Can a New Buyer Rent Out Summit at Copper Square?

On December 1, 2010 the Phoenix Business Journal reported that the 75 unsold condos at Summit at Copper Square were “within days of being sold.”  Word is that the deal has fallen through.

In the article two of my competitors mentioned that the best option for the unsold units was to rent them.  This led me to wonder if renting them was even an option.

My mom use to say, “if you don’t know the answer to something… look it up” so I started digging in to answer the question.  Little did I know just how challenging this would be.

First I went to the “Condominium Declaration for The Summit at Copper Square, a Condominium”, otherwise known as the Condo Dec.  Per Answers.com, “The recorded instrument that is sometimes called a Declaration of Condominium is the legal document that actually creates a condominium development under relevant state law.”  It further states that, “In some states the Declaration (decs) includes the Covenants, Conditions, Restrictions and Rules (CC&Rs), the By-laws and other amendments forming the basis for the association’s governing documents. The association’s board of directors uses these governing documents to conduct the business of the association, including collecting assessments from owners and paying bills for services to assets owned in common.”

Ok, so you can see that the Condo Dec not only legally establishes a condominium development but also outlines the rules and rights under which the owners of individual condos live.  This is where the Home Owner Association (HOA) rights and rules are spelled out.

Section 4.16 of the Condo Dec for Summit at Copper Square is entitled “Leasing Restrictions.”  It clearly states, “No more than twenty percent (20%) of the Units may be leased at any one time.  No Unit shall be leased by a Unit Owner, or occupied by an Occupant, for hotel or transient purposes or for an initial term of less than one (1) year.  No portion of a Unit which is less than the entire Unit shall be leased.”  Ok, so per the HOA rules which govern the condominiums, no more than 20% of the units can be rented out at any one time and no nightly or short term leases for less than a one year period are allowed.

BUT, if you keep reading to the very last line of the section you’ll see, “The provisions of this Section shall not (emphasis added) apply to the leasing of a Unit by the Declarant (emphasis added) or the Association.”  Ah, maybe the owner of the 75 condos does have the right to rent them out, assuming that that entity would be the “Declarant” or the “Association”.

So who or what is a Declarant?

The answer to that is on the first page of the Condo Dec.  There it reads, “This Condominium Declaration for The Summit at Copper Square, a condominium, is made as of this 28th day of June, 2005, by The Summit at Copper Square, L.L.C., an Illinois limited liability company (the “Declarant”).”

So, the original developer set up a legal entity called The Summit at Copper Square, LLC as the Declarant and it had the right to rent out more than 20% of the condos and to do so nightly (like a hotel) or for other periods shorter than a year.  Since the developer is now gone and Stearns Bank took the condos over in foreclosure does this mean that Stearns Bank can rent out over 20% of the condos etc?

I found a great document on the web by Carol Jane Brown which helped me a lot.  What I got from the document is that if a lender is simply foreclosing on a condo building then the lender is typically not liable for things that the developer did or did not do unless that lender begins acting like a developer (building units etc…) and exercising declarant rights that were originally reserved for the developer or its affiliates.  Brown wrote, “[a] lender that succeeds to all (emphasis added) special declarant rights is exposed to a broad range of potential liability. Essentially, the lender becomes liable to unit owners for everything except the developer’s misrepresentations, breaches of warranty, breaches of fiduciary duty, and obligations resulting from the developer’s acts after the transfer” (p. 18).  Therefor a prudent lender will not succeed to all special declarant rights but instead will succeed only certain special declarant rights, and thereby limit its liability.  Brown said, “[i]f the complex is complete [a la Summit at Copper Square], the second alternative would be more attractive to the foreclosing lender. This alternative allows the lender to maintain models, sales offices, and signs on the common elements, and to advertise and sell individual units. The lender’s only potential liability would be for failure to issue a public offering statement. Because a lender can avoid liability by simply filing the required papers, the lender can eliminate virtually all liability. Thus, if the lender can sell the condominium units without additional construction, the lender should choose the second option” (p. 19).

Turns out the State of Arizona further specifies which “special declarant rights” can transfer to a foreclosing lender without the lender assuming any of the liabilities mentioned by Brown.

Per ARS 33-1202 paragraph 21, “Special declarant rights” means any right or combination of rights reserved by or granted to a declarant in the declaration to do any of the following:

(a) Construct improvements provided for in the declaration.

(b) Exercise any development right.

(c) Maintain sales offices, management offices, signs advertising the condominium, and models.

