While most people are familiar with condominium structures, can the same be said of townhome developments? How do the two differ? Do townhomes have common and limited elements? What if the home is not a condo or townhome, but located in a “planned community”? How do planned communities differ from condominiums and townhomes? Avoiding the technical legal distinctions for the moment, the basic differences between these three forms of residential structures can be summarized as follows:
Townhomes. Ownership of a townhome includes the land upon which the structure sits. The land in the front and back of the building’s footprint is usually owned by the townhome owner. Thus, when the owner of a townhome receives their property tax assessment, they will see a combined assessment, one for the structure, and another for the land.
When townhomes are built side-by-side, they share a common wall, and the roof spans all of the connected homes. These common areas are owned and maintained by a homeowner’s association, which levies dues for the shared responsibilities. Those portions of the home that are for the exclusive use of the homeowner are limited common elements, and are the responsibility of the owner. Whether the owner, or the homeowner association, is responsible for maintenance is dictated by the terms of the Conditions, Covenants and Restrictions (“CC&Rs”) or “Declaration”. Townhomes are sometimes referred to as “row houses”, where each home shares a common wall with its neighbor.
Condominiums. A condominium is not materially different from a townhome in terms of limited and common areas, except that the entirety of the land and structure is owned by the Unit Owners Association.[1] This means that the tax assessment will not show the unit owner owning any land, because it would be owned by the association.
Loosely speaking, a condo unit consists of a “box of air”. Condominiums can be, and usually are, vertically stacked; townhomes are not, since each one is required to be located upon a separate tax lot. Condos are located upon either a single parcel or multiple parcels of land, all under single ownership, usually in the name of the unit owners’ association.
Similar to the CC&Rs for townhomes, the Declaration for unit owners is important to review, as certain features inside the condo may be designated as limited common areas, and may be the unit owner’s responsibility, such as sliding doors, light fixtures, plumbing, etc. The grounds surrounding a condominium structure are all common areas, for which the association is responsible.
Since both structures – townhomes and condos – include commonly owned property (e.g. the roof of the townhome structure, and elevators in the condo building) there is a homeowner or unit owner association that is set up for levying periodic assessments. The assessments are collected and accumulated for the purpose of creating reserves to replace the capital improvements when their useful life expires.
How do you to determine if property is a townhome or condo? Interestingly, there can be confusion by homeowners themselves when selling their own condo or townhome. The easiest way to determine one from the other is to check the tax assessment; if the property is a townhome, where the ground is also owned, it will be split between the land and structure. If it is a condo, there is an assessment for the unit itself, but not for the land, which is owned by the association.
Planned Communities. Is it possible to have a detached home that is not a condo or townhome, which is in a community that requires a homeowner’s association? Yes. This occurs when the home is a “planned community”, which means that it maintains certain common elements, such as parks or recreational areas. See, ORS 94.550 et seq. These common areas may either be jointly owned by all of the homeowners, or they may be owned by the HOA itself.
Governance Documents. Typically, the HOAs for a townhome or planned community or condo development[2] are non-profit corporations, run by officers and directors. The bylaws determine how the organization will operate, the frequency of meetings, voting rights, and other such regulations for the operation of the entity. Both are required under Oregon law to have annual reserve studies, which determine the depreciable life of the common areas, the cost to fully replace them, and the amount of the assessments to do so. (See, ORS 94.595 for townhomes and planned communities, and ORS 100.175 for condominiums.) Insofar as the governance documents go, there is no major distinction between condominium developments, townhomes, or planned communities.
Tips and Traps. Townhomes, planned communities, and condominium developments all have property that is jointly owned and managed by an association. And if there is an association, there will be dues assessments. Accordingly, what is important in purchasing any of these three forms of residential structures is to obtain and review the association’s governance documents. Also, the Oregon’s Seller Property Disclosure Statement, required by ORS 105.464, should be reviewed. It asks the following questions:
7. COMMON INTEREST
A. Is there a Home Owners’ Association or other governing entity?
B. Name of Association or Other Governing Entity _______________
Contact Person __________________
Address ______________________
Phone Number __________________
Regular periodic assessments: $_____ per [ ]Month [ ]Year [ ]Other _____
C. Are there any pending or proposed special assessments?[3]
D. Are there shared “common areas” or joint maintenance agreements for facilities like walls, fences, pools, tennis courts, walkways or other areas co-owned in undivided interest with others?
E. Is the Home Owners’ Association or other governing entity a party to pending litigation or subject to an unsatisfied judgment?
F. Is the property in violation of recorded covenants, conditions and restrictions or in violation of other bylaws or governing rules, whether recorded or not?
Documents to Request and Review. Below is a list of documents that should be requested and carefully reviewed by prospective buyers of condominium units, townhomes, and homes in planned communities.
- Conditions, Covenants, and Restrictions (“CC&Rs”) or Declaration;
- The HOA articles of incorporation and bylaws, including any revisions or amendments;
- HOA Rules and Regulations, including any revisions or amendments;
- Policies, agreements, notices relating to: age restrictions, pets, parking, any restrictions on rental of homes;
- All minutes of meetings for the preceding months (twelve [12] if not filled in) for the HOA and the board of directors;
- Documents verifying coverage under the current policies of casualty and liability insurance for the HOA and its directors and officers (“D&O insurance”);
- Documents verifying the current HOA assessments and budget, together with any HOA notices relating to potential increases in the assessments or any potential special assessments;
- Documents prepared for the HOA or its directors and/or officers acting in their official capacity, such as inspection reports, studies, bids, or proposals for repair or replacement of any actual or suspected material defects in the structural integrity or safety of the Property, and its limited or common areas;
- Documents relating to any demands or claims made by or against the HOA relating to any actual or suspected material defects in the structural integrity or safety of the Property, and its limited or common;
- Documents showing the latest reserve study conducted by or for the HOA together with current reserve fund figures;[4]
- The total number of homes/units with assessments over 30 days past due, expressed as a percentage of total number of homes/units in the development;
- The total number of homes/units that are non-owner occupied, expressed as a percentage of total number of homes/units in the development.
Conclusion. Buyers need to pay special attention to the governance documents for their seller’s association. Why? Because some associations are run better than others. Are the reserves fully funded? Are there any significant delinquencies? Is there any deferred maintenance of the common areas for which a large assessment will become due? How many units are renter-occupied rather than owner-occupied?[5] Has the HOA ignored a construction defect issue that needs to be addressed?
Lastly, as a part of any due diligence, in addition to obtaining copies of all relevant documents, prospective buyers should reach out to current owners, asking whether the board of directors are doing an adequate job, whether the corporate minutes are up-to-date and accurate, etc. Oftentimes, more can be gleaned from a good conversation with neighbors, than speaking to an officer of the association or reviewing sanitized meeting minutes. ~Phil
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[1] Townhomes are referred to as “homes” and condominiums are referred to as “units”.
[2] Technically, the association for a condominium development is a “unit owners’ association” since each structure is referred to as a “unit”.
[3] This question contains an asterisk next to it, which instructs the seller that if they answered “yes” to attach a copy or explain their answer on an attached sheet. Buyers must be very vigilant here. Even if the seller answers “no” – i.e., saying there are no pending assessments, the prior minutes of the board of directors for at least a year should be carefully reviewed.
[4] There are private companies that specialize in analyzing reserve studies.
[5] Lenders impose maximum renter to owner-occupant ratios. Too many renters is bad for a condo development on several levels, including the ability of buyers to obtain financing. The HOA should have rules in its Declaration or Bylaws setting maximum limits. The same should hold true for townhome developments.
