Converting An Office Building To Commercial Condominiums

by Shaun Pappas

Rudder Property Group sat down with Shaun W. Pappas, Partner of Starr Associates LLP—one of New York’s pre-eminent law firms providing comprehensive legal representation for the real estate industry—to learn more about the process of converting an existing office building into commercial condominiums.

How long does it take to convert an office building into office condominiums for sales?

Typically a commercial condominium offering plan takes about 3 to 5 months to be accepted by the Attorney General’s office (AG). There is a comment stage after the offering plan is submitted where the AG can request additional information or clarity on the property and the disclosures made.

What consultants are needed to execute this process?

The best way to ensure a smooth conversion process is to assemble a team with experience converting properties to condominiums. To successfully execute an office condominium conversion you’ll need an architecture firm (to provide a building condition report), tax attorneys (to provide tax projections), income tax attorneys (to provide an opinion on mortgage deductions), budget experts (to create the initial budget for the property) and brokers (to certify common interest and conduct sales efforts).

How do residential and office condominium plans differ?

They are actually somewhat similar. The biggest difference is that an occupied commercial building falls under a Part 20 Offering Plan (AG regulations), which allows for a faster review and comment stage. An occupied residential building is a Part 23 Offering Plan and takes about six more months for review and approval and has a multitude of residential tenant protections and requirements to adhere to.

In addition to standard condominium plans, what are other options for conversion?

A commercial land owner can also submit a no-action letter for faster approval. However, this is typically only permitted to create two- to three-unit condominiums LEGAL CORNER CONVERTING AN OFFICE BUILDING TO COMMERCIAL CONDOMINIUMS where the owner is not making a public offering but has a targeted purchaser who is a sophisticated investor and thus does not require protection of the Martin Act and AG regulations.

What are the costs of converting?

The cost is generally around $100,000.

What’s the difference between an office co-op and an office condominium?

If you own a condominium, your unit and a percentage of the common elements belong to you. The Unit is a deeded interest. A co-op owner, often called a shareholder, does not own the physical unit. In fact, we call that person a tenant under a proprietary lease. The co-op—which is usually a corporation consisting of all the shareholders—owns the entire building, including all of the individual units. Each co-op owner holds shares in the association (just like owning shares in any other corporation) under the “proprietary” lease. That lease spells out the rights and responsibilities of the owner, as well as the obligations and duties of the association.

Are there any forthcoming changes coming to the condominium conversion process?

The residential real estate world was changed dramatically after Governor Cuomo signed new legislation related to rent regulation reform. Part of this legislation applies to changes made to the conversion of occupied residential rental buildings, which makes it significantly more challenging to declare your offering plan effective if there are tenants in place at the time the offering plan is accepted — there is now a requirement that 51% of tenants in occupancy on the date the offering plan is accepted for filing must agree to purchase dwelling units before the offering plan can be declared effective. The good news is that the recent reforms to the General Business Law as they relate to the condominium conversion process in New York do not impact conversions to commercial condominiums.

What is a CPS-1?

The CPS-1 is a cost effective tool to test the market prior to submitting an offering plan. It permits an owner to set up a website and solicit interest from the market on the condominium conversion. The owner cannot enter into any deals or contracts but can get a better understanding of the appetite for the project from a market perspective.

What if you don’t sell the entire condominium?

This is the best news. The owner can retain the unconditional right to rent rather than sell units. So long as the owner sells the minimum number of 15% required under the AG regulations, the owner can then rent the remaining units in perpetuity.

Link to full article: Legal Corner

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David Penick, Vice President

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“As an active developer in New York City, Magnum Real Estate Group is proud to have partnered with Starr Associates, LLP as our legal counsel in 5 significant projects valued at approximately $800 million. Over the last 5 years, Starr has provided us with exceptional advice on condominium Offering Plans and related transactions. Partner Samantha Sheeber, Esq. and her team have professionally guided us, and provided creative and effective solutions when needed.”
Susan DeFranca, President & CEO

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Michael Rudder

Rudder Property Group

“Starr Associates’ specialty in the creation and representation of condominiums is unmatched. Their knowledge, experience and professionalism in the office condominium sector is best-in-class. Starr Associates’ hard work and expertise has been critical to the success of our firm’s office condominium projects.”
Charles Bendit

Co-CEO Taconic Investment Partners LLC

“Starr Associates have been our condominium attorneys for many years. Their counsel goes well beyond just drafting the condominium documents, which of course they do extremely well. They also represent us and our brand with condominium unit purchasers, and with our lenders and partners on condominium related matters. We have always found Starr’s attorneys to be professional, responsive and cost-conscious.”