Electric Vehicle Charging Stations: Keep your Condominium Association Current!

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Kevin Hirzel_8x10@300Electric vehicles are increasing in popularity throughout the United States and create unique challenges for Michigan condominium associations, especially those that were created before electric vehicles were even contemplated. Experts project that by 2040, at least thirty-five percent of all new cars will have a plug. Accordingly, condominium associations will be forced to deal with issues relating to the charging of electric vehicles both now and well into the future. However, the vast majority of states, including Michigan, do not currently regulate the installation of electric vehicle charging stations. Accordingly, this article will provide information for Michigan condominium associations to consider when dealing with a request to install an electric vehicle charging station.

How are Electric Vehicles charged?

A. Level 1 Charging

Level 1 charging equipment provides electricity to the vehicle through a 120 volt alternating current plug. Level 1 charging is the easiest and most basic way to charge an electric vehicle as it allows for the vehicle to be charged by plugging a cord into an ordinary household electrical outlet. Level 1 charging equipment is standard on most electric vehicles. However, Level 1 charging is often inconvenient as it generally takes a much longer time to charge a vehicle. More specifically, Level 1 charging typically only provides 2-5 miles of driving range per hour of charging.

Permitting Level 1 charging is the easiest way for a condominium association to accommodate an individual co-owner’s request to charge an electric vehicle. In most instances, co-owners can simply plug their electric vehicles into their garages, as Level 1 charging typically only requires a 15 or 20-amp, single-pole breaker. As long as the unit is individually metered, and modifications do not need to be made to the common element electrical system, a condominium association will likely have minimal involvement with respect to Level 1 charging in a unit with an attached garage.

However, in situations where a co-owner plans to employ Level 1 charging in a general common element parking space, a condominium association will likely need to amend its governing documents or create rules and regulations concerning Level 1 charging of electric vehicles as will be discussed in more detail below.

B. Level 2 Charging

Level 2 charging equipment provides electricity to an electric vehicle through a 240 volt or 208 volt electrical service and is typically hardwired to the existing electrical systems. Level 2 charging can easily be installed in a garage or on a common element parking area, but it will typically require a co-owner to enter into a modification agreement to install. A Level 2 charging system requires the installation of charging equipment and a dedicated 20 to 80 amp circuit, even though it uses the same connector to attach to an electrical vehicle as a Level 1 charging system. A Level 2 charging system charges much faster than a Level 1 charging system and typically provides 10-20 miles of driving range per hour of charging.

In most instances, condominium associations can accommodate a co-owner request to install a Level 2 charging station in the co-owner’s unit. However, this typically requires the co-owner to submit detailed plans to the association for approval and having an engineer or electrician review the plans to ensure that the condominium association’s system can handle the Level 2 charging system. Many municipal codes encourage garages to be constructed with a 240 volt outlet on a dedicated circuit to accommodate Level 2 Charging. See Auburn Hills, Michigan, Zoning Ordinance, Section 1834.

C. Level 3 Charging/DC Charging

Level 3 charging equipment, commonly known as a DC Charging System, charges an electric vehicle through a 480 volt direct current (DC) plug. Unlike a Level 1 or Level 2 charging system, Level 3 charging systems are typically designed for outdoor use as they are commonly found in public fueling stations. A level 3 charging station is the fastest way to charge an electric vehicle and it can provide 180-240 miles of driving range per hour of charging.

Adding a Level 3 charging station is typically difficult and undesirable for a condominium association to accommodate. First, a Level 3 charging system may be undesirable because not all electric vehicles offer a Level 3 charging port. Second, owning and maintaining a Level 3 charging system is expensive and can sometimes cost upwards of $50,000 or more. Third, the existing electrical system has to be designed to handle a significantly higher electric load capacity. Accordingly, most Level 3 charging stations are located along interstate highways or in designated public charging areas. However, a Level 3 charging system could be effective if installed on a common parking lot to accommodate the charging of multiple electric vehicles in the same condominium association.

What should condominium associations consider when dealing with a request to install an electric vehicle charging station?

The Michigan Condominium Act, specifically, MCL 559.147(1) provides as follows:

(1) Subject to the prohibitions and restrictions in the condominium documents, a co-owner may make improvements or alterations within a condominium unit that do not impair the structural integrity of a structure or otherwise lessen the support of a portion of the condominium project. Except as provided in section 47a, a co-owner shall not do anything which would change the exterior appearance of a condominium unit or of any other portion of the condominium project except to the extent and subject to the conditions as the condominium documents may specify.

Accordingly, unless a co-owner is engaging in Level 1 Charging within their own unit, via an existing outlet, it is likely that a co-owner will need to obtain permission from the condominium association to alter the common elements and/or their unit to install a charging system. In determining whether to grant permission, condominium associations should consider the following:

How will the vehicle be charged?

Similar to other common element modifications, Michigan condominium associations should require an owner to submit proposed plans relating to the modification. Determining whether the proposed charging station is going to be a Level 1, Level 2 or Level 3 charging station is important. Level 1 charging already exists and is readily accessible for many co-owners. Issues relating to Level 1 charging stations that are located outside of a unit will typically relate to defining the responsibilities related to the use of the station, as installation is typically quite easy. Level 2 charging station requests will likely be most common due to the stark difference in charging times between Level 1 and Level 2 charging stations. In some instances, new multi-family homes may already include wiring that would support a Level 2 charging station. By way of example, the Auburn Hills, MI ordinance that is discussed above encourages, although it does not currently require, that all new one-family and multiple family homes with garages be constructed to provide a 220-240 volt / 40 amp outlet on a dedicated circuit to accommodate potential future hardwire installation of a Level 2 electric vehicle charging station as “retrofitting a home for electric vehicle charging is considerably more expensive than the cost of including the capacity at the time of construction.” See Auburn Hills, Michigan, Zoning Ordinance, Section 1834. Level 3 charging station requests will likely be the least common, as they are the most expensive and most difficult to install. Accordingly, after the association determines the proposed charging method, and a proposed set of plans is submitted for review, the next step is to engage an expert. However, prior to engaging an expert, the association should also evaluate the aesthetic impact on the condominium. Level 1 and Level 2 charging stations will likely have minimal aesthetic impact if they are merely attached to an existing wall. However, if erection of new structures or significant modifications to existing structures would be required, a condominium association should also determine the best location to place the electric vehicle charging station.

Has the condominium association hired sufficient experts to determine whether installation of an electric vehicle charging station will work with existing infrastructure?

Similar to other decisions made by the board of directors, in determining whether to permit or deny a request to install an electric vehicle charging station, the board of directors should consults experts. By way of example, in Michigan, the Michigan Nonprofit Corporation Act, specifically MCL 450.2541(1), requires a director to act in good faith and with the care of an ordinarily prudent person in a like position under the circumstances. In discharging their fiduciary duties, directors are entitled to rely on information, opinions, reports or statements prepared by a professional if it is within their expert competence. See e.g. MCL 450.2541(2). However, a director is not entitled to rely on such information if they have knowledge concerning the matter that makes reliance unwarranted. See e.g. MCL 450.2541(3).