(d) Use easements through the common elements for the purpose of making improvements within the condominium or within real estate which may be added to the condominium.

(e) Appoint or remove any officer of the association or any board member during any period of declarant control.”

Per ARS 33-1202 paragraph 14, “Development rights” means any right or combination of rights reserved by or granted to a declarant in the declaration to do any of the following:

(a) Add real estate to a condominium.

(b) Create easements, units, common elements or limited common elements within a condominium.

(c) Subdivide units, convert units into common elements or convert common elements into units.

(d) Withdraw real estate from a condominium.

(e) Make the condominium part of a larger condominium or planned community.

(f) Amend the declaration during any period of declarant control, pursuant to section 33-1243, subsection E, to comply with applicable law or to correct any error or inconsistency in the declaration, if the amendment does not adversely affect the rights of any unit owner.

(g) Amend the declaration during any period of declarant control, pursuant to section 33-1243, subsection E, to comply with the rules or guidelines, in effect from time to time, of any governmental or quasi-governmental entity or federal corporation guaranteeing or insuring mortgage loans or governing transactions involving mortgage instruments.”

ARS 33-1244 addresses the transfer of special declarant rights.  In it it states that a lender like Stearns Bank will succeed to all the special declarant rights [defined in ARS 33-1202] and that successor “is subject to liability only for his own acts in the exercise of those special declarant rights.”  However, nowhere in ARS 33-1202 do I see anything about renting out more than 20% of the condominiums.  If I am correct in this, then Stearns Bank by assuming a special declarant right to lease out more than 20% of the condominiums may forfeit it’s protection provided by ARS 33-1244 and subject itself to undesired liabilities.  I really really doubt that they did this.

Let’s assume for a moment that Stearns Bank succeeded the special declarant right to rent out all the condos (again I’m not sure that is the case) the question is whether or not that right would transfer to a new buyer of the condos.

In all my reading I saw nothing that said that the special declarant rights of a foreclosing bank transfer to a subsequent buyer nor would it make sense.  Read Brown’s article.  In it she states that the laws protecting lenders of failed condo buildings were designed to protect those lenders.  The idea was that by offering reasonable protection to condo lenders of failed buildings future condo lending would be preserved.  The laws were not designed to protect bulk buyers of busted condos from the condo lender.  Whoever buys the 75 condos is a buyer of, not a lender to, the condo complex.  For that matter I wonder if the laws even protect Stearns Bank.  After all, Stearns Bank is not the original lender but rather bought the construction note with government help when the original lender went under.  Hmmm.

Finally, if a buyer of the 75 units is not the developer, not the construction lender, not the buyer of the construction loan note then is he or she just a buyer?  And if so, isn’t that buyer subject to the same HOA rules that every other buyer/owner at Summit at Copper Square is subject to?  If the 90 people who already own condos there are not allowed to rent out more than 18 condos then why would the buyer of 75 condos be allowed to rent them all out?  And let’s not forget, if an investor does buy all 75 condos and rents them all out, then it will be impossible for the current owners to sell their condos as no bank will loan money on a building with so many rentals.  I would expect the current owners to fight this for sure.

Gang, I spent way more time researching this issue than I ever imagined I would.  And shoot I have more questions now than when I started this quest.  What’s worse is I’m not an attorney and despite my best efforts I don’t know if anything I wrote makes sense or is correct.  I do however wholeheartedly believe that there is one convoluted situation at Summit at Copper Square.  Please, if any of you have a different view on all this, chime in.  I’m anxious to read your input and I’m really anxious to see how things work out at Summit at Copper Square.

About the author

Will Daly Will Daly has specialized in selling and leasing high rise condos and other urban property since 1997... before urban was "in" in Phoenix. His company, We Know Urban Realty has helped more urban buyers, sellers, renters and landlords than any other real estate office in Phoenix. Connect with . If you are ready to talk to an agent about the Urban Lifestyle Click Here

9 thoughts on “Can a New Buyer Rent Out Summit at Copper Square?
Will Daly
Will Daly

Alan,

You ask great questions. Here is what I have heard and/or some of my thoughts:

I have not seen recent financials of the HOA. I can tell you that a lot of the little maintenance issues that existed prior to Stearns taking over have been remedied which leads me to think that the HOA is healthier financially, but that is only a guess.

The building is in escrow to sell and it sounds like this deal will actually go through. If so, I would expect a new infusion of cash to manage the building but that is a complete guess as well. But that is what happened at One Lexington and Ten Wine Lofts so it makes sense that the same might happen at Summit.

