By: Kurt W. Porter
Most land developers may be familiar with the basic concepts of common interest communities, or “CICs”. Often when one thinks of CICs, the first thought that comes to mind is townhomes: each person owns his or her residential unit and contributes (usually through an association fee) to the taxes, insurance premiums, maintenance costs, or construction costs associated with a different area of land that is generally available for use to all others in the CIC, often called “common area.” While townhomes are often cited as the quintessential CIC, not all CICs need be set up as townhomes. In fact, CICs need not be residential land developments at all and may be used to create storage units, boat slips, and many other types of non-residential uses.
This series addresses the concept of CICs in Minnesota. It is an ever-changing area of law that is complex and laced with numerous pitfalls for the unwary developer. This is true from the very beginning of a land development when one must determine what type of CIC is the best fit for the intended use of the property. It is also important to note that the laws regulating CIC’s are very dynamic and materially change regularly, both by changes in statutes and Court decisions.
To begin, a CIC may be “flexible”, which merely indicates that land may be added to the CIC at a later time. While the designation may seem inconsequential, a flexible CIC has additional requirements that must be considered before the CIC is even created. An informed decision as to whether or not a CIC should be designated as flexible can help save many headaches down the road. As a buyer, the purchaser of a CIC unit in a flexible will want to know whether the purchased unit is part of an existing unit that will not expand, or may be only a less important unit in a larger and ever expanding project.
Whether or not a CIC is flexible, all CIC’s must be one of three types of CICs in Minnesota: (1) a “Condominium”, (2) a “Cooperative”, or (3) a “Planned Community”. These three types of CICs are distinguished and characterized by the level of ownership afforded to the individual property owners in the CIC. For instance, in a cooperative, a homeowner’s association owns all the real estate, which is divided into “units”, and each member of the homeowner’s association is entitled to lease a unit (this is very important for finance purposes because the leasehold interest is personal property and cannot be mortgaged, which complicates buyers obtaining financing for lenders who are not familiar with cooperatives). Whereas the owner in a condominium CIC owns his or her unit, but the unit is typically defined as the space between the walls, ceiling, and floor (and, thus, does not include the structure around the unit, i.e., the building in which the unit is located). In a planned community, again the owner owns the unit, but units in planned communities are generally defined to include at least the structural residence (if not also the land around the structure). Planned communities are the most frequently used type of CIC in Minnesota.
There are both short term and long term considerations that must be taken into account for each of the three types of CICs. The Minnesota legislature has taken great pains to draft the CIC statutes to favor and protect unit purchasers (including prospective unit purchasers). As was mentioned earlier, the CIC statutes are extremely complex and ever changing, and strict compliance by the developer is legally required to avoid potentially severe adverse consequences. The absolute necessity of advice from an experienced real estate attorney at the inception of the development cannot be overstated.
*This article does not constitute legal advice and is not intended to constitute advertising or solicitation for legal services. Nothing in this article should be construed by you as a source of legal advice. You should not rely or act upon the contents of this article without seeking advice from your own attorney.