There has recently been a lot of talk about the health of individual Condo Associations and Projects, and what constitutes a safe Condominium investment. The Chicago Tribune ran a terrific article a couple of weeks ago about this very topic, and frankly, scared the bejeezus out of a lot of potential buyers and realtors. You can see the article in its original form here. Chicago Tribune - Condo Deals Die Article
This article touches on a number of things, which we are going to cover here over the next week or two, but something I have been running into a lot lately is the way Fannie and Freddie are now viewing Commercial Space in Condo Buildings. If you live in a major city, this could very well affect you.
Fannie Mae, Freddie Mac and FHA have long had guidelines in place that state that a Condominium Project cannot contain more than 20% Commercial Space. So, what constitutes 20% commercial space? Technically it is supposed to be square footage. When a developer has the Declarations written for a building, there is a survey done of the building itself and the square footage that belongs to each individual unit. This is used to determine the amount that each unit pays into the HOA for dues.
Now, picture any four unit condo building on a commercial thoroughfare in Chicago. While it might seem obvious from the street that each unit takes up the same amount of space, and that 100% divided by 4 is 25% each, that isn't usually the case. In most cases, the survey will include parking that may only belong to the residential units, or common space like a roof deck, or a deck above a garage, that only belong to the residential units, that push the percentage of ownership of the commercial space under 20%, thus conforming to Fannie/Freddie/FHA condo guidelines.
When the commercial space still doesn't conform to this 20% threshold, it has long been commonplace to separate the commercial units from the residential Home Owners Association. Until recently if the commercial spaces didn't appear in the declarations and didn't contribute to the HOA, they were not considered part of the residential project and were excluded completely. Recently, Fannie Mae, Freddie Mac and FHA have clarified this issue and this no longer holds true. If you have commercial space in a condominium project, regardless of whether they are part of the residential condo association, that square footage is now factored into the condo approval.
This is not a big deal in our first example, but a very big deal for many existing condo projects. For instance, if you have a 3 unit condominium building on a commercial thoroughfare, you are virtually out of options for financing. Another example would be some older condo conversions with multiple commercial and even multiple levels of commercial space, and no clear declarations stating percentage of ownership, because maybe these units were never part of the association.
So, what are your options then? They aren't good. If you fall between 20%-25%, and the rest of the association is in good shape and you have a strong file in terms of the borrower, there is a good chance you can get an exception through Fannie/Freddie. You can also generally find a portfolio lender that will overlook the percentage of ownership, but at a higher down payment. If you are between 25%-30%, you can apply for an exception, but the higher the percentage of commercial, the less likely you get it approved.
If you are in a property where the percentage of commercial is over 20%, you may want to look at the original survey and see if it is truly reflective of where your current project is. For instance, if a roof deck was added, or common space was added over a garage, they property now has more residential square footage, and the Declarations could potentially be changed. The original survey may also have been done incorrectly and the commercial space, when including common elements belonging to the residential units, may just be incorrect.
If you are in one of these larger buildings where the square footage isn't clear at all, it's best to be prepared when you go into this either with documentation showing the calculated square footage. At the end of the day, it's a judgment call by the appraiser as to exactly what percentage is residential verses commercial, and even they aren't always sure. A single appraiser doesn't always even have the type of access that would be necessary to walk off an entire properties square footage, much less the time or patience to do so in the first place. Remember, these guys are only making a couple hundred bucks to be out there for a very short period of time.
If you have any questions, feel free to reach out to Your Chicago Mortgage Guy!
Joe Burke
Your Chicago Mortgage Guy
773-742-6707
joe@yourchicagomortgageguy.com
