With the increasing lack of available lands for new development, many property owners are looking to condominium conversion to maximize their use and value of existing lands. A common trend is the conversion of commercial or industrial properties to residential complexes, but this is hardly a necessary approach. Less common, but potentially just as valuable, is the conversion of existing commercial and industrial properties into commercial or industrial condominiums.
Condominium is a form of subdivision
Condominiums are not homes. Condominiums are not even buildings. A condominium is, at heart, (as our colleague, Eric Laxton, shared in a recent Ontario Bar Association seminar) a kind of subdivision. It is the process and product of dividing property into multiple units, which are capable of being separately owned, and common elements in which all the unit owners share.
That is, the condominium concept has everything to do with the way title is held, but nothing to do with the way property is used: Any kind of property can become a condominium, and nothing has to change about its uses or occupancy.
But, why do it? This article provides a summary explanation of three key benefits:
- Condominium conversion can be a kind of “estate planning” for property, helping to rationalize your ultimate divestiture of title;
- It adds flexibility to your equity, expanding financing options; and
- It provides the potential for sharing the property’s costs and control while continuing its current application.
Estate and succession planning
Subdividing your wholly owned commercial or industrial property into several units and common elements permits you to consider a range of options for sharing ownership of the property amongst partners, successors, and/or beneficiaries. This is because, when you convert your property to condominium, each unit is a separate parcel for Land Titles purposes; so, instead of having to transfer the property as a whole, the units can be transferred separately to various entities and individuals (all at once or at several different times).
In relation to your estate, this can help avoid the conflict that might occur when beneficiaries have different notions about how your property should be held, or no interest in holding it at all. As individually bequeathed condominium units, one might choose to retain theirs, while another decides to sell, without either one inhibiting or affecting the other’s interests or desires.
Flexible equity
As with ownership, so with financing.
Prior to it becoming a condominium, if you mortgage your property, you mortgage the whole of it, but after conversion, each unit may be separately mortgaged or not all. Currently, even if your mortgage is 70% paid off, the charge encumbers the whole of the property and not just 30% of it; but as a condominium, a mortgage registered against 70% of the units would leave the remaining 30% free and clear, including making them available as security for other financing if wanted (without the requirement of obtaining the other mortgagee’s consent).
The Condominium Act, 1998 also provides that any encumbrance on title to the property at the time of condominium conversion can thereafter be discharged from title to each and any of the individual units, so long as the unit owner pays out that portion of principal and interest that is attributable to the unit’s proportionate share of the interest in the condominium’s common elements. Therefore, after condominium conversion, equity in the property can be reclaimed, one unit at a time.
Shared costs and control
Another advantage of condominium conversion is that it permits the obligations and costs of operating and maintaining the property to be more effectively shared. The Condominium Act, 1998 serves to govern the working relationship between the owners (when there is more than one), providing guidelines and a governance infrastructure supporting everything from property management and dispute resolution to collectively saving some money for the inevitable “rainy days” of major repairs.
On the potential downside of this aspect, as you decide to relinquish ownership of individual units, you will eventually lose exclusive control over how the property is governed and used. A majority of owners can do many things to change their condominium, including enacting new rules and by-laws and electing an alternative governing board.
Indeed, due to various provisions of the Condominium Act, 1998, once you have sold more than 10% to 20% of the units, other owners will begin to obtain some privileges relating to control of the property overall. Changes to the condominium’s declaration (its principal governing document), for example, can only be made with the consent of the owners of 80% to 90% of the units. These kinds of restrictions are only a concern, however, if you haven’t prepared well for them. Knowing they will happen is key, so you can ensure the condominium’s constating documents anticipate and adequately restrain owners from making significant changes to the way the property is configured and run. This will go a long way toward resolving any practical concerns that arise from increased sharing of control.
This latter point serves to emphasize the importance of having experienced legal counsel and other professional advisers as you embark on the condominium conversion journey. That’s the kind of help that we at Miller Thomson LLP can provide you. Please reach out to a member of our Condominium & Strata group if you have any questions.
In Parts 2 and 3 of this series of articles, we will discuss the tax consequences and processes involved in converting your commercial or industrial properties to condominium.
