Commercial condominiums (that is, condominiums made up of non-residential units such as retail and offices) are an interesting subspecies of condominiums. Most people envision residences when they think of the condo concept but the idea of exclusive ownership of one's own space and shared ownership of common areas — in short, a condominium — can apply to business settings as well. Although they are still relatively few in number, there are many good reasons why the business condominium should become more prevalent in the future. In the 1980s real estate boom, there were a noticeable number of these developments created, particularly in suburban areas. So, they may receive renewed interest, particularly as the commercial rental market heats up again (as I write this, rents for new downtown Boston space are hovering around $75.00 per square foot).

Three Different Types

Commercial units may be found in three different arrangements:

First, in a mixed-use setting, where residential units may co-exist with retail stores, offices and perhaps a restaurant or two.

Second, in an exclusively commercial setting such as an office park.

Third, a variant of the first, where a commercial condominium of a block of business units may be part of a "master" condominium, the other parts of which might be residences and sometimes a hotel.

Particularly in urban areas where there tend to be more mixed-use properties, one can find a fair number of mixed-use condominiums. These present some interesting challenges in how to distribute expenses, control and other rights and obligations among the classes of owners and the documentation (master deed, by-laws, etc.) may be quite complex for such properties.

Careful Foresight Needed

Over the years there have been interesting legal cases where the meshing of the different uses was not adequately planned for in the initial governing documents. (A mundane example was a dispute where public restrooms in the commercial areas were treated as a common expense so that the costs of their cleaning and repair were borne by residential owners as well.) Careful foresight is needed in such properties.

Typically, the methods used to deal with such issues include: physically separating residential and commercial uses in the property; classes of trustees elected by different types of users so there is always some representation of each group on the board; and specific common charges (called "limited common charges") which apply to different classes.

No Shortage of Issues

There is also no shortage of issues and concerns in the exclusively non-residential condominium. The variety of types is virtually the same as the variety of possible commercial activities — from medical office buildings to shopping malls to warehouses to self-storage facilities. And, of course, it is possible to mix commercial uses in one condominium as well, with many of the same issues as mentioned previously.

From a legal perspective the commercial condominium can operate and be governed quite differently from the residential or mixed counterparts. In Massachusetts, Section 21 of the Condominium Law covers properties where no more than ten percent of units are residential. It permits (but does not require) very substantial variations from what Chapter 183A, the Condominium Law, otherwise mandates. These variations include how common charges are assessed and different voting rights. Collection remedies can also be altered. The main point is that a greater level of customization of the documents and operational provisions is possible in the commercial condominium. Anyone considering a possible purchase of a unit in such a development should therefore review the documents with particular care.

Relatively few of the existing commercial condominiums are conversions from rentals, a difference from apartment conversions. New construction specifically designed for ownership, space flexibility and individual utility service seems to be necessary to draw buyers. Such properties are often built so that space can be expanded or contracted with relative ease and the units can be joined. It is this kind of layout and expansion/contraction flexibility which enhances the ownership option.

Easier on Managers

A property manager from a residential background serving a commercial condominium will find a number of differences from what he might have been used to. The differences will often be welcome. These include daytime or right-after-work meetings; much more businesslike, efficient meetings; generally, much less resistance to spending money on maintenance and improvements.

These are several areas of governance which particularly need to be addressed in creating a commercial condominium. Primary is what types of uses which can be made of units. Examples might include "general office" or "professional office" (both of which, perhaps, should require more definition). If a non-specific "general business" type of use is permitted, there could be change, perhaps detrimental, in the development's character over time. What if a new owner brings a hairdressing salon into mostly office setting? But if the uses are too narrowly drawn, changes in the real estate market may cause vacancies to develop and financial problems for the association. It might be wise to permit changes in use by some vote which is less than what would otherwise be required to amend the documents. Of course, in a medical condominium or some other special-purpose condominium, the limited use would be central to the concept.

Another specific issue would be signage. Businesses like to be visible but the association must see that the exuberance does not get out of hand. Well-drawn documents will address sign issues, usually prescribing uniformity or at least harmony of appearance and size.

Parking — always a key issue in condominiums —should be addressed. Substantial parking is, of course, typically desired. A good arrangement might be a combination of some specifically designated spaces per unit and a larger number of unassigned spaces.

Rent or Own?

Central to this entire discussion is why a business owner would want to own rather than rent his space. Businesses are typically renters, driven by the apparent flexibility of being able to move and/or expand, using their capital elsewhere rather than "sinking" it into the property, and the full tax deductibility of rent and other expenses.

Yet, there are a number of appeals of a business owning its space. A tenant may find its lease not renewed or subject to a prohibitive rent increase at renewal; ownership gives a right of tenure and smoothes out such dramatic and unpredictable cost variations. There is also some participation in overall control of the development. The owner can also build up equity and experience price appreciation. When the time comes to sell the business, the owner can sell the "location" as well, which enhances the value of the business. It is possible for a group of business partners to create one entity to own the space and another to operate the business and pay rent to the first one. This allows for income and tax flexibility and also may insulate assets from creditor claims.

It should not be overlooked that a unit can be rented and held for investment as well as used for one's own business. The specific appeals of the condominium format are owning while having someone else deal with management, and sharing risk with a number of co-owners of the real estate. There may also be the possible synergy from being in an environment of other businesses.

All in all, the conception and design of a commercial condominium can be challenging but also result in something quite beneficial to owners. A growing experience with what has already succeeded will help make future developments work better.