CONDOMINIUMS

Definition

The Condominium Property Act became effective in Illinois on July 1, 1962. Under this Act, an owner/developer may elect to submit a parcel of real estate to condominium ownership by recording a "Declaration" to which is attached a three-dimensional plat of survey of the parcel showing the location and size of all units in the building. A building built on leased land may not be submitted for condominium ownership in Illinois. The survey required with each Declaration of Condominium Ownership must indicate the dimensions of each unit. The survey will show the outlines of the lot, the size and shape of each apartment and the elevation or height above base datum for the "upper surface of floor level" and the "lower surface of ceiling level." The difference between these two levels represents the airspace owned in fee simple by the unit owner.

Ownership

Once the property is established as a condominium, each unit becomes a separate parcel of real estate and every unit purchaser acquires the fee simple title to a particular unit, together with the percentage of ownership of the common elements that is set forth in the declaration and that belongs to that unit. This percentage is computed on the basis of the initial list prices of each unit. Although the owners hold their interest in the common elements as tenants in common, they do not have the right to partition. Common elements may include such areas as land, walls, hallways, elevators, stairways, roof, swimming pool(s), club houses, tennis courts, golf courses, lawns, parking areas, exterior structures, etc. Each condominium unit is a statutory entity that may be mortgaged, taxed, sold, or otherwise transferred in ownership, separately and independently of all other units in the condominium complex or building. Default in the payment of the mortgage loan by one unit owner may result in a foreclosure sale of that owner’s unit but does not effect the ownership of the other unit owners.

Style

The condominium form of ownership can exist in a variety of architectural styles, ranging from single free-standing units and townhouse structures to high-rise buildings. This form of ownership is also used for commercial property, office buildings and mulituse buildings that contain offices and retail shops as well as residential units.

Dissolution of the Condominium Property

Under the Illinois Condominium Property Act of 1963, the property may be removed from condominium status at any time by the unanimous consent of all owners and lienholders, as evidenced by a recorded written instrument. All owners would then be tenants in common. Condominium unit owners have no individual rights of partition.

If an entire condominium building is damaged by fire, the insurance proceeds, if sufficient, must be used for reconstruction. If such insurance is insufficient and unit owners do not voluntarily provide for reconstruction of the building, a notice removing the property from the Condominium Act may be prepared and recorded.

Real Estate Taxes

Real Estate taxes are assessed against each unit, including that unit’s corresponding percentage of the common elements. Such tax bills are usually sent to the unit owners. Default in the payment of taxes by one unit owner may result in a tax sale of that owner’s unit but does not affect ownership of the other unit owners.

Homeowner’s Association

When a certain percentage of the units in a condominium property have been sold by the developer, the condominium unit owners form an owners’ association which is usually incorporated as a non-profit corporation. The Association members elect a Board of Directors or other official entity to act as the legal unit for operating the property as a whole, or engage a professional property manager to perform this function. The Board is required by law to obtain fire and extended coverage insurance on the property for full replacement cost, provide for the maintenance of common elements and perform any other actions entrusted to it by the association.

Special Assessments

Assessments of common expenses for insurance and other operating costs are to be collected by the Board from all unit owners. Unpaid assessments become a lien on the unit assessed and the Board may foreclose such lien in the same manner as a mortgage foreclosure.

Condominium Conversions

Due to the popularity of converting existing apartment buildings to condominiums during the late 1970s and early 1980s, many municipalities adopted ordinances to protect tenants in those structures as well as prospective purchasers. These laws typically allow tenants an opportunity to extend their leases and/or to have first purchase rights. Additional protections are usually provided regarding disclosure of all material information, building and construction soundness, adequacy of parking, etc. These ordinances have been generally upheld by the courts as a valid exercise of police power.

COOPERATIVES

Definition

In the usual cooperative, a corporation (or partnership or trust) that holds title to the land and building offers shares of stock to a prospective tenant. The price the corporation sets up for each apartment becomes the price of the stock. The purchaser becomes a shareholder in the corporation by virtue of stock ownership and receives a Proprietary ("owner’s") Lease granting occupancy of a specific unit in the building for the life of the corporation. The Cooperative tenant/owners do not own real estate because stock is personal property. The Stock Certificate usually is freely assignable; however, the Proprietary Lease typically has several restrictions on its assignability.

Operation and Management

The shareholders control the property and its operation. They elect officers and directors, as provided for in the corporation by-laws, who are responsible for directing the affairs of the corporation and its real estate operation. Usually, each unit in the Cooperative building has one vote. The directors may engage the services of a professional property manager to assist them. The by-laws also provide for tenant use of the property and the method by which the shares in the corporation may be transferred and any approval of prospective shareholders by the Board of Directors that may be required. In some Cooperatives a tenant/owner must sell the stock back to the corporation at the original purchase price so that the corporation will realize any profits when the shares are resold. Individual shareholders are obligated to abide by the by-laws established by the corporation.

The corporation incurs costs in the operation and maintenance of the entire parcel, including the common property as well as the individual apartments. These costs include real estate taxes and any mortgage payments that the corporation may have. The corporation also budgets funds for such expenses as insurance, utilities, repairs, and maintenance, janitorial and other services, replacement of equipment and reserves for capital expenditures. Funds for the budget are assessed to the individual shareholders, generally in the form of monthly fees similar to those charged by a homeowners’ association in a condominium. Each unit owner must pay his or her pro rate share of the corporation’s expenses. The owner can deduct for tax purposes his or her share of the taxes and interest charges (provided 80 percent of a Cooperative’s income is derived from tenant/owner rentals.)

Default of Payments

Unlike in a condominium association, which has the authority to impose a lien on the title owned by one who defaulted on maintenance payments, the burden of any defaulted in a Cooperative falls on the remaining shareholders. Each shareholder is affected by the financial ability of the others. For this reason, approval of prospective tenant/owners by the Board of Directors frequently involves financial evaluation. If the corporation is unable to make mortgage and tax payments because of shareholder defaults, the property might be sold by court order in a foreclosure suit. This would destroy the interests of all tenant/shareholders, including those who have paid their assessments.

Advantages

Cooperative ownership, despite its risks, has become more desirable in recent years for several reasons. Lending institutions view the shares of stock, although personal property, as acceptable collateral for financing, which was not always the case. The availability of financing expands the transferability of shares beyond "cash buyers." As a tenant/owner, rather than a tenant who pays rent to a landlord, the shareholder has some control over the property and realizes some income tax advantage from the payment of property tax. Owners also enjoy freedom from maintenance.

Of Special Note

The laws in some states may prohibit real estate licensees from listing or selling cooperative interest because the owners own only personal property. Brokers who participate in these transactions may need a securities license that is appropriate for the type of cooperative interest involved.

When preparing a Sales Contract involving a Cooperative, the following language may be used to describe the property: "Ten shares of stock in Paige Apartments, Inc., entitling owner to proprietary use of Apartment 67 and parking Stall #3, and co-use of common elements."

April 7, 1999