Condominium ownership is considered a hybrid form of ownership because it falls outside traditional structures of property ownership. Certain legal and technical characteristics help define condominium ownership:
Individually Owned Unit
In condominium ownership, an individually owned "unit" is an enclosed space that exists within specified boundaries, as with a one-room unit. The space can also consist of multiple rooms and the interior walls that divide the rooms in that unit, as well as balconies, patios or storage areas. Even though the unit is only airspace (and no land), for legal purposes a condominium unit is still considered to be real estate.
All other parts of the property are called the "limited common elements" or "common areas." The ownership of these areas is shared by all of the unit owners. The common areas include:
- All parts of the building other than units, including the basement, ceilings, elevators, floors, foundation, halls, lobbies, roof, etc;
- All installations for central services, including heating and air conditioning, electricity, gas and water;
- The land on which the building stands and the parking areas;
- Community facilities, such as boat docks, clubhouses, gardens, playgrounds, tennis courts and swimming pools.
A condominium unit owner's interest in real property (or real estate) is conveyed by deed. The interest is comparable to that of any other owner of a freehold estate in real property, and the owner is free to sell or convey his or her interest at will. Like other types of property, ownership can be held by an individual, by two or more individuals as tenants in common, by a husband and wife as tenants by the entirety, or by a business entity.
Like any other property owner, the condominium unit owner's must pay real property taxes. For tax purposes, each unit and its associated percentage of the undivided interest in the common areas is deemed a parcel and is individually assessed and taxed. The common areas are not separately assessed or taxed, and each unit owner is liable only for the taxes on his or her parcel.
SEE: How Property Taxes Are Calculated
Unit Owner's Association
A unit owner's association, or condominium association, is established at the time the condominium is created to enable the various unit owners to manage and maintain the property together. Often, the association will hire an outside property manager to handle the managing of the development. Certain developments have both a condo association and a homeowners' association where each is responsible for certain aspects of the development's managing and maintenance.
The covenants, conditions and restrictions (CC&Rs) of the condominium development are the governing documents that determine how the association operates and what rules the owners (and any tenants and guests) must obey. These are legal documents that are sometimes called the bylaws or the master deed. CC&Rs might dictate, for example, the color of any interior window treatments or the size of allowable pets. The consequences for breaking a rule include fines, forced compliance or a lawsuit. Because the CC&R is a legal document, any questions or concerns should be reviewed with a qualified attorney prior to making any offers on the unit.
Each unit owner is responsible for paying monthly, quarterly or annual dues to the association to cover management and maintenance expenses. The dues cover fixed and variable expenses such as building insurance, garbage removal, landscaping, pool maintenance, taxes and the funding of a reserve fund. If the association has not saved enough money in the reserve fund, a special assessment may be charged to unit owners to cover special projects and improvements, such as a new roof or repairs to the furnace. These topics will be covered in more detail later in this tutorial.
Condominiums versus Townhouses
While condominiums and townhouses appear to be very similar, there are certain legal differences between the two:
- A condominium unit owner individually owns only the enclosed space within the unit. A townhouse unit owner, on the other hand, owns the unit in severalty, the physical structure and the plot of land on which the unit stands.
- The common areas in a condominium development are owned by all unit owners as tenants in common. Conversely, the common areas of a townhouse development are owned by a homeowners' association.
InvestingCondo fees and special assessments scare many owners away from condo ownership, but is this fear justified?
Managing WealthLearn the pros and cons of buying a beach condo in California, and how to protect yourself from common pitfalls many condominium buyers experience.
InvestingFind out how best to claim and convey ownership on your assets.