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August 11, 2014Client Alert

Don’t Forget to Take the Developer’s Rights as Collateral

The long real estate recession is over, and thank goodness for that. New developments are sprouting up everywhere in response to pent-up demand. There are even condominium developments beginning or long-stalled condominium developments resuming, and it’s time for a reminder about taking collateral in these unique projects.

 

A condominium is purely a creature of statute. Chapter 703 of the Wisconsin Statutes, the Wisconsin Condominium Act, defines what rights are created when a developer, called a “Declarant,” records a condominium declaration which contains the magic language, “I hereby submit this land to the condominium form of ownership.”

 

As soon as that declaration, and its accompanying condominium plat, are recorded in the Register of Deed’s Office in the county where the land is located, they create condominium units, which are legally existing separate boxes of air, whether anything is physically built or not. Everything inside the boundaries of the land submitted to the declaration is either a unit, or a common element. Each unit can be separately owned and mortgaged, carries a separate real estate tax bill, and is capable of being assessed a lien for that unit’s share of the expenses of owning, maintaining, and insuring the common elements.

 

Under the Condominium Act, the Declarant can write into the Declaration, special rights reserved only to the Declarant, and to those the Declarant authorizes to specifically receive those rights, including the Declarant’s lender. These rights are very important, and taking a security interest in those rights can make a significant financial difference to a lender, should the lender need to foreclose those rights, or put them into a receivership. Those rights can include:

 

  • the right to expand the condominium into more land reserved as the “Expansion Land;”

 

  • the right to create more units in the condominium;

 

  • the right to avoid paying a full association assessment for each of the units, as long as it pays the associations’ costs above what other unit owners pay under the association budget;

 

  • the right to reconfigure the boundaries between units by combining units and separating units;

 

  • the right to control the condominium association until a sufficient number of the units in the condominium have been sold to unrelated third parties;

 

  • in some limited circumstances, the power to unilaterally amend the declaration; and

 

  • the right to declare easements over the common elements of the condominium.

 

The correct way for a lender to take a security interest in these Declarant rights is to take a collateral assignment of declarant’s rights, in a manner similar to an assignment of rents, which gives an immediate grant to the lender of these rights, with a limited license back to the Declarant to exercise these rights, as long as the Declarant is not in default.
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