Planning for the Coming Shortage: Conversion Condominiums

As of the end of 2011, approximately 3,010 apartment units in 17 projects were under construction in Seattle, according to the Downtown Seattle Association.  Zero condominium projects were reported to be under construction at that time.  Simultaneously, even bearish sources like the popular blog Seattle Bubble are reporting near-record-low inventories of homes on the market.

While there are myriad reasons to believe the housing market is not yet in a true recovery, there are indications that a recovery is on the way.  The statistics above suggest that when a recovery does occur we may quickly see a strong seller's market for condominiums, while simultaneously experiencing a glut in the multifamily rental market.  While those statistics relate to King County, there is no reason to expect the trend is much different in other urban areas in Western Washington.  In such a scenario, conversion condominiums may be the answer.The Washington Condominium Act (RCW 64.34) allows for conversion of existing buildings (of all kinds, not just multifamily residential), but places special restrictions on conversions, especially with regard to residential properties.  For instance, there are special notice obligations the owner owes to any existing tenants in the property, which are set forth in RCW 64.34.440.  Notices must be given at least 120 days in advance.  Existing residential tenants also have a right of first refusal on the unit they occupy.  A declarant may also be required to pay relocation assistance.

Further, owners often make improvements to units prior to offering them for sale, because purchasers typically have higher finish expectations than renters.  However, owners who have made improvements to a condominium prior to sale will be subject to the implied warranties of quality set forth in the Act, as to any such improvements.  Accordingly, an owner intending to proceed with a conversion ought to be careful in choosing and contracting with contractors to ensure those contractors are providing a sufficient quality of work and making warranties consistent with the owner's warranties to the purchasers.

Approached without care the conversion process can offer substantial pitfalls.  However, if the future dearth of condominium units suggested by some statistics comes to pass, the process will also offer a great opportunity for profit.

- Ryan D. White

Priority of Condo Association Liens

The six months of condominium association assessments immediately preceding foreclosure of the association's lien have priority over the lien of an owner's lender (RCW 64.34.364), an advantage recently affirmed by the Washington Court of Appeals in Summerhill Village Homeowners Association v. Roughley.

Summerhill involved a condominium in Issaquah.  When the owner fell behind on her assessments, the association filed a foreclosure action, served the lender and the owner and recorded a lis pendens against the property.  The owner and the lender failed to respond and the association was granted a default judgment.  The association then proceeded with a foreclosure sale.  Following the sale, the lender's successor moved to intervene in the association's action and asked the trial court to void the sale, which the court declined to do.  The court ruled that the lender was not entitled to redeem the property and had lost its mortgage in the sale.  The lender appealed the decision, but the Court of Appeals affirmed the trial court.

.

Today even good buildings face delinquencies.

The decision is noteworthy in that it affirmed both the association's lien priority over a mortgagee and that such a lender may not redeem the property (i.e. buy it back by paying off the new owner).  It highlights the robust rights of newer condominium associations to recover unpaid assessments, which rights are increasingly important in this post-bubble world.

Associations should note that the super priority lien is only available to those condominiums formed after July 1, 1990 (i.e. "New Act" condominiums) or those condominiums formed prior to that date that have amended their declarations and opted in to the new priority scheme.  Accordingly, an association should carefully consider amending its declaration to take advantage of the super priority available under the Condominium Act.

Lien foreclosure is not a universal solution, however.  The limited six-month reach of the lien priority and the lack of interested buyers at a foreclosure sale can undermine the association's effort to recover by way of a foreclosure.  Accordingly, associations should consult with counsel and carefully consider their options before pursuing any kind of collection.

- Ryan D. White

Successfully Negotiating Commercial Loans

Intelligent borrowing is a critical element of becoming a successful real estate investor.  Whether the investment property is a multifamily development, such as an apartment building, or a commercial office building, having the right loan can make the difference between a project that generates a robust stream of income for its owner and one that risks becoming a liability for the borrower and, potentially, the lender.

What some owners do not realize is that commercial loans and the tens or hundreds of pages of documents that comprise the loan agreements are not take-it-or-leave-it transactions.  Tailoring an agreement to suit the needs of the particular borrower, bank and property will benefit all parties, because it helps to prevent default and conflict, which can destabilize the building, scare off tenants and threaten the profits of both lender and owner.