In the context of a request to install an electric vehicle charging station, a board that is discharging its duty of good faith will consult with an attorney to determine the applicable requirements, whether they be statutory, a municipal ordinance, or imposed by the governing documents. Insurance agents should be consulted to determine what is covered under the association’s existing policy and what will be covered under a co-owner’s insurance policy. Additionally, most board members will not be electrical experts, therefore a licensed electrician, electrical engineer and/or the utility company should be consulted to review any plans. This is important to determine whether the condominium association’s existing infrastructure can accommodate the request without endangering the safety of the co-owners and whether the other co-owners will be required to pay increased costs.

How will responsibilities for the charging station be allocated?

After the board has obtained expert advice relating to the installation of an electric vehicle charging station, the board of directors should enter into a written modification agreement with the co-owner who will be using the charging station. The modification agreement should define the parameters relating to the installation and use of the charging station. Common issues that need to be addressed in a modification agreement are as follows:

  1. Who will pay for the costs of electricity?

One of the most common problems encountered in these types of situations is how to calculate whether the co-owner is paying for their fair share of electricity. If possible, condominium associations should require the installation of a separate meter for the electric vehicle charging station if at all possible. If a single co-owner will be using the charging station, that co-owner can simply pay the cost of electricity. If multiple co-owners are using the charging station, the bill should be equitably split between those co-owners, unless the charging station is a general common element that can be used by all co-owners.

Adding a separate meter not only avoids disputes as to responsibility for cost, but may also reduce the co-owner’s electricity costs. For example, DTE Energy has a special PEV Rate for Level 2 Charging. After DTE installs a special PEV Meter, pricing plans are available that allow for flat fees or significantly reduced charges for off-peak use. Accordingly, having a separate meter installed for an electric vehicle may resolve issues related to cost allocation and may reduce the overall price of electricity.

2. Who is responsible for the maintenance and repair of the charging station?

In the vast majority of condominium association governing documents, the responsibility for maintaining and repairing the general common elements belongs to the association. Conversely, the responsibility for maintaining limited common elements and individual units typically belongs to the co-owner. However, if an electric vehicle charging station is not identified as a limited common element, a typical catch all provision in governing documents may indicate that it is a general common element. Accordingly, assuming that the governing documents allow for modification to the general common elements, an association should ensure that it is not taking on additional maintenance and repair responsibilities unless the charging station is available for use by all of the co-owners.

3. Who is responsible for insurance?

A condominium association is responsible for providing insurance on the common elements. In situations where an electric vehicle charging station is a general common element, that is available for use by all co-owners, it makes sense that the association should incur responsibility for insuring the risks associated with the charging station. However, if the charging station is only going to be utilized by a single co-owner, or a few co-owners, those co-owners should be required to pay the costs of insurance. With respect to installing the charging station, the Association should require the co-owner to hire a contractor that has a general commercial liability policy and appropriate worker’s compensation coverage. With respect to insuring the electric vehicle charging station after it is installed, a co-owner should be required to add coverage under their homeowner’s insurance policy and add the condominium association as a named insured on that policy.

4. Who is liable for damage caused by a charging station?

While condominium associations may have an interest in going “green” and keeping co-owners happy by accommodating reasonable requests to install electric vehicle charging stations, the condominium association should not be forced to bear the burden of the potential additional liability associated with an individual co-owner’s use of an electric vehicle charging station. A San Francisco based electric vehicle charging station manufacturer was recently named in a class action lawsuit involving claims that the manufacturer’s charging stations were overheating and melting during use. Given that electric vehicle charging stations can potentially cause damage to persons or property, condominium associations should ensure that the co-owner is required to defend, indemnify and hold harmless the condominium association from any potential liability.

CONCLUSION

Electric vehicle use is on the rise throughout the United States and most condominium associations will be forced to deal with issues related to electric vehicle charging stations in the near future, if they have not done so already. In states such as Michigan that do not have statutes regulating electric vehicle charging stations in condominium associations, failure to appropriately handle requests related to electric vehicle charging stations may lead to lawsuits and/or decrease property values as a result of bad publicity.

In conclusion, the following tips will be useful for condominium associations when dealing with requests to install charging stations:

1. Know the law. Determine if any local ordinances apply.

2. Be proactive instead of reactive. All condominium associations are likely to deal with this issue at some point and governing documents and rules and regulations should be evaluated prior to receiving a modification request to ensure that appropriate procedures are in place.

3. Consult with experts. Electric vehicles and electric vehicle charging stations are a relatively new technology. Most board members will not be experts in this area, and guidance from experts is necessary to ensure the safety.

Kevin Hirzel is a Partner at Cummings, McClorey, Davis & Acho, P.L.C. and leads the Community Association Practice Group. Mr. Hirzel can be contacted at (734) 261-2400 or　khirzel@cmda-law.com. Please view The Michigan Community Association Law Blog at　http://micondolaw.com　for additional resources on Michigan Community Association Law.

Hallaq Wins First Motion for Summary Disposition

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brandan-hallaq-profile-photoCongratulations to Brandan Hallaq, Esq. for winning his first Motion for Summary Disposition before the Honorable Archie Brown in the Washtenaw County Circuit Court. Mr. Hallaq successfully drafted and argued the motion on behalf of a condominium association against a co-owner for numerous bylaw infractions and violations of the Michigan Condominium Act. In addition to obtaining an order compelling the co-owner to comply with the condominium documents, the Court granted an award of attorneys fees in the association’s favor.

Mr. Hallaq graduated with his Juris Doctor, cum laude, from Wayne State University Law School in May 2016 before joining our Livonia office.  Mr. Hallaq focuses his practice in the areas of community association, business, and real estate law.  He may be reached at (734) 261-2400 or bhallaq@cmda-law.com.

Congratulations Brandan!

Autonomous Vehicles: Coming to a Condominium or HOA Near You!

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autonomous-vehicle-1200-x-796An autonomous vehicle, also known as a driverless car, self-driving car, or robotic car is a vehicle that senses its environment and operates without human input. On December 9, 2016, Governor Rick Snyder signed 2016 PA 332 into law and amended the Michigan Motor Vehicle Code to make Michigan the first state that allows for autonomous vehicles to be operated on a public street or highway. Michigan Senate Bill 995 amended MCL 257.2b(2) and now defines an automated motor vehicle as follows under Michigan law:

(2) “Automated motor vehicle” means a motor vehicle on which an automated driving system has been installed, either by a manufacturer of automated driving systems or an upfitter that enables the motor vehicle to be operated without any control or monitoring by a human operator. Automated motor vehicle does not include a motor vehicle enabled with 1 or more active safety systems or operator assistance systems, including, but not limited to, a system to provide electronic blind spot assistance, crash avoidance, emergency braking, parking assistance, adaptive cruise control, lane-keeping assistance, lane departure warning, or traffic jam and queuing assistance, unless 1 or more of these technologies alone or in combination with other systems enable the vehicle on which any active safety systems or operator assistance systems are installed to operate without any control or monitoring by an operator.

