The Hidden Costs of De-Condominiumizing
May 31, 2023
In a previous blog post, we discussed how a property’s condominium status can be terminated. We expect “de-condominiumizing” or terminating/dissolving condominium corporations to become a more common and attractive option for owners as buildings age and maintenance/repair costs increase. Real estate investors might also consider de-condominiumizing investment properties and conversion to rental apartment buildings. However, de-condominiumizing can have unintended tax consequences and owners should seek legal advice so they can fully appreciate all the pros and cons of this option.
Take, for example, the situation in which the owners of College Plaza recently found themselves, in the following decision: Governors of the University of Alberta v Edmonton (City), 2022 ABCA 290.
College Plaza is a single title, mixed-use, commercial and residential apartment complex located near the University of Alberta campus and owned by the University. As the owner of the building, the University challenged the City of Edmonton’s property tax assessment arguing that rental apartment buildings should benefit from the same tax advantages as rental condominium buildings.
Property taxes are levied according to the property’s assessed values. The Municipal Governance Act (MGA) sets out how properties are assessed for tax purposes. Different assessment rules apply to condominiums and apartments. Drawing on all applicable laws and regulations, the City of Edmonton determines their “Assessment Methodology” which sets out the factors that are considered and the various models that are applied when determining a property’s assessed value.
The City of Edmonton’s 2019 Assessment Methodology assigned a 20% downward adjustment to the assessed values of rental condominiums (the “Rental Ownership Factor”). This applied to multi-title condominium buildings, where all units were owned by the same owner and all units are rentals. The owner of College Plaza questioned the distinction between rental apartment buildings and rental condominium buildings arguing that both types of properties are essentially the same, and thus, should be taxed similarly. The Alberta Court of Appeal disagreed, identifying important differences between rental condos and rental apartments, and found it was reasonable that these properties would be taxed differently.
The Court of Appeal found that the 20% downward adjustment acknowledged two unique characteristics of rental condominiums:
- Rental condominium buildings are subject to increased wear and tear, which results in the common property needing more frequent maintenance and upgrades, and an overall decrease in the value of the property as compared with owner-occupied condominium properties.[1]
- Sole owners of rental condominium buildings act as a non-arms’ length board and are subject to different statutory obligations under the Condominium Property Act that adversely affect the marketability and the value of a rental property (for example, there is no requirement for a reserve fund to be maintained where al the units are held by a single owner).[2]
The key take away for condominium owners and investors considering purchasing a condominium building as a whole, or all units in a condominium building where rental is the intended use, is that, depending on the municipality, important property tax benefits may be lost by de-condominiumizing or converting the property to a single lot, block and plan. Anyone contemplating de-condominiumizing should seek legal and tax advice.
For more information on de-condominiumizing or condominium law in general, contact us.
[1] Paragraph 8.
[2] Paragraph 14.
I live in a 36 home bare land condo community. We are having difficulties getting board members but do not want to pay a management company thousands of dollars when we need members to step up anyway. How can we dissolve the condo corp and become 36 private residences? Can I become a private residence on my own?
Please see our blog post on condominium termination here: Aging Condominiums: Repair or Terminate?. For bare land condominiums, there can be other challenges to termination, including ownership of roadways, curbs, sidewalks and boulevards, underground utilities servicing and drainage, among other things. Termination is also likely to be a very costly process. I suggest the board obtain legal advice on its options.
Hi Erin,
We own a majority of condos in a 17-unit building in Red Deer and over the last ten years values have dropped dramatically on single condo units in the building.
I have been told to convert each unit in the building back into an apartment building as a single ownership group would increase the value (larger than the sum of the parts), lower financing costs, and lower operational costs including management costs.
Can you suggest any books or written content that support the idea of converting single-residential condos in an apartment setting back to an apartment building with one ownership group?
What is your opinion on converting single-apartment condos back to a one-owner apartment building?
Thanks,
Rick
I’m not an expert on real estate values or appraisals, and can’t comment on the desirability of terminating condominium status in terms of its effect on value or operational costs. However as the case described in this blog post notes, there may be significant tax benefits which are lost if the condominium is terminated and the property is converted to a single lot, block and plan. In terms of potential effect on costs, this is certainly something that I suggest be considered. Further, the minority unit owners may not wish to terminate the condominium and could block your efforts through the court by demonstrating that termination is not just and equitable having regard to the rights and interests of the owners as a whole. This would substantially increase the legal cost of the termination process itself and perhaps delay it indefinitely. In some circumstances, termination makes sense and can be accomplished in a cost-effective and straightforward manner, perhaps even without a court application (by special resolution), but each case is very fact-specific such that it’s not possible to render an opinion one way or the other without a thorough review of the circumstances and details. For more information on termination/dissolution processes, approvals, owner and mortgagee rights, and entire condo sales, you might refer to a recent text: Condominium Law in Alberta, written by some former colleagues of mine, Roberto Noce and Michael Gibson. It provides a general overview of this topic.