Stearns has been renting out units so apparently either the declarant rights issue is a “non-issue” or Stearns found a way to circumvent the restrictions?

You may be correct that maintenance costs will be “spread to a wider base of owners” but I doubt it. I believe that Stearns Bank is currently paying its share of HOA related costs. IF so, then nothing should change with a new buyer coming in. EXCEPT a new buyer might add additional cash in order to make the building more attractive to potential buyers or renters. However, if the new buyer does this I don’t think it will have anything to do with the HOA budget.

If Stearn’s basis is $90k per door I don’t believe that its sale of the condos will hurt prices. To the best of my knowledge Stears has been holding out for a buyer that will pay more than Stearns paid. If so, one would also expect the new buyer to ultimately want to sell at a profit. Prices are already distressed based on the high rise condo market it general. I think a sale of the remaining condos at Summit will ultimately be a good thing.

I have no idea what a court might do regarding declarant rights. That question is way above my pay grade. :-) However, I assume that the only way the issue would go to court would be if someone contested the actions of a new buyer. It is possible that the current owners of the condos (i.e. the folks who bought individual units prior to Stearns taking over) might think that it is better to allow a new owner to lease all 74 units, thereby improving the financial viability of the project vs. enforcing the 20% rule and potentially hurting the building financially.

We will see.

Alan

Will… Thanks for the research and blog hosting. Your insight is objective and vey helpful. I have not seen anything recently about: 1) state of the HOA, or 2) the potential sale of the 74 units by Stearns Bank. What is the latest?

If the 74 units are sold and thereafter declarant rights enable leasing,… My first assumption is the maintenance and general upkeep costs of the building will be spread to a wider base of owners… My second assumption is the value of the units would continue to drop…given the approximate $90k per door paid by Stearns Bank.

Do you think the circumstances might be a catalyst for the courts to enable declarant rights with minimized risk for a defined period of time?..e.g. Two year leasing capability with requirement to begin selling units by some point in the future. I’m simply suggesting the economic conditions might be reason for the courts to consider an interim plan to get the building moving in the right direction.

Thoughts?

Shlummit

The assessment to replenish the reserve fund was set in upwards of $2500 for the unit I was looking at. The assessment date was mid-December ish. I was very excited about the property I was under contract for, it was a corner unit on the 15th floor(#1501) with ridiculous views and a great floorplan. Then the awful state of the HOA began creeping through and single handedly ruined the deal for me. There was a prospective deal to sell the 74 units still owned by the bank, but that fell through this month as well. At the time of my contract, HOA fee delinquency was at about 18%, which makes it nearly impossible to get a conventional loan. It happened to be a Homepath property, so I could have pushed the deal through that way if I was really hellbent on it. But by the end it was clearly a horrid situation, and now the property is relisted for less than their “final” counter offer was. Figured…

lisa

Very interesting and as a previous owner of one of the units I will say that the previous owner of the building changed the hoa’s and never recorded it with the state of arizona. Since there was never enough owners for an HOA to be established the HOA was run by the previous owners. Since none of the previous owners ever received the NEW CC&R’s who really knows what they say. This information came out in one of the Home Owner Association meetings but again don’t take my word for it, do your research before buying anything. The building is more than 18% full of renters I know that for sure.

    Will Daly
    Will Daly

    Lisa – I haven’t heard anything about “new” CC&R’s. How do you mean that it came out during an HOA meeting? Do you have anymore details?

Angie

Any idea what the assessment per owner worked out to be? I would really like to buy a unit at Summit, but I don’t want to fall into a money pit.

Irvine Homes for Sale

Great Read, First thing I would say also would be to rent it out. Eventually things will pick up but hard to say when.

Will Daly

Shlummit – comments like yours are always welcome. It will be really interesting to see what happens at Summit at Copper Square. I really want to see it succeed. W

Shlummit

That’s really an awesome article even though it really does stir up more questions than it answers. I had a recent offer fall through at Summit due to the financial state of the HOA there and other factors. The HOA dues are increasing around %25 across the board in 2011, so instead of paying $430 for a ~1500sqft condo it went up to $530. In addition, there is an assessment this month to replenish the reserve fund, which was literally at $0.00. That’s pretty extreme, and I bailed after learning about this stuff. I’m posting this as a friendly FYI to people looking at Summit, but if I shouldn’t be posting this information please edit or delete my post. Awesome site btw, I check it often even though I’m under contract at the moment.

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