Similarly, on March 20, 2017, Senator Gary Peters announced that he was working on federal legislation to regulate autonomous vehicles, which are anticipated to become ubiquitous in the not so distant future, as many automakers have announced plans to introduce driverless cars to the market. By way of example, the Audi A8, which will be released later this year, will feature driverless technology. Ford intends to have a driverless car on the market no later than 2021. General Motors anticipates having an autonomous vehicle by 2020 or sooner as well. It is estimated that there will be ten (10) million self-driving automobiles on roadways by 2020 (referring to vehicles with features allowing them to accelerate, brake, and steer with limited or no driver input, categorized as fully or semi-autonomous). Accordingly, condominium and homeowner associations will have to deal with the benefits and detriments associated with autonomous vehicles in the near future and should be proactive about dealing with this technological advancement. The purpose of this article is to discuss the issues that autonomous vehicles may pose for condominium and homeowner associations in the next few years.

Can condominium associations and homeowners associations preclude co-owners from using autonomous vehicles on private roads?

MCL 257.74 of the Michigan Vehicle Code defines a street or highway that is subject to the Michigan Vehicle Code as follows: ” ‘Street or highway’ means the entire width between boundary lines of every way publicly maintained when any part thereof is open to the use of the public for purposes of vehicular travel.” Accordingly, a road that is privately maintained by a condominium association or homeowners association is not required to allow autonomous vehicle traffic. However, community associations that desire to exclude autonomous vehicle traffic on private roads would need to amend the condominium bylaws or declaration of restrictions to prohibit the use of autonomous vehicles, as most governing documents would permit the use of any type of vehicle on private roads. Accordingly, condominium and homeowner associations should review their governing documents to determine whether autonomous vehicles would be allowed on private roads, as the drafters or the documents likely did not contemplate the existence of such technology.

Should condominium associations or homeowners associations preclude co-owners from using autonomous vehicles on private roads?

Proponents of autonomous vehicles claim that they are safer and reduce human error that may cause accidents. Unlike a human driver, an autonomous vehicle would not drink and drive, text and drive or fall asleep at the wheel. Additionally, elderly co-owners that are not physically capable of driving would have increased mobility. Accordingly, there are many potential benefits to autonomous vehicles.

However, autonomous vehicles are not fool proof. One of the biggest concerns about autonomous vehicles is that ability of the vehicle to make moral choices. If a child kicked a ball into the street, would the vehicle decide to crash the car into a tree or run into the child if it was unable to stop? Moreover, an autonomous vehicle could have a software error or it is possible that the owner of an autonomous vehicle could attempt to modify the operating system in a manner that could cause it to malfunction. In fact, Michigan Senate Bill 998 amended MCL 600.2949b and specifically exempted a manufacturer and subcomponent system producer from civil liability if any of the equipment used in the vehicle for automatic mode had been modified. Accordingly, given that autonomous vehicles are a developing technology, it would be reasonable for a condominium or homeowner association to preclude use of autonomous vehicles until this technology is more fully developed.

For community associations that desire to allow autonomous vehicles, associations should take proper precautionary measures. First, associations should require that owners of autonomous maintain adequate insurance. In Michigan, the minimum required insurance policy only covers $20,000 for injuries or death to an individual, up to $40,000 per accident if multiple parties are injured and up to $10,000 in property damage. Accordingly, given the unknown risks involved with autonomous vehicles, community associations that allow autonomous vehicle traffic may want to amend their bylaws or create rules that requiring higher insurance coverage in the event that damage to person or property occurs on common elements and also require co-owners to provide proof of insurance. Second, while not currently required, the association may also want to mandate regular safety inspections as a condition of autonomous vehicle use. Finally, associations should review their current bylaws to ensure that appropriate indemnification provisions are in place in the event that a co-owner’s autonomous vehicles causes damage to the common elements.

What impact will autonomous vehicles have on parking in community associations?

One of the touted benefits of autonomous vehicles is that it will reduce the need for parking in urban areas, where parking is often a premium. In short, co-owners will no longer need to be within walking distance of a car if the car is capable of parking itself and later picking up the co-owner. It is estimated that the need for parking space should decline more than 5.7 billion square meters as a result of driverless cars by 2035. Experts speculate that individual car ownership will eventually become a thing of the past, and that individuals will purchase a subscription service or buy into a “cardominium” where an autonomous vehicle, that no longer needs to be parked on-site, will arrive and take an individual to their desired destination.

For condominiums that are located in densely populated urban areas, on-site parking spaces are currently sold between co-owners at premium rates. In most cases, on-site parking spaces are limited common elements that are associated with an individual unit. The Michigan Condominium Act, specifically MCL 559.139, allows for limited common element parking spaces to be transferred as follows:

(1) Assignments and reassignments of limited common elements shall be reflected by the original master deed or an amendment to the master deed. A limited common element shall not be assigned or reassigned except in accordance with this act and the condominium documents.

(2) Unless expressly prohibited by the condominium documents, a limited common element may be reassigned upon written application of the co-owners concerned to the principal officer of the association of co-owners or to other persons as the condominium documents may specify. The officer or persons to whom the application is duly made shall promptly prepare and execute an amendment to the master deed reassigning all rights and obligations with respect to the limited common element involved. The amendment shall be delivered to the co-owners of the condominium units concerned upon payment by them of all reasonable costs for the preparation and recording of the amendment to the master deed.

(3) A common element not previously assigned as a limited common element shall be so assigned only in pursuance of the provisions of the condominium documents and of this act. The amendment to the master deed making the assignment shall be prepared and executed by the principal officer of the association of co-owners or by other persons as the condominium documents specify.

While autonomous vehicles will likely decrease the value of on-site limited common element parking spaces, autonomous vehicles may also help solve parking problems for condominium associations that do not have sufficient parking. By way of example, MCL 559.136 allows for common elements to be added to a condominium as follows:

The master deed may provide that undivided interests in land may be added to the condominium project as common elements in which land the co-owners may be tenants in common, joint tenants, or life tenants with other persons. A condominium unit shall not be situated on the lands. The master deed, or any amendment to master deed under which the land is submitted to the condominium project shall include a legal description thereof and shall describe the nature of the co-owners’ estate therein.

Accordingly, if a condominium association that had insufficient parking desired to purchase a vacant lot that was 10 miles away and add the land to the condominium as general common elements, or add limited common element parking spaces on the land, it may be able to do so in order to alleviate a parking problem. Accordingly, autonomous vehicles may revolutionize the manner in which condominium associations think about parking.

Conclusion

The technological advancements in autonomous vehicles will likely create new issues related to liability, insurance and parking for condominium and homeowner associations to consider. As with any new technology, the law is typically slow to evolve and the regulation of autonomous vehicles in community associations will largely be dependent on the governing documents. Given that an ounce of prevention is worth a pound of cure, condominium and homeowner associations should be proactive in amending their governing documents and making decisions about whether to allow autonomous vehicles and what conditions to impose on autonomous vehicle use before problems arise in the next couple of years. Additionally, community associations that have parking issues may want to consider the possibility of acquiring additional land or planning to re-develop unused parking spaces in the future.

Kevin Hirzel is a Partner at Cummings, McClorey, Davis & Acho, P.L.C. and leads the Community Association Practice Group. Mr. Hirzel can be contacted at (734) 261-2400 or　khirzel@cmda-law.com. Please view The Michigan Community Association Law Blog at　http://micondolaw.com　for additional resources on Michigan Community Association Law.