With that in mind, below are some of the most commonly negotiated categories of loan terms, in my experience, in no particular order:

• Grace period and notice requirements before a default may be declared;
• Borrower warranties and disclosures regarding the condition of the property (these should reflect actual known conditions, rather than simply warranting an absolute absence of defects);
• Borrower warranties regarding the financial condition of borrower (failure to tailor these warranties may result in additional non-recourse liability for the borrower);
• Applicable law, jurisdiction and venue for any disputes;
• Ongoing financial reporting requirements, which can have a tremendous effect on the cost of the loan to the borrower;
• Prepayment penalties and what constitutes "prepayment";
• The initial and renewal terms of the loan, including conditions for extending the maturity date;
• How rents are handled and by whom;
• Due-on-sale provisions, including defining what constitutes a prohibited sale;
• Debt service coverage ratio ("DSCR") requirements;
• What constitutes an event of default;
• Allocation of expenses related to closing and servicing the loan.

This is not an exhaustive list, but is intended to provide examples of areas within the loan documents that may be worthy of special attention.  Of course, once you have identified areas requiring specific attention, you will want to negotiate modifications and draft revisions in such a way that they will satisfy the needs of each side, without causing undue conflict.  A skilled attorney will be invaluable in that process.

- Ryan D. White

Who Owns a Tree On a Boundary Line?

An owner of Lot A plants a tree, just on his side of the boundary line.  Years pass and the tree grows, to the extent that it now straddles the property line with Lot B.  The owner of Lot B likes the tree.  One year, during a windstorm, the tree drops a number of limbs onto the home on Lot A.  The owner of Lot A decides that, although he planted the tree and although it is perfectly healthy, it is not worth the mess it creates and he wants to cut it down.  The owner of Lot B, who did not plant the tree but has grown to like it, tells the owner of Lot A not to cut down the tree.  The owner of Lot A says, "I planted it, it is mostly on my property, I can cut it whenever I want."  Is he right?

The short answer is "no."

The highest authority on the issue in our state is found in the ironically-titled Happy Bunch, LLC v. Grandview North, LLC, 142 Wn. App. 81, 173 P.3d 959 (Div. 1 2007); review denied, 164 Wn.2d 1009 (2008).  The court held: “[a] tree, standing directly upon the line between adjoining owners, so that the line passes through it, is the common property of both parties, whether marked or not; and trespass will lie if one cuts and destroys it without the consent of the other.”  

According to the holding in Happy Bunch, the ownership of the tree is apportioned according to the percentage of the tree standing on each lot.  However, it is not subject to a majority-rule regime.  Instead, each owner must assent to the removal of the tree.

The court further held that trespass statute at RCW 64.12.030 is applicable to boundary trees.  That statute allows the injured owner to recover triple the amount of such owner's damages, plus attorneys fees.  Damages must be calculated “proportionate to the percentage of their trunks growing on [the subject] property.” 

On the other hand, each owner may remove limbs from the tree, in a manner that does not harm it, up to their respective boundary line.  Different rules may also apply where the parties know the tree to be diseased or unsafe.

So, pay special attention to trees near property lines and think before you cut.  

- Ryan D. White

New Land Use Petition Act ("LUPA") Decisions

Our appeals courts issued a pair of opinions on LUPA in the past few months, each clarifying the rules for appeal of land use decisions.

In Vogel v. City of Richland the Division 3 Court of Appeals held that the final land use decision reclassifying a street as private, rather than public, was issued, for purposes of 21-day limitations period applicable under LUPA, on date that first public record was made finalizing change. In this case, the public record was the permit approving the entrance gate detail, which rendered the road private. The fact that the public was aware of the approval by way of internal city documents generally referring to the decision, but lacking in specifics, at an earlier date did not start the limitations period running earlier.

In Brotherton v. Jefferson County the Division 2 Court of Appeals held that the denial of the landowners' request for a waiver from state and local sewage system regulations was a land use decision, and therefore deadline for appealing final decision of local land use authorities contained in LUPA applied to the landowners' request for judicial review. The Jefferson County Board of Health's denial of the landowners' waiver request was the County's final determination on the enforcement of ordinances regulating the use of real property and was, therefore, a “land use decision” within the meaning of LUPA.

Each of these decisions hones a different edge of the LUPA cutting tool. Together, they reaffirm what all good land use practitioners already know: each communication from a governmental authority with regard to a property or its development is worthy of close scrutiny in order to determine whether it is a decision subject to LUPA's brief and unforgiving 21-day appeal period.

The Elements of an Effective Purchase and Sale Agreement

When you prepare to buy a new home or commercial property, the first step will be often referred to as "making an offer," because the formation of every contract requires two elements: offer and acceptance.  Either the seller or buyer will prepare a document that sets forth the terms and conditions upon which that person desires to purchase or sell the property.  That party will then submit that document to the other party.

