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Challenges Associated with Mixed-Use Condominiums

Howard Schechter, Partner, Armstrong Teasdale in Legal/Financial on December 7, 2023

New York City

Dec. 7, 2023

There are no standard organizational documents for guidance on the governance of condominiums with a mix of residential and commercial spaces. In some cases, separate boards govern the operations of the residential section and commercial sections, and an overall condo board rules on questions involving both sections or the common elements shared by both. Other mixed-use condos have one board with various committees, one for the residential section and one for the commercial, which are given authority to act on matters affecting only their residential or commercial domain. The key documents governing such structures are typically the condo declaration and bylaws. A nuanced understanding of these unique structures and their legal frameworks is important in order to deal with the challenges that can arise in hybrid buildings. 

Common charge allocations. One of the most common areas where disputes arise is in the  allocation of common charges. Condo bylaws often lack consistency, making it challenging to determine how these charges should be allocated to each section of the building. Disputes frequently emerge around the interpretation of budget allocations from the original offering plan, especially when additional budget items are included or the allocations in the original budget really don't match the actual usage. This can lead to disputes about what the charges should be. 

Commercial tenant dynamics. It’s not uncommon for disputes over common charges to arise when a new commercial tenant enters the picture. There’s often an inherent tension between boards believing commercial entities aren't paying enough and commercial tenants feeling they are being overcharged. The usual format for calculating common charges is to determine the percentage of the budget equal to the percentage of common interest owned or allocated to a particular unit, and this is the percentage that gets paid by the unit owner. 

However, the Condominium Act allows boards to allocate budget items based on actual usage. So items like electricity consumption and other kinds of utilities are often allocated with the actual usage in mind. Often, commercial entities are not paying their percentage of common interest of such items, they're paying less. And so you get disputes about whether the allocation is the right allocation, whether the amount that's being consumed is properly reflected by a particular allocation, and whether the board should exercise its discretion to reallocate based on actual usage.

Preventing disputes. It’s important to understand the correct budgeting process outlined in the building’s governing documents. Often disputes occur when the governing documents are just disregarded. For example, if you're putting in a 3% increase in common charges, it’s easier to just increase everybody 3% across the board. If the insurance is driving the increase and it is supposed to be shared by common interest, it makes sense. However, if it’s labor that’s driving the increase and 15 of the 18 employees service only the residential section, the commercial entity is going to be disproportionately impacted in a way that violates the documents. To avoid disputes, the starting point is to look at the documents, discuss with your attorney what the correct manner of doing the calculation is, and present a budget that tries to meet those requirements.

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