Michigan Court Rules in Favor of Condominium Association in Interpreting Newly-Amended MCL 559.167 (SB 610)

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Kevin Hirzel_8x10@300Kevin Hirzel recently scored an important victory for a Michigan condominium associations.  The Oakland County Circuit Court held that the  MCL 559.167, as amended by 2016 PA 233, does not recreate “need not be built” units that were eliminated under the prior version of MCL 559.167.  The ruling will have an impact on any condominium projects that contain unconstructed “need not be built” units and also meet one of the following two (2) requirements:

 1.Construction of the condominium was commenced prior to September 21, 2006; or

2. An amendment to the master deed that expanded the condominium, contracted the condominium or exercised a right of convertibility was recorded prior to September 21, 2010.

As the court held in Cove Creek, if a condominium meets these requirements, a developer or successor developer automatically lost the right to construct the “need not be built” units and the land on which the units were located will remain as common elements owned by the co-owners. If a condominium does not meet the above requirements, it will be subject to the new “reversion” requirements contained in the 2016 amendment to MCL 559.167, and the “need not be built” units will remain in the condominium until the “reversion” requirements are satisfied.

History of MCL 559.167

As previously discussed in Senate Bill 610 Passes: Is the amendment to MCL 559.167 of the Michigan Condominium Act constitutional?, MCL 559.167 was enacted in 2001 in order to provide an end date for the development of condominiums. MCL 559.167(3) required that a developer, its successors or assigns either complete any units identified as “need not be built” on the condominium subdivision plan within ten (10) years of the date of commencement of construction or within six (6) years of exercising a right of conversion, expansion or contraction.  If the developer, its successors or assigns did not complete the “need not be built” units with the statutory time periods, the right to construct the units would automatically terminate and the undeveloped land would remain as common elements if it was not withdrawn from the condominium.

In contrast, the 2016 amendments to MCL 559.167, which became effective on September 21, 2016, created a new “reversion” process to eliminate “need not be built” units after the expiration of the six (6) year or ten (10) year statutory time periods. Newly created MCL 559.167(4) now requires 2/3 of the co-owners that are in good standing to vote to approve a “reversion” of “need not be built” units to common elements by adopting a declaration that will be recorded in the register of deeds after the expiration of the statutory time periods. If 2/3 co-owner approval is obtained, the condominium association must then send the declaration to a developer or successor developer at its last known address.  The developer or successor developer may withdraw the land on which the units were to be located or amend the master deed to make the units “must be built” within the sixty (60) day time period.   If the developer or successor developer fails to withdraw the land or amend the master deed within sixty (60) days, the condominium association may record the declaration, which becomes effective upon recording and the right to construct the “need not be built” units will be eliminated.

Cove Creek Condominium Association v Vistal Land & Home Development, L.L.C., et al.

One of the most important questions surrounding the 2016 amendment to MCL 559.167 was whether 2016 PA 233 would be applied retroactively or only prospectively. Specifically, newly created MCL 559.167(5) states, “A reversion under subsection (4), whether occurring before or after the date of the 2016 amendatory act that added this subsection, is not effective unless the election, notice, and recording requirements of subsection (4) have been met.” In Cove Creek Condominium Association v Vistal Land & Home Development, L.L.C., et al., Oakland County Circuit Court Case No. 16-155706-CH (Order Granting Summary Disposition, Dated February 10, 2017) the court held that MCL 559.167, as amended by 2016 PA 233, did not retroactively recreate “need not be built” units that had previously been eliminated from the Cove Creek Condominium (the “Condominium”). The court held that the co-owners’ vested ownership interest in the common elements that was acquired under MCL 559.167, as amended by 2002 PA 283, remained intact.

Facts

The Condominium was established by the recording of the Master Deed in the Oakland County Register of Deeds on April 21, 1989. Lifestyle Homes, a co-partnership, was the developer of the Condominium, which was originally to be composed of 31 units.  On May 11, 1989 Lifestyle Homes recorded the First Amended to the Master Deed indicating that Cove Creek Limited Partnership (“Cove Creek, LP”) was now the developer. On May 17, 1989, Lifestyle executed a deed transferring all of its interest in the Condominium to Cove Creek, LP.  Units 1-14 have never been constructed and were identified as “need not be built” on the condominium subdivision plan.  Units 15-31 were constructed and sold to non-developer co-owners.  Construction of the condominium commenced prior to October 27, 1989, as this was the date that the first constructed unit was conveyed to a non-developer co-owner.

On September 15, 2004, Cove Creek, LP executed a deed attempting to convey units 1-14 to Vistal Cothery, LLC. On November 6, 2006, Vistal Cothery, LLC attempted to deed units 1-14 to Vistal Land & Home Development, LLC (“VLHD, LLC”).  On October 31, 2016, VLDH, LLC attempted to deed units 1-14 to the America and Maria Cervi Living Trust (the “Trust”).  On November 3, 2016, the Trust advised the Cove Creek Condominium Association that it had withdrawn “need not be built” units 1-14 from the Condominium pursuant to MCL 559.167, as amended by 2016 PA 233.

Interpretation of the Plain Language of MCL 559.167

The defendants argued that MCL 559.167, as amended by 2016 PA 233, repealed and replaced all prior versions of MCL 559.167 on September 21, 2016.  The Court held that defendants’ argument failed for several reasons.  First, the court held that MCL 559.167, as amended by 2002 PA 283, eliminated any rights to construct units 1-14.  The court held that the time period to construct or withdraw units 1-14 ended no later than October 27, 1999.  The court held that even if the ten (10) year period did not begin to run until 2002, when 2002 PA 283 was enacted, that the time period to construct units 1-14 expired no later 2012.  Accordingly, the court held that the enactment of 2016 PA 233 did not change the fact that the right to construct units 1-14 ceased to exist no later than 2012.

The court also held that the plain language of MCL 559.167, as amended by 2016 PA 233, evidenced the legislature’s intent that 2016 PA 233 is not retroactive.  The court recognized that the term “reversion” was not contained in any prior version of MCL 559.167, and that a “reversion”, i.e. the 2/3 co-owner vote and recording of a declaration, could not have occurred prior to September 21, 2016, the date that 2016 PA 233 became effective.  Rather, the court acknowledged that the co-owners acquired vested rights under MCL 559.167(3), as amended by 2002 PA 283, no later than 2012.  Given that the co-owners acquired their rights under 2002 PA 283, newly created MCL 559.167(5) was inapplicable as it only applied to “A reversion under subsection (4)”.

The court also held that even if a “reversion” could have occurred prior to September 21, 2016, the plain language of MCL 559.167(5) indicates that it would not undo a completed “reversion”.  The court held that defendants’ interpretation attempted to substitute the word “occurred”, which is a past participle, for the word “occurring”, which is a present participle, in MCL 559.167(5).  The court held that the use of the word “occurring”, a present participle, meant that 2016 PA 233 only applied to condominiums in which the statutory time periods were running, but had not yet been completed.  However, if the 6 or 10 year statutory time periods had already expired, any “reversion” would have already occurred, i.e. been completed, and 2016 PA 233 would not apply.

