Pitfalls of Loft Condominiums and How to Avoid Them

By Don Dagenais
Lathrop & Gage L.C.
Kansas City, MO

Kansas City is a national leader in turning warehouses and other commercial buildings into loft apartments. These projects are often structured as condominiums.

The Missouri Condominium Law was drafted in response to the new construction of condominiums and resorts in areas such as the Lake of the Ozarks. However, there is a world of difference between a new condominium construction project and a rehabilitation condominium project. Developers must be sensitive to these differences and address them up front in the rehabilitation process.

Legally, once the building is condominium-ized, it is going to be divided into units, common areas, and limited common elements. Units are the areas in which the residents live (in a residential condominium); common elements are the lobby, entryway, and other areas used by all residents; and limited common elements are those parts of the condominium that are assigned for the use of one or more unit owners but are not really a part of the units themselves.

It is important to consider the structure of the building in determining how a particular portion of the building should be allocated. For example, a developer should look closely at the ingress and egress to the building, the parking situation, and other areas used for such functions as laundry and utility areas and maintenance closets. How are these elements to be categorized? If the building has balconies, are these to be a part of the unit or part of the limited common elements?

The answer to these questions carry maintenance and insurance implications because a unit’s owner is typically responsible for the maintenance and insurance of the individual unit while the condominium association is responsible for all other portions of the condominium.

It is also important to think about the parking and storage areas. Is the unit owner going to have fee title to the parking space and storage area, or are these to be limited common elements over which the unit owner only has license?

Flexibility in the future is another item that should be carefully considered by the developer. For example, hallways often are set aside as a common element in a condominium plat. However, if a multiple unit owner eventually wants to expand the units to cover both sides of the hallway, could the owner wall off the hallway adjacent to the units and make it a part of one larger unit? It would be nice if this could be done without having to amend the condominium documents or replat the condominium.

Maintenance issues are another important consideration. An older building often has components, such as a roof or a furnace, which might be subject to replacement in just a few years. Would it be a good idea for the condominium association to set aside reserves to pay for these replacements when the time occurs? A developer failing to do so might be subject to great criticism later on by unit purchasers decrying this lack of foresight.

Insurance considerations run through all of these issues. Usually, each unit owner is responsible for insuring the unit while the condominium association insures the building itself. But this practice may not work well in an older building. For example, certain structural features of the building may be part of an individual unit, but they may be important to the overall look and feel of the project and thus might be better characterized as common elements.

Most condominium declarations contain certain restrictions on the use of the condominium units. Before finalizing these, any developer should think of who the likely purchaser is and plan accordingly. If this project is going to appeal to young singles, for example, it may be important to structure an appropriate pet policy or to provide facilities for gatherings and parties. Some loft developers have set aside rooftop areas for rooftop deck parties.

If the developer expects empty nesters to be the purchasers, the developer might consider the importance of access issues to those who are getting a bit older. It is also important to think about the allocation of space for elevators and other facilities that may affect the definition of common areas and units in the condominium plat.

Will the condominium documents be sufficiently broad to accommodate expansion to the project? This is a common practice in new development, but often overlooked in rehabilitation projects. Yet expansion could be of great importance if an adjacent building becomes available for rehabilitation, or if the developer needs to acquire additional properties for parking or other facilities.

In condominium rehabilitation projects as in so many other things in life, foresight, planning and flexibility are the keys to success.