Colorado Real Estate Journal - December 3, 2014

Ways out of the rabbit hole

Alice failed to consider how to find her way ou tof the rabbit hole before she entered it and found herself in a curious wonderland with whimsical rules and no easy path out of the world with mixed-up order. A variety of stakeholders who may have or acquire an interest in a partially finished real estate project that also has been encumbered with declarations of covenants, conditions and restrictions governed by the Colorado Common Interest Ownership Act, CRS 38-33.3-101 et.

seq., may find the path to completing the development to be a similar adventure.

Many real estate projects that were left partially completed or were foreclosed upon during the recession are now opportunities for completion of the development to avoid having blighted property within a CCIOA controlled community. Whether representing a developer, lender, seller or investor in one of these partially completed projects, it is critical to determine the path to successfully develop the pockets of property left vacant prior to acquiring or taking possession of the unfinished project.

One of the threshold issues is to determine the bundle of sticks being acquired. A review of the CC&Rs and the plat/map is critical to determine if the property is included within the CCIOA community and, as a result, subject to the restrictions set forth in the CC&Rs. Additionally, it is critical to determine whether the property was properly annexed into the CCIOA community or whether it was de-annexed from the development in anticipation of the original developer’s desire not to develop the property. Due diligence would include a determination of the “property” being acquired, including access to the property for development purposes, any restrictions on the use or development of the property and the status of any entitlements.

Another issue to consider, assuming the property is subject to the CC&Rs, is the status of the special declarant rights described in the CC&Rs.

Special declarant rights under CCIOA include development rights and other specified rights in the CC&Rs. Have the special declarant rights lapsed or been assigned? Who holds the special declarant rights and may that party transfer the special declarant rights to the party desiring to develop the property? If the property was subject to a foreclosure or deed in lieu, what happened to the special declarant rights in the foreclosure or other sale of the security interest? Were the special declarant rights preserved and can they now be assigned? Critical among the special declarant rights are the rights to make improvements and the rights to use easements through the community to make the improvements.

Section 304 of CCIOA outlines the process for succession to special declarant rights in a foreclosure or sale of a security interest in the property. A person acquiring title to the foreclosed property succeeds only to the special declarant rights that are specified in a writing and recorded at or about the same time by the person when acquiring title to the property. This right may be preserved solely for the purpose of transferring to another party.

Section 304 of CCIOA also states that the period of declarant control terminates unless a transfer of declarant rights is conveyed. Section 304 of CCIOA assumes a lapse of the special declarant rights if the acquirer of the property fails to record a notice of transfer.

Section 210 (5) of CCIOA may provide some relief to both the holder of an interest in undeveloped real property subject to CCIOA CC&Rs and the association attempting to manage and control the undeveloped property.

Development rights lapse under Section 210 (5) of CCIOA unless the association, upon the request of the declarant or the owner of the real estate subject to the development right, agrees to an extension of time with the extension and any terms and conditions of the exercise of the development rights included in an amendment executed by the owner of the real estate and the association.

This provision provides an association with undeveloped property in its community, the opportunity to revive the lapsed development rights and permit the development of the property. Given the association’s duty to maintain and upkeep the community, Section 210(5) is a tool to meet the association’s obligations and permit development of the undeveloped property within the community.

Overall, it is critical to include a process to determine the feasibility of completing the development as part of the purchase or transfer agreement. Part of this process includes having access to the association and any unrecorded documents that govern the development of the property that are not publicly available. The association may have a design review committee and design review guidelines that were not recorded. It is critical to know what the guidelines are prior to the end of the due diligence period, this right must be specified in the purchase agreement, as it is not mandated by CCIOA that nonmembers of the association have access to such documents.

It also is important to provide the developer, lender, seller or investor the right to walk away from the uncompleted project prior to any money becoming nonrefundable, if it is determined that there is no feasible path to develop the project and to get out of the maze of the rabbit hole.