Constitutionality of retroactive application of MCL 559.167, as amended by 2016 PA 233

The court also ruled that defendants’ interpretation of MCL 559.167, as amended by 2016 PA 233, would render MCL 559.167 unconstitutional and that Michigan courts have an obligation to interpret a statute to be constitutional if possible.  Specifically, the court relied on Gorte v Dept of Transp, 202 Mich App 161, 164; 507 NW2d 797, 799 (1993). In Gorte, the plaintiff filed a complaint for adverse possession against the state on March 3, 1988 claiming that he held title to land via adverse possession from the state. Id. at 164.  MCL 600.5821 was amended to preclude adverse possession claims against the state and became effective on March 1, 1988, prior to the filing of the lawsuit. Id.  The trial court held that since 1966, plaintiff and his predecessors had adversely possessed the disputed acreage and that the amendment to MCL 600.5821 did not bar plaintiff’s adverse possession claim because he had a vested property right before March 1, 1988. Id.  In affirming the trial court, the Court of Appeals held:

…a statute may not be applied retroactively if it abrogates or impairs vested rights. In re Certified Questions, 416 Mich. 558, 572, 331 N.W.2d 456 (1982)…where a period of limitation has expired, the rights afforded by that statute are vested and the action in question is barred. Russo, supra, 439 Mich. at 594–595, 487 N.W.2d 698. Thus, § 5821, as amended, cannot be applied to plaintiffs if it would abrogate or impair a vested right.

Defendant argues that, in amending § 5821, the Legislature intended to void not only causes of action accruing after the effective date of the statute, but also causes of action for adverse possession against the state that could have been asserted before March 1, 1988, but were not….We are constrained, however, to follow the rules of statutory construction that dictate that a statute of limitations may not be applied retroactively to take away vested rights. We therefore interpret § 5821, as amended, to preclude the running of the period of limitation against the state for purposes of adverse possession after the effective date of the statute. We further interpret § 5821 as inapplicable where applying the statute would abrogate or impair vested rights.

Because the statute cannot be applied if it would abrogate or impair a vested right, it is necessary to determine when a claim of title to property by adverse possession vests. Generally, the expiration of a period of limitation vests the rights of the claimant. Russo, supra….Defendant argues the contrary view, that plaintiffs’ possession of the property merely gave plaintiffs the ability, before the amendment of § 5821, to raise the expiration of the period of limitation as a defense to defendant’s assertion of title. Contrary to defendant’s arguments, however, Michigan courts have followed the general rule that the expiration of the period of limitation terminates the title of those who slept on their rights and vests title in the party claiming adverse possession….Thus, assuming all other elements have been established, one gains title by adverse possession when the period of limitation expires, not when an action regarding the title to the property is brought.

Id. at 167-169 (emphasis added).

The court held that similar to the adverse possession statute, Gorte makes clear that the vested rights of the co-owners cannot be constitutionally abrogated under MCL 559.167, as amended by 2016 PA 233.

MCL 559.167, as amended by 2002 PA 283, eliminates “need not be built” units by operation of law

Finally, the court rejected the defendants’ argument that some form of recording or a replat is required to eliminate the right to construct units under MCL 557.167, as amended by 2002 PA 283. The court relied on the plain language of the statute as well as the statute of frauds, MCL 566.106.  Specifically, the court held that the right to construct “need not be built” units is eliminated by operation of law and that a property interest created by operation of law is not subject to the statute of frauds.  As such, the court granted summary disposition in favor of the Cove Creek Condominium Association and held that the “need not be built” units ceased to exist and that the defendants could not withdraw the undeveloped land from the condominium in 2016.

Conclusion

            While Cove Creek Condominium Association v Vistal Land & Home Development, L.L.C., et al., Oakland County Circuit Court Case No. 16-155706-CH (Order Granting Summary Disposition, Dated February 10, 2017) is only a circuit court opinion, it certainly provides a significant amount of guidance in interpreting MCL 559.167.  Until there is a published court of appeals opinion that interprets MCL 559.167, attorneys, co-owners, condominium associations, developers, successor developers and title companies should be aware of the following takeaways from the Cove Creek case:

  1. MCL 559.167, as amended by 2002 PA 283, applies to ALL condominiums that existed at the time the statute was enacted, not just condominiums that were created on or after the effective date of 2002 PA 283.
  2. “Need not be built” condominium units are automatically eliminated by operation of law under MCL 559.167, as amended by 2002 PA 283, and a replat or recording of any additional documents is not necessary.
  3. Vested rights in the common elements acquired by the co-owners under MCL 559.167, as amended by 2002 PA 283, cannot constitutionally be eliminated by 2016 PA 233.
  4. The co-owner voting “reversion” process, and the additional 60 day time period for a developer to withdraw “need not be built” units that was created by 2016 PA 233 only applies to condominiums in which the six (6) or ten (10) year statutory periods had not expired prior to September 21, 2016 or to condominiums created after September 21, 2016.

Kevin Hirzel is a Partner in our Livonia and Clinton Township offices and leads the Community Association Practice Group. He frequently represents Builders, Community Associations, Condominium Associations, Cooperatives, Co-Owners, Developers, Homeowner Associations, Investors, Property Owners and Property Managers throughout the State of Michigan. Mr. Hirzel can be contacted at (734) 261-2400 or khirzel@cmda-law.com. Please view The Michigan Community Association Law Blog at http://micondolaw.com for additional resources on Michigan Community Association Law.

Why Every Condominium and Homeowners Association Should Trademark its Name and Logo

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brandan-hallaq-profile-photoOver the past decade, the popularity of living in a common interest community, particularly condominium and homeowners associations, has risen significantly. According to recent statistics provided by Community Associations Institute, there are over 340,000 community associations, over 26 million housing units, and over 68 million residents living in these associations in the United States. As these numbers continue to grow, the range of differences between associations grows larger. With so many new associations forming each year, and so many residents choosing to live in these types of developments, every condominium and homeowners association should consider trademarking its name and logo.

WHAT IS A TRADEMARK?
A trademark includes names, slogans, and/or symbols that identify and distinguish goods and/or services. A trademark grants the exclusive right to use the name or logo to the owner of the mark. Owning a trademark is important because it puts the world on notice that a particular name or logo is owned and being used to identify a specific product or service. Owning a trademark also allows the owner to file a lawsuit in federal court to seek recourse against anyone who has unlawfully used the trademark. Upon being granted a trademark by the United States Patent and Trademark Office, the owner has the exclusive right to use the trademark throughout the entire country. Additionally, as the owner of the trademark, you can use the ® symbol which indicates to others that the name or logo is a registered trademark. If one has not yet applied for registration but nonetheless wishes to put the world on notice of its claim and use of a name or logo, the ™ symbol may be used, although it does not confer the exclusive right to use the name or logo.

DIFFERENCES BETWEEN APPLYING FOR A TRADEMARK AND INCORPORATING UNDER STATE LAW
Incorporation under state law provides some protections for business entities wishing to utilize a specific name or logo. Most condominium and homeowners associations are formed as nonprofit corporations in Michigan. In order to form the corporation, the association must file Articles of Incorporation with the State and select a unique name. The State will not permit any business entity to form using a name that is already in use by another entity. Accordingly, if an association is formed in one state with a particular name, no other entity may be formed using that same name in the same state. However, nothing prevents another entity from using the same name, or similar names, in a different state. Additionally, individuals might use the name without registering as a business entity with the state.

