from the Condominium Regime. This article does not allow for a comprehensive discussion of Development Rights and Special Declarant Rights. When a Condominium project involves the gradual phasing of units and common elements into the Condominium Regime, the proper documentation of Development Rights within the Declaration is vitally important. Mortgage Underwriting for Condominiums Condominium financing can qualify for FHA, FNMA, or VA financing on conforming loan amounts if certain specific criteria applicable to Condominiums are met. The national economic downturn and the resulting widespread failure of condominium projects have made these underwriting requirements an area of frequent change lately. HUD s Mortgagee Letter of Nov. 9, 2009, was set to expire on Dec. 7, 2010, but was extended. The underwriting standards are restrictive and complicated. Phasing will be required on multi-unit projects to stay within the required minimum percentages for owner occupied and pre-sold units. Once again, specialized knowledge and experience are important in drafting Condominium Regime documents and navigating unit sales and phasing to maintain a project s eligibility for these programs. Conclusion Condominiums represent a wonderful and useful tool for developers and builders of residential real estate fitting the condominium model. They are also complicated and detail oriented in nature. The importance of properly documenting the Condominium Regime cannot be understated. With the proper documentation in place, Condominiums can allow for maximum flexibility and order within residential real estate projects. William P. McLean is the Senior Partner and Kristi Stotts is an Associate within the Condominium and Master Planned Community Practice Group of McLean & Howard, L.L.P., a law firm located in Austin, Texas. This article should not be used for or substituted for legal advice. The article is provided as an introduction to the general concepts of the Texas Condominium law and formations. The article does not provide comprehensive coverage of the subject matter nor is it adequate to equip a non-qualified person with the ability to form a Condominium Regime without the assistance of qualified counsel. Note: The Texas Association of Builders is not responsible for the information that is contained in the above article nor does TAB make any representations or warranties as to the validity, accuracy or sufficiency of any such information. Further, the information that is contained in this article is for information purposes only and is not intended to be legal advice. The answers to many legal issues often depend on the facts involved, and any questions about a particular situation, incident or issue should be brought to the attention of a competent legal counsel. n on Council TAB Welcomes New Members and New Member Program by Lorraine Urey The results are in! Congratulations to the 18 local associations that participated in the statewide membership drive May sponsored by StrucSure Home Warranty. These HBAs recruited a combined total of 665 new members! The winners of the membership drive contest are: West Texas HBA with the most new members: 143 BIA of the Highland Lakes with the highest percentage increase: 56 percent (105 new members) In addition, TAB wants to recognize the top individual recruiter, Adrian Balderas, HBA of San Angelo, who recruited 17 new members. TAB also gave away an ipad; volunteers who attended membership drive orientation and served on a team during the drive were eligible to win. Adrian Balderas, whose name was chosen in a random drawing, was presented with his ipad at TAB s June board meetings where the two winning HBAs also received their trophies. I am truly grateful for all the hard work and dedication that the local associations put forth to ensure a successful membership drive, said Chad Waller, Membership Committee co-chair. Without the commitment of each member, local HBA, and TAB staff, we would not be where we are today. Our association is in existence because of our members, and it is here to serve our members. The largest benefit we have is each other and our ability as one to keep our industry growing strong and moving in the direction that is best for our communities and our family that we call the Texas Association of Builders. TAB First Vice President David Miller remarked, I would like to thank every one of our members who participated in, or are planning on participating in, a membership drive this year. The reason for TAB s existence is to serve our members, and the more members we have, the stronger we become. The tough economic climate requires that our association and industry stay strong, and we can only achieve this by growing our membership. Thank you again for keeping us strong! Although the membership drive is behind us, we cannot rest on our laurels. Member retention continues to be an issue. Although the HBA executive officers and staff work hard to retain members, they need the assistance of the membership. TAB s officers and Membership Committee Co-chairs challenge you the volunteers to help your local association increase its retention rate. For those of you who received Spike credits for recruiting new members, what do you do to retain those members? Have you ever picked up the phone to thank a new member for joining the association? Have you invited a new member to join you at an upcoming HBA event as your guest? Is it your policy to do business with a member? more On Council on page 34 July/August 2011 Texas Builder 29