In Texas and nationally over the past 15 years, we have seen a higher number of condominium projects being developed. The reasons vary, but include a desire for greater density as a means to accommodate higher land prices and/or construction costs, changing demographics, and/or a means to offer the option for homeownership with a higher level of service and amenities. Affordability enters these projects to take advantage of state or local regulatory development incentives or access to specialized development lending or capital. To realize these incentives or lending and development requirements, the developer must often agree to set aside a certain proportion of the condominiums for purchase by owners meeting defined income qualifications. These projects are commonly referred to as mixed-income, meaning there is a blend between market-rate and affordable homes. Generally, the affordable component in mixed-income projects ranges from 5 to 20% of the total number of homes being sold.
There are differences between the market-rate and affordable buyers. The affordable buyer is more sensitive to community expenses and unexpected increases (condominium assessment and special assessments). What was initially an affordable home can quickly become unaffordable. Community decisions are most often made by a majority of the board of directors of the condominium association, and those board members are elected by homeowners. Since in the mixed-income project, affordable homeowners often constitute well less than a majority of owners, there is the prospect that the affordable homeowner perspective will be missing from important community decisions.
Here are a few suggestions to address some of these issues:
Financial Sustainability
- Consider whether there should be an assessment discount for affordable homeowners. Obviously, this raises the dues for market-rate units.
- Pay particular attention to the initial community maintenance budget, specifically replacement reserves. A major oversite can cause immediate fiscal stress for all homeowners, especially an affordable homeowner. Consider whether a pre-construction reserve study should be prepared to more accurately predict ongoing capital replacement costs.
Social Sustainability
- To establish buy-in, consider disclosing in the community and sales documents the presence of affordable homes with, if appropriate, statements outlining the benefits of a mixed-income project. These disclosures should be part of the documentation provided to both market-rate and affordable buyers during the sales process.
- Consider requiring that an affordable homeowner have a position on the governing board of the community. In most cases, though laws do vary by jurisdiction, the community documents can be structured to create dedicated participation by representatives of both the market-rate and affordable homeowners.
- Consider implementing an education and training program for both market-rate and affordable homeowners regarding operation and administration of their community. Ultimately, the owners will be required to elect representatives to make decisions regarding maintenance, operation, and repair of the community, including the development, over time, of policies and procedures for the community. Most owners, irrespective of their economic status, have little to no experience in overseeing a community or a framework for making decisions that may affect multiple owners.
CONTACT:
CONTACT:
Bob Burton I 512.370.2869 I rburton@winstead.com
Bob Burton is a Shareholder and Department Head at Winstead, where he leads the firm’s Real Estate Development, Real Estate Finance, and Public Finance practice areas. He has significant experience advising clients on mixed-use developments, master-planned communities, and complex community governance structures. Bob counsels national homebuilders and real estate developers on all aspects of residential, commercial, and mixed-use projects, including land acquisition, entitlement, project structuring, marketing, and regulatory compliance. His work spans large-scale master-planned communities, urban and suburban mixed-use developments, resort and second-home communities, and multifaceted condominium projects across the country.