WHY APPLY FOR A TRADEMARK?
Many people are surprised to learn that the cost of obtaining a trademark is extremely reasonable in light of all the benefits it confers. The cost of submitting an application for a trademark ranges between $225 and $400. The process can require a legal analysis but many times will not be extremely time consuming which means the cost of hiring an attorney should not be prohibitive. If a particular association is affiliated with or administers the affairs for multiple developments, a specific brand name and logo will be very important. Trademarks are particularly important in this situation to protect associations that have expended resources in creating and maintaining a positive reputation in the community from having competitors steal their names and/or logos in order to profit or trick the public into believing that the two entities are related.

Condominium projects now include (1) site condominiums with detached buildings, (2) a number of identical or similarly constructed smaller buildings, each housing 2 or more Units, (3) large high rise buildings with potentially hundreds or thousands of Units, (4) strictly residential developments, (5) strictly commercial developments, (6) mixed-use developments, (7) condominiums dedicated to mobile homes and other recreational vehicles, and (8) condominiums created specifically for boat docks. Whether your association is small or large, in order to prevent others from using the association name, obtaining a trademark is the best way to protect your rights.

For smaller associations that only manage one development, a trademark is still an important tool for the association to protect itself against hostile or uncooperative members. As far too many associations and board members are familiar, it is not uncommon for an angry member of the association to go rogue and create a website or social media accounts in the association’s name. The member might do this for a number of reasons but often times it is done merely to cause trouble and to provide a platform to bad-mouth the association and its board members. Pursuant to the Lanham Act, 15 U.S.C. § 1125, obtaining a trademark in the association’s name prohibits any other person or entity from creating a domain name that infringes upon said trademark. In these situations, having a trademark of the association’s name provides the association with significantly greater resources to take swift action to prevent this behavior.

For example, in Board of Directors of Sapphire Bay Condominiums West v Simpson, 328 F Supp 2d 571 (D.V.I. 2004), affirmed by 129 F App’x 711 (3d Cir 2005), a condominium association sued an unhappy co-owner and obtained a preliminary injunction preventing the co-owner from operating a website under the name of the association. In that case, the co-owner registered the domain name “sapphirebaycondos.com” and used that name to operate a website where he made negative statements about the association and its board of directors. However, because the association did not have a registered trademark, the association’s options for recovery against the co-owner were more limited.

The Association eventually lost at trial and was unable to obtain a permanent injunction or monetary damages against the co-owner. Board of Directors of Sapphire Bay Condominiums West v Simpson, No. CV 04-62, 2014 WL 4067175 (D.V.I. 2014), affirmed by, 641 F App’x 113 (3d Cir 2015). The association may have been successful if it had a registered trademark as opposed to simply relying on common law protections. Even if the association in the Sapphire Bay case had prevailed at trial, it may not have been able to prevent someone in another state from using that domain name. Furthermore, because there was no registered trademark, nothing prevents another entity from attempting to obtain a trademark in the association’s name.

As mentioned, having a registered trademark provides the ultimate protection. Registration of a trademark provides constructive notice to all others throughout the country that the trademark is in use as well as the name of the owner. Having a registered mark also provides the opportunity to recover monetary damages for infringement including attorney’s fees and treble damages in certain cases. Additionally, using a registered trademark for five continuous years can grant the owner of the mark “incontestable” status meaning the exclusive right to use of the trademark is conclusively established.

CONCLUSION
Whether your association only operates in one state and only manages a single small development, or whether your association is managing a large number of properties throughout the country, obtaining a trademark of the association’s name and logo will undoubtedly be a valuable asset. Associations can use the trademark to protect their brand and reputation from being confused with competitors and can protect property values from nefarious, difficult co-owners. Additionally, associations can use the trademark to prevent others from hijacking the association’s name online. Because of the affordability of obtaining a trademark, it is something every association should at least consider and discuss with legal counsel.

Brandan Hallaq is an attorney in our Livonia office where he focuses his practice in the areas of business and real estate law. He may be reached at (734) 261-2400 or bhallaq@cmda-law.com.

Hirzel Appointed to CAI National Government & Public Affairs Committee

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Kevin Hirzel_8x10@300The Community Associations Institute (CAI) Board of Trustees recently appointed Kevin Hirzel to the national Government & Public Affairs Committee for a two year term from January 1, 2017 through December 31, 2018.  He is tasked with providing oversight, support and counsel to advocacy efforts, including developing and updating CAI’s public policy positions, establishing position statements on policy issues and drafting model legislation on key legislative and regulatory issues impacting CAI members.

CAI is an international membership organization with more than 34,000 members in partnership with 60 chapters around the globe. CAI provides information, education and resources to the homeowner volunteers who govern communities and the professionals who support them.

Congratulations to Mr. Hirzel on this well-deserved honor.

Kevin Hirzel is a partner in our Livonia and Clinton Township offices and leads the Community Association Practice Group. He frequently represents Builders, Community Associations, Condominium Associations, Cooperatives, Co-Owners, Developers, Homeowner Associations, Investors, Property Owners and Property Managers throughout the State of Michigan. He may be reached at (734) 261-2400 or khirzel@cmda-law.com.

Please view The Michigan Community Association Law Blog at http://micondolaw.com for additional resources on Michigan Community Association Law.

Transparency breeds Legitimacy: 3 Tips for your Condominium Association to Avoid a Lawsuit

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Kevin Hirzel_8x10@300Many condominium board members volunteer to serve their condominium association for altruistic purposes. While often well intentioned, it is not uncommon for board members to not have any training that would make them aware of potential pitfalls that commonly entangle a condominium association in litigation. In other instances, co-owners may have self-interested motives for serving on a board that cloud their business judgment. Under either scenario, a condominium association can be subject to a lawsuit if it is not operated properly. As will be discussed below, lack of transparency is one of the most common reasons for co-owner lawsuits against condominium associations. The three most common reasons for a lawsuit against a condominium association related to transparency issues are 1) failing to prepare adequate financial statements 2) failing to respond to requests to inspect the books and records of the condominium association and 3) failing to hold elections.

Failing to prepare adequate financial statements

One of the most common sources of angst for co-owners is not knowing how their assessments are being spent. Accordingly, the first step to keeping co-owners happy is to prepare financial statements on an annual basis and have them audited or reviewed. MCL 559.157 requires a Michigan condominium association with annual revenues in excess of $20,000 to have its financial statements independently audited or reviewed by a certified public accountant on an annual basis. A condominium association may opt out of having a CPA perform an audit or review of the books, records and financial statements if a majority of the co-owners approve not having the CPA perform the audit or review. However, unless such a vote is conducted, a condominium should ensure that an audit or review is performed, and not just a compilation.

Additionally, MCL 559.154(5) of the Michigan Condominium Act and MCL 450.2901 of the Michigan Nonprofit Corporation require a condominium to prepare a financial statement for the preceding fiscal year and distribute the same at least once a year. While MCL 559.154(5) indicates that the contents of the financial statement can be defined by the condominium association, MCL 450.2901 requires the statements to include, at the very least, an income statement, year-end balance sheet and a statement of the source and application of funds. When condominium associations fail to prepare financial statements, and have them audited or reviewed by a CPA, this often creates concern and suspicion amongst the co-owners. Accordingly, complying with the above requirements demonstrates that the condominium association is being operated in a transparent manner and is recommended to avoid a lawsuit.

