The previous post in this series, “What Are CICs”, introduced a few of the most basic concepts related to common interest communities, or “CICs”. As was briefly discussed, all CIC’s in Minnesota are one of three types: (1) a “Condominium”, (2) a “Cooperative”, or (3) a “Planned Community”. This post explores the three types of CICs and some of the factors that may be considered in determining which type of CIC to use. With this, however, comes the obvious disclaimer that each individual situation is different and the factors listed here are only some that may be applicable in a general sense.
The first type of CIC is the most frequently used, likely because it is the most broadly defined. Any CIC that is not a Cooperative or a Condominium (the other two types of CICs) is a “Planned Community”. In a planned community the owner owns the unit. Units are generally defined to include at least the structural residence (if not also the land around the structure). There is an owner’s association tied to the planned community; the owner’s association will own and maintain all other property in the planned community that is not a unit. This other property is known as the common property. Another reason planned communities tend to be used more frequently is because the ownership structure of a unit in a planned community is generally easier for potential buyers to understand. The homeowner owns his or her unit, and the owner’s association owns everything else. For the same reason, financing to purchase units in a planned community tends to be easier than, for instance, in a cooperative. Planned communities work well for, among other things, townhomes and single family detached homes.
In a Condominium-type CIC, a unit owner owns his or her unit, which 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). This is a drawback for those if the condominium CIC is new construction; a condominium unit does not physically exist until all the floors of all the buildings (if there is to be more than one residential building) are framed in. Unlike a planned community, where a separate entity (the owner’s association) owns the common elements of the CIC, in a condominium CIC unit owners share an undivided percentage of interest in the common elements. This may be a marketing point for the sale of units, as some potential buyers will undoubtedly enjoy the idea that they own an interest in the common elements of the property. Similar to planned communities, condominiums are fairly easily financed, which may make them more marketable to the consumer.
Cooperatives are relatively rare in Minnesota. This may be for a number of reasons. For instance, instead of owning a unit (or any real property), a person owns a membership interest or share in the cooperative. It should be noted that the ownership interest in a cooperative is more often than not deemed as personal property but in rare instances may be couched as real property. As a member of the cooperative, the member is entitled to lease a particular unit in the cooperative. Because the individual units are not separately legally defined, financing can be troublesome. A lender does not have a separate legal description to which it can attach a mortgage as security. Instead, the lender must use the membership interest in the cooperative that is merely pledged as security against the loan by the owner. Only a minority of lenders in Minnesota will have the experience or ability necessary to finance a cooperative. Obviously, this can make marketing membership interests in a cooperative difficult.
The factors discussed above are only some of the many considerations one should undertake before delving into the arduous process of creating a CIC. 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.