Q: My husband and I have in put an offer on a first floor gut-rehabbed condo unit in Chicago.
As part of the contract, we asked that the developer allow us to duplex the condo with the basement below.
Rather than duplexing down, he offered to give us a large part of the basement as a limited common element. He said that he didn’t originally apply for a permit on the basement, so he couldn’t officially sell us the basement as real estate.
The basement already has plumbing installed for a bathroom, so the developer has suggested that we can turn the basement into a family room and join it to the first floor by adding stairs to the condo.
Second, the attorney for the developer suggested that it would be much easier for us to apply for a permit on the unit to turn the basement into a part of our home than it would be for the developer.
The attorney said the builder can’t wait on the city to re-do the permits, and suggested that we wait 3 to 6 months after we buy the unit to apply for permits with the city. He suggested that if we want to be certain that we can get a permit, we could put a 15 to 30 day due diligence clause in the contract, so that we can investigate whether the basement (as a limited common element) can actually be turned into real estate, so the unit is officially considered a “duplex.”
Do you foresee any legal issues or problems if we turn a limited common element into our “basement family room?” Is a 15- to 30-day time period is feasible to find out if this can be done? What else should we be thinking about?
A: The most important part of your question is somewhat loaded. You already know that having the developer duplex down into the basement area is the preferable way to go.
To create a condominium, a developer or other person must comply with each provision of the applicable state statutes. Usually parking spaces, garages, balconies, roof decks, storage spaces, garden areas and the like can be designated as a limited common element.
There are differences in the way you own a fee interest in a condominium and the way you own a limited common element of a condominium.
Ownership of a condominium interest means that somebody owns and generally has exclusive control of some space within a condominium development to call his or her own. He or she can use that space exclusively and has a certain percentage of ownership interest in the condominium association and the building as a whole (the common elements of the building — outside walls, the land on which the condominium sits and other common areas).
A limited common element is carved out of the common elements of the building which ordinarily could be used by all and designated for the exclusive use by one owner. Generally, ownership of a limited common element does not entitle the owner to “voting” rights. Thus if you have 10 units in a building and each unit is designated as a 10 percent owner of the building, when it comes to elections in the association and paying assessments, each owner would pay 10 percent of the costs and could vote as a 10 percent owner of the building.
Depending on how the condominium declaration is drafted, if the basement of your building is made into a limited common element and if other elements in the declaration are not reviewed and changed, you could end up with the basement, but your percentage interest in the association might be too low and other inequities could arise by creating a large unit for you but causing a large part of your home to be a limited common element.
While in Illinois you may be able to have a large part of your home be a limited common element even if it skews many issues in the condominium declaration in your favor and maybe against you, some other states may not allow it.
You should work closely with a knowledgeable real estate attorney to review the condominium documents to insure that your interests are protected and that the association does not retain some of the rights that they otherwise would have for other types of limited common elements.
For example, if you have a parking space in a garage, the association would usually retain the right to maintain the parking spaces, repair them, redecorate them and for all practical purposes close them off while they make repairs.
Also, the condominium documents usually limit the use of limited common areas to a specific use: a parking space for the parking of automobiles, a wine storage area to the storage of wine, a storage room to the storage of personal items, etc. Some of these issues would not apply to you if the basement was part of your “unit” and not designated a limited common element.
But if the basement was designated as a limited common area, the condominium documents would have to permit you to use the space as you would your home. But if the developer drafts the documents this way, he would, in fact, be marketing the basement as living space to you contrary to the permits he obtained.
Setting aside the rather legalistic conversation about whether your basement would be a limited common element or not, the bigger issue is whether you can convert the basement area into living space based on local zoning laws, building codes and other local ordinances.
Here’s the kicker: Don’t you think the builder would have already explored the idea? Don’t you think he’d have already thought how much extra money he’d make by converting the basement area into living area? Doesn’t it seem likely he would have already explored the possibility, realized he couldn’t do it legally and decided not to take the risk?
Most developers try to maximize each square foot of space in a building they are developing to try to get the most money from the development.
What the attorney and developer are telling you just feels wrong. It’s a guess, but we’d be willing to bet that the builder decided against duplexing down into the basement because they felt that either they’d have problems with the rest of the building, or they couldn’t get the permits for it, or there were other issues that would give the developer a headache.
You certainly talk to someone at the building department about your situation. Some municipalities are quick to give you advice, others may require architectural blue prints and plans for them to review before they could tell you definitively whether you could do it or not.
You will probably find that the City of Chicago will be the later rather than the former and if you decide to move forward you’ll have to do it on a leap of faith.
Is it a good bet? Well, if you’re not paying a premium for the basement, a leap of faith might be worthwhile. The most you’d lose is your time and you’d end up with a much smaller condominium with a large storage area in the basement.
In the best case, you’d end up with a large duplex condominium and would have to be sure you have title insurance to cover the basement area to give comfort to subsequent buyers that you have exclusive rights to the basement in perpetuity.
Tread carefully and make sure you have a good real estate attorney working with you to help you decide how much risk you’re willing to take in your venture.