Failing to respond to requests to inspect books and records

Another common problem for co-owners is not being able to see how their money is spent. In Michigan, MCL 559.157 of the Michigan Condominium Act requires that the “…books, records, contracts, and financial statements concerning the administration and operation of the condominium” be available for examination by the co-owners at convenient times. MCL 450.2487 of the Michigan Nonprofit Corporation Act also allows for a co-owner, either in person, by attorney, or through another agent to inspect the books and records of the condominium association after providing a written demand. The written demand must describe a proper purpose for the inspection and specify the records that the co-owner desires to inspect. If the request is made by an attorney, or agent of the co-owner, the written demand must include a power of attorney or other writing that authorizes the attorney or agent to perform the inspection. In the event that the condominium association does not permit an inspection within five business days after a demand is received, a co-owner may file an action in the circuit court to compel an inspection of the books and records of the association. A condominium association may place reasonable restrictions on an inspection. However, if a court orders an inspection, a court may also order the condominium association to pay the co-owner’s costs, including reasonable attorney’s fees, unless the association can demonstrate that it had a good faith reasonable basis for the denial. Accordingly, it is extremely important for a condominium association and/or is managing agent to provide a timely response to a request for inspection of records. While inspections can be denied in certain circumstances, it is not uncommon for condominium associations that completely ignore requests to inspect the books and records to be sued.

Failing to elect co-owner directors

MCL 559.152 provides a formula for electing directors when control of the condominium association is transitioned from the developer. MCL 559.152 provides in pertinent part:

(2) Not later than 120 days after conveyance of legal or equitable title to nondeveloper co-owners of 25% of the units that may be created, at least 1 director and not less than 25% of the board of directors of the association of co-owners shall be elected by nondeveloper co-owners. Not later than 120 days after conveyance of legal or equitable title to nondeveloper co-owners of 50% of the units that may be created, not less than 33-1/3% of the board of directors shall be elected by nondeveloper co-owners. Not later than 120 days after conveyance of legal or equitable title to nondeveloper co-owners of 75% of the units that may be created, and before conveyance of 90% of such units, the nondeveloper co-owners shall elect all directors on the board, except that the developer shall have the right to designate at least 1 director as long as the developer owns and offers for sale at least 10% of the units in the project or as long as 10% of the units remain that may be created.

(3) Notwithstanding the formula provided in subsection (2), 54 months after the first conveyance of legal or equitable title to a nondeveloper co-owner of a unit in the project, if title to not less than 75% of the units that may be created has not been conveyed, the nondeveloper co-owners have the right to elect, as provided in the condominium documents, a number of members of the board of directors of the association of co-owners equal to the percentage of units they hold and the developer has the right to elect, as provided in the condominium documents, a number of members of the board equal to the percentage of units which are owned by the developer and for which all assessments are payable by the developer.

Often times a new condominium association will not elect directors in compliance with the timelines set forth above. Moreover, even after control of the association is transitioned from the developer to a co-owner board, co-owners do not always hold regular elections despite being required to do so. MCL 450.2402 provides as follows:

A corporation shall hold an annual meeting of its shareholders or members, to elect directors and conduct any other business that may come before the meeting, on a date designated in the bylaws, unless the shareholders or members act by written consent under section 407 or by ballot under section 408 or 409…. If the annual meeting is not held on the date designated for the meeting, the board shall cause the meeting to be held as soon after that date as is convenient. If the annual meeting is not held for 90 days after the date designated for the meeting, or if no date is designated for 15 months after formation of the corporation or after its last annual meeting, the circuit court for the county in which the principal place of business or registered office of the corporation is located,…may summarily order that the corporation hold the meeting or the election, or both….

In certain circumstances, whether due to co-owner apathy or a desire to maintain control, boards will not have annual elections or will not have fair elections. Accordingly, having regular and fair elections is another good way to keep the co-owners happy and for condominium associations to avoid a lawsuit.

Conclusion

Preparing proper financial statements, responding to co-owner requests to inspect the books and records and having regular elections is essential for a condominium association to run smoothly. While it is certainly possible for co-owners to abuse the above processes, transparency is typically the best policy as it not only keeps the co-owners happy but also keeps the condominium association’s legal fees down.

Kevin Hirzel is a partner in our Livonia and Clinton Township offices and leads the Community Association Practice Group. He frequently represents Builders, Community Associations, Condominium Associations, Cooperatives, Co-Owners, Developers, Homeowner Associations, Investors, Property Owners and Property Managers throughout the State of Michigan. He may be reached at (734) 261-2400 or khirzel@cmda-law.com.

Please view The Michigan Community Association Law Blog at http://micondolaw.com for additional resources on Michigan Community Association Law.

Condo Board Members Invited to Seminar on Condominium Law Legislative Updates

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Kevin Hirzel_8x10@300Condominium board members are invited to attend a free seminar presented by Kevin Hirzel on Condominium Law Legislative Updates and Legal Questions and Answers.  Mr. Hirzel will be discussing the current legislation impacting associations and answering questions regarding to the legislation changes or other legal topics. The seminar is being sponsored by the Michigan Chapter of the Community Association Institute Legislative Action Committee.

Condominium Law Legislative Update and Legal Q & A
Presented by Kevin Hirzel
Tuesday, October 4, 2016 at 9:00 a.m.
Farmington Hills Manor
3666 Orchard Lake Road – Farmington Hills, MI 48336

Please RSVP to lloude@cmda-law.com no later than September 30, 2016 to reserve your seat.

Kevin Hirzel is a partner in our Livonia and Clinton Township offices where he concentrates his practice on commercial litigation, community association law, condominium law, construction law, real estate law, and probate and estate planning. He may be reached at (734) 261-2400 or khirzel@cmda-law.com.

Factors to Consider in Maintaining and Maximizing the Value of Your Condominium

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Matt Heron colorDevelopers in the City of Detroit recently announced a plan to open an eleven (11) story 83 unit luxury condominium complex in Detroit known as The Ashton Detroit.  Construction is expected to start in 2017 and it is to be ready for occupancy by 2018.  The $35 million project is significant because it is the first free-standing condominium complex in downtown Detroit in the past twenty (20) years.  Renderings of the intended complex portray expansive living spaces, units flooded with bright, natural lighting, and modern common areas including an indoor pool.  Units are expected to be large, between 1,500 and 2,200 square feet, and in addition to a pool and fitness area, the developers have indicated that the complex will have unspecified ground-floor retail space.

The announcement of The Ashton Detroit brings excitement, and were it to be built its presence would add significantly to the downtown area in which it is intended to be located.  Regardless of the actual prices of the units that are eventually sold, the purchasers (and, to a certain extent, the developers), are most likely going to be concerned about the very same things that other condominium owners are concerned with – namely, how to maximize the value of their investment by maintaining the value of their condominium.

Discussion

Target prices for the units to be sold at The Ashton Detroit have not yet been announced.  However, assuming that its intended market is millennials and Gen-Xers seeking to live in an urban community, (whatever you do, don’t use the term young, urban, professionals), the developers will most likely need to keep costs at least at the upper ranges of affordability for a median-income family, which would put the lowest potential cost of a unit (excluding regular assessments), around $350,000.  Assuming this to be the low end of the purchaser’s investment, each owner will have a significant stake in ensuring that the condominium thrives and that they can recover their investment (and more) when they decide to sell.  This article discusses different factors that can affect the long-term value of a condominium unit.

