Condominium Issue with Long-Term Tax-Exempt Bond Financing

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July 5, 2017

We recently helped a client complete long-term tax-exempt bond financing of a portion of a mixed-use condominium. These projects raise interesting issues. Long story short, if you find yourself in a similar situation, you need to be very careful as to how you document costs and how you define each condominium element.

Quick, simplified background: The mixed-use project was originally owned by a limited liability company consisting of two members, a for-profit entity and a non-profit entity. Once construction was completed, the plan was to split the condo by deeding the commercial units to one member in exchange for surrendering its membership interest in the limited liability company. Thus, one member would own the commercial condominium unit outright, and the other member (as the now sole owner of the limited liability company) would own the other unit outright.

The limited liability company had originally obtained conventional financing for the construction of the development. After the membership interest redemption took place, the tax-exempt member decided to re-finance their project costs with a long-term tax-exempt bond. This is where things got interesting since no portion of the tax-exempt bond could be used to reimburse costs incurred by a non-profit entity.

A normally set up condominium has the internal portions of the respective units classified separately from the roof, exterior walls, vent pipes running from the first floor to the roof, and shared services (electrical, water, etc.) which make up the common elements. However, because a non-profit owned the residential unit, the exterior walls and roof of the building, among other items, could not be classified as common areas as the tax-exempt member wanted the bond funds to be used to finance most of those portions of the building that it was paying for, too.

So, we had to first go through all of the building costs to trace and identify those costs and payments that were part of the building solely owned by the non-profit. Then, we also needed to revise the standard condominium documents to make the unit descriptions akin to a layered cake – most anything on a layer, whether or not the same is customarily a common element, had to be part of one unit or the other, so there could be very little common area.

We were able to find solutions that worked for all of the parties, but it took a lot of detailed work and careful drafting to get things right.

Moral of the story: If you’re going to be doing long-term tax-exempt bond financing for a condominium unit, try to anticipate the accounting and tax concerns before incurring costs. This will make drafting the condominium documents much easier later.

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