In legal effect, the submitting party has made an offer, which the other party may accept in order to form an agreement.  The goal, of course, is to create a legally enforceable contract that will allow the transaction to close and title to the land to transfer in conformance to the expectations of both parties.

Most people are generally familiar with this process.  What many people do no know is what must be included in that contract in order to make it enforceable.

The answer, in Washington, is that the purchase and sale agreement (also referred to as the "PSA" or "earnest money agreement") must include the following: (1) consideration; (2) adequate description of the property; (3) specification of total purchase price; (4) specification of the method of payment of principal and interest; (5) provision for prorating taxes, insurance, and liens; (6) provision for payment of water and other utilities; (7) provisions for possession; (8) provisions for the deposit in escrow of the balance of the down payment by the purchaser; (9) provisions for delivery of a deed by the seller.

If those elements are included, a court will award damages to the non-breaching party if the breaching party refuses, without legal excuse, to close the transaction.  If any one of those elements is missing, either party may (absent other legally significant circumstances) ignore the agreement and refuse to perform it, without legal consequence.  

If one party breaches the agreement and the other party wants to specifically enforce the agreement - that is, get a court to order the other party to close the transaction - each of the elements (and any other terms the parties include) must be defined clearly and proven unequivocally, so that there is no doubt as to the parties' intent with regard to each term.  So, as a buyer, if you want the ability to compel the seller to perform the agreement, rather than just ask a court to award cash for the seller's failure to do so, the purchase and sale agreement must be drafted with a greater level of specificity.

While the forms available for use by real estate professionals, if filled out completely, are typically suitable for a transaction, problems most often arise when parties attempt to draft their own non-standard terms into an agreement, either by crossing out standard terms of the agreement or by including their own self-drafted addendum.  Doing so can undermine the effectiveness of the form.  Real estate agents, even those that are very knowledgeable about these types of transaction, are legally prohibited from drafting these non-standard terms into agreements.  Accordingly, parties may try to draft these terms themselves and, accordingly, it is from these non-standard terms that a large number of disputes arise.

A real estate attorney can often provide a quick solution by preparing a specially tailored addendum that will set forth the non-standard terms desired by the parties, without risking the signing of a document that will be unenforceable.  For most people, real estate transactions are too important, and litigation is too expensive, to risk using a faulty contract that may become the subject of a later dispute or be ruled unenforceable.

The First Step to Becoming a Successful Residential Landlord

For many people, in this time when selling a home for an amount greater than the mortgage debt may be impossible, leasing their house is a way to move to a new home without facing the risk of taking a loss on their investment.  The fundamental element of success in becoming a landlord is a good lease.

What makes a good lease?  The simple answer is, the agreement between landlord and tenant must ensure that the expectations of both parties are met and must comply with both state and federal law.  One of the most important expectations of a landlord is that if the tenant fails to pay rent or damages the premises, the landlord may retain the security deposit.  However, many landlords do not realize that security deposits, and most aspects or residential leasing, are strictly regulated by Chapter 59.18 RCW, commonly known as the Residential Landlord-Tenant Act.

For instance, if a landlord wishes to require a security deposit, the lease must be in writing and must include "the terms and conditions under which the deposit or portion thereof may be withheld by the landlord."  In addition, in order to have the right to withhold funds for damage to the premises at the termination of the lease, the landlord must provide a "written checklist or statement specifically describing the condition and cleanliness of or existing damages to the premises and furnishings," at the beginning of the lease term.  Further, the landlord must "provide the tenant with a written receipt for the deposit and shall provide written notice of the name and address" of the bank holding the deposit.

If a landlord is holding a deposit and there is actual damage to the premises, the landlord may only withhold the deposit if the landlord delivers to tenant a statement of the specific reasons for withholding the deposit, within 14 days of the date the tenant vacates the premises.  Failure to follow this requirement may result in the landlord being obligated to the tenant for twice the amount of the deposit.

There other important requirements applicable to residential leases, such as a landlord's obligation to provide notices related to toxic mold or lead paint, regardless of whether either is known to be present on the premises.  The landlord-tenant relationship is regulated by both state and federal law.  In our state, the legislature has been active in this field lately, revising several sections of the Act as recently as 2010.  This means lease forms from previous years may be outdated.

Owners should not be afraid of leasing their home.  If done correctly, it can offer financial and other practical rewards.  However, it is important that prospective landlords plan ahead to ensure that the leasing relationship is built on the solid foundation of a properly drafted lease agreement.

- Ryan D. White