One of the most important aspects in determining the value of a condominium complex to a prospective purchaser is the upkeep of its common elements.  A well run condominium will make capital improvements as they become necessary, address maintenance issues immediately, and keep the grounds neat and orderly.  In order to be able to afford the costs associated with these expenses, an association must make sure that its budget is adequate, and that its reserve funds are sufficient to address any necessary capital improvements.  This requires a board of directors to be involved and to ensure that co-owners are timely paying their assessments.  On the other hand, if an association fails to maintain its common elements, or fails to increase assessments sufficiently to maintain the project, then not only will the board of directors have contributed to the potential devaluation of the project as a whole, but the board may have also exposed themselves to potential liability for a breach of fiduciary duty, as the New Jersey Court of Appeals found in Ebert v. Briar Knoll Condominium Association.

At the time units are initially sold, a condominium’s assessments are most likely as low as they will ever be.  In an effort not to scare away potential purchasers, a developer has an incentive to portray the recurring costs associated with owning a unit as minimally as possible.  These initial assessments may reflect the maintenance costs of a brand-new condominium complex, but may not reflect the true costs associated with a condominium complex that requires capital improvements or significant maintenance over time.  In addition, these initial low assessments do not alter the fundamental principle that the value of the condominium units within the condominium are maximized by adequately maintaining the common elements and portraying the condominium as an attractive place to live.  Accordingly, it is important that purchasers of new condominium units engage in adequate long-term planning which takes into account the true cost of maintaining the complex, and, if necessary, adjust their assessments to take into account those costs not considered by the developer but vital for the condominium project’s long-term success.

Another potential factor in maintaining the long-term value of an investment in a condominium project is whether potential purchasers of units within the condominium project qualify for government insured mortgages, an important resource for many first time home-buyers.  This is significant because the national share of first time home-buyers with either a Fannie Mae, Freddie Mac, or Federal Housing Association (“FHA”) mortgage was 54% of all purchase mortgages in 2014.  Especially with respect to FHA financing, however, there is a concern that a restrictive regulatory environment has forced a number of potential purchasers out of the marketplace.  While the FHA helped finance roughly 80,000 to 90,000 condominium mortgages a year over the past decade and a half, this number has more recently been reduced to a quarter of that volume.  In addition, the FHA requires condominium projects to go through a certification process every two years, but according to the Community Associations Institute less than 14,000 of the 152,000 condominium associations eligible for FHA loans actually attain FHA certification.  Undoubtedly, removing 60,000 potential purchasers from the condominium market will have an effect on value.  To a certain extent, the FHA’s restrictive policies arise out of lessons learned from the collapse in housing values in the late 2000s, when the typical U.S. condominium lost 33.2 percent of its value.  Further, there is an argument to be made that these restrictive policies do not have a materially adverse effect on values since, at least as of late 2015, condominium value appreciation was still outpacing single-family homes.

Nonetheless, steps are being made to make condominiums available to more potential purchasers within the current regulatory framework.  A major issue in this area tends to revolve around rentals.  For several years the FHA has required a non-owner occupancy percentage of no more than fifty (50%) percent in order for a potential buyer to be approved for an FHA-approved mortgage.  Fannie Mae and Freddie Mac have similar requirements.  In late 2015 the FHA rules interpreting its requirements were temporarily relaxed to allow non-investor owner second homes to be considered “owner occupied.”  In addition, in July 2016 Congress passed legislation (H.R. 3700) which reduces the minimum owner-occupancy ratio from 50% to 35%, unless the FHA can provide justification for a higher percentage, and also requires the FHA to streamline its certification process.  If a project does not allow for an FHA mortgage, or a Fannie Mae or Freddie Mac mortgage, then an entire market of potential purchasers is excluded, potentially decreasing the value of the units within the project as less purchasers are available to compete with one another.  Accordingly, these changes may assist in maintaining condominium values by increasing the pool of potential purchasers.

In addition to meeting FHA eligibility, there are additional reasons why a condominium may want to limit the number of rental units within the condominium.  More anecdotal concerns regarding rentals relate to the incentive (or lack of incentive) for a non-owner occupant to adhere to and comply with condominium rules and regulations pertaining to usage of the common elements and maintenance requirements, and to work on building a long-term relationship between the unit occupant and the project.  This rationale presumes that an owner occupant has more of a personal stake in the ownership of his or her unit than a non-owner occupant, and in the long-term success of the condominium project as a whole.  This is part of the thinking behind the FHA’s requirement that a minimum percentage of units be owner-occupied.  To this argument, however, there is a counter-argument, at least as to value.  If a condominium prohibits sales to non-occupant owners due to a maximum rental threshold having already been reached, then such prohibition will also exclude a market of potential purchasers (i.e., investors), who might otherwise be interested in purchasing a unit.  In theory, this too could have a potential adverse effect on the value of a unit, though the effect would most likely only be felt if the price-point for a condominium unit were already at a price-point that an investor were willing to pay.  In other words, the adverse effect of a rental limitation may, as a practical matter, only be felt when prices are trending downwards and investors are seeking to purchase units at discounted prices.  Further, this could potentially actually have a positive effect, as it could prevent disillusioned owners from “dumping” their units at bargain-basement prices when the market turns south, thus preventing an influx of comparable sales with low sale prices.  In stock market parlance, a rental cap could act as a “trading curb” or a “circuit breaker” to help prevent crashing prices (by preventing owners from being able to sell to investors who will only purchase at low prices).

Finally, because of its location, The Ashton Detroit may be able to tap into what has been called a “pent-up demand” for walkable housing in metropolitan Detroit which is believed to correlate to a 50% premium for residential housing.  If retail shops are opened and the project becomes a true “mixed use” development, then this may also assist in keeping values high.  These comparative advantages over similar projects in other areas may help maintain the values of the units sold in the project even in economic instability.  Undoubtedly, this concept was attractive to the developers as they embarked on their development project, and similar factors can be considered by condominium boards as they observe the development that takes place in their particular areas.

Summary

Whether to attain FHA certification and whether to impose a rental cap are issues that may affect condominium value.  Location is a factor in value, but is mostly fixed and difficult to change internally.  Ultimately, as with every condominium project, it will be incumbent on the condominium association to fulfill its responsibilities in maintaining the condominium in order to preserve property values over time.  This involves an adequate reserve fund, a realistic budget, timely collection of assessments, adherence to the condominium documents, and an involved board of directors.  So long as these core principles are followed, then a condominium project should thrive indefinitely.

Matthew W. Heron is an attorney in our Livonia office where he focuses his practice on dispute avoidance, condominium law, commercial litigation, commercial real estate, large contractual disputes, and title litigation. He has extensive litigation and trial experience in state and federal courts involving commercial litigation issues and real estate matters.  He can be reached at (734) 261-2400 or mheron@cmda-law.com.  You can also follow him on Twitter at @mwheron75.

Condo Group Attends CAI Golf Outing

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Condo Group CAI Outing 16Attorneys Kevin Hirzel, Joe Wloszek, William Kolobaric and Matt Heron from the Firm’s Condo Group enjoyed a fun day with board members, managers and industry leaders at the Community Associations Institute (CAI) Annual Golf Outing. Thanks to everyone who stopped by Hole #2 for snacks, fun games and great prizes.