One of the most overlooked obligations of a condominium developer is the payment of proportionate share of expenses to the condominium association. This is likely due to the fact that condominium associations frequently confuse the terms “assessments” and “proportionate share of expenses.” This article will identify the differences between “assessments” and “proportionate share of expenses” and identify the proper manner in which each should be collected.
Understanding a Developer’s Obligation to Pay Expenses in Michigan
The Michigan Condominium Act outlines the obligations of all co-owners, including the developer, to pay for operational expenses of the condominium association. MCL 559.169 provides as follows:
(1) Except to the extent that the condominium documents provide otherwise, common expenses associated with the maintenance, repair, renovation, restoration, or replacement of a limited common element shall be specially assessed against the condominium unit to which that limited common element was assigned at the time the expenses were incurred. If the limited common element involved was assigned to more than 1 condominium unit, the expenses shall be specially assessed against each of the condominium units equally so that the total of the special assessments equals the total of the expenses, except to the extent that the condominium documents provide otherwise.
(2) To the extent that the condominium documents expressly so provide, any other unusual common expenses benefiting less than all of the condominium units, or any expenses incurred as a result of the conduct of less than all those entitled to occupy the condominium project or by their licensees or invitees, shall be specially assessed against the condominium unit or condominium units involved, in accordance with reasonable provisions as the condominium documents may provide.
(3) The amount of all common expenses not specially assessed under subsections (1) and (2) shall be assessed against the condominium units in proportion to the percentages of value or other provisions as may be contained in the master deed for apportionment of expenses of administration.
(4) A co-owner shall not be exempt from contributing as provided in this act by nonuse or waiver of the use of any of the common elements or by abandonment of his or her condominium unit.
Accordingly, the condominium documents will typically set forth the developer’s obligations to make a financial contribution to the condominium association, subject to the requirements contained in MCL 559.169. In some cases, the developer is obligated to pay full assessments, similar to any other co-owner. Accordingly, in these situations, the condominium association would simply collect assessments in the same manner as any other co-owner. However, in many cases the condominium documents will require a developer to pay “proportionate share of expenses” and identify specific expenses that a developer is required to pay.
What Are the “Proportionate Share of Expenses” for a Michigan Condominium?
Many developers will include a provision in the condominium bylaws that requires a developer to pay proportionate share of expenses instead of full assessments. While the provisions may vary depending on the developer, sample language requiring a developer to pay proportionate share of expenses is as follows:
During the Construction and Sales Period, the Developer, even though a member of the Association, shall not be responsible for payment of the monthly Association assessment. The Developer, however, shall during the Construction and Sales Period pay a proportionate share of the Association’s current maintenance expenses actually incurred from time to time based upon the ratio of Completed Units owned by Developer at the time the expense is incurred to the total number of Units that may be created in the Condominium. In no event shall Developer be responsible for payment, during the Construction and Sales Period, of any assessments for deferred maintenance, reserves for replacement, for capital improvements or other special assessments, except with respect to Occupied Units owned by it.
While it is an unpublished case, and not binding authority, at least one court decision has determined that a developer can pay less than the full amount of assessments by paying proportionate share of expenses, based on the language of the condominium bylaws. Specifically, the Michigan Court of Appeals has stated:
…the trial court issued its decision and held that Warren Financial was liable to “plaintiff for its pro rata share of expenses of administration, consistent with Article II, § 8 of the Bylaws,” and had to pay $96,565.60. But the court also ruled that Article II, § 8’s developer exemption was valid under the Condominium Act, MCL 559.101 et seq., and that it exempted Warren Financial’s liability for assessments.
Reserve at Heritage Vill Condo Assn v Warren Fin Acquisition, LLC, unpublished opinion of the Court of Appeals, issued December, 18, 2018 (Docket No. 339765), 2018 WL 6625256, p *1. Accordingly, given that the developer’s obligations to pay assessments or proportionate share of expenses will largely be determined by the specific language of the governing documents, it is important for a new condominium association board to consult with an attorney to determine whether a developer has honored its financial obligations to the association.
What Is the Difference between “Assessments” and “Proportionate Share of Expenses?”
Generally speaking, assessments are determined based on a budget for the upcoming year. Accordingly, once the overall expenses of the Association are estimated, a budget is created, and the amount of the overall expenses contained in the budget is apportioned among the co-owners. Accordingly, payment of an assessment is typically made in advance of the condominium association actually incurring operational expenses. In contrast, proportionate share of expenses that are paid by a developer are typically calculated differently. In addition to being limited to specific categories of expenses, proportionate share of expenses are not billed until they are incurred by a condominium association. Unlike assessments, which are based on an estimated budget, proportionate share of expenses are based on expenses that have actually been incurred.
Have Additional Questions About a Developer Proportionate Share of Expenses? Contact Hirzel Law Today
Given that the timing for billing for proportionate share of expenses is typically different than assessments, it is important for condominium associations and property managers to keep track of the actual expenses and bill the developer appropriately. At the time that a condominium association is transitioned from developer control to co-owner control, the new co-owner board should ensure that the developer has paid assessments or proportionate share of expenses as required under the condominium documents. Given that proportionate share of expenses are typically paid at a different time than assessments, it is not uncommon for a condominium association to forget to collect proportionate share of expenses. Accordingly, a condominium attorney should be consulted regarding the developer’s financial obligations to ensure that a condominium association is not leaving money on the table.
Kevin Hirzel is the Managing Member of Hirzel Law, PLC. He concentrates his practice on commercial litigation, community association law, condominium law, Fair Housing Act compliance, homeowners association and real estate law. Mr. Hirzel is a fellow in the College of Community Association Lawyers, a prestigious designation given to less than 175 attorneys in the country. He is also a member of the Community Associations Institute’s (“CAI”) National Board of Trustees. Mr. Hirzel has been a Michigan Super Lawyer’s Rising Star in Real Estate Law from 2013-2020, an award given to only 2.5% of the attorneys in Michigan each year. Mr. Hirzel has been named a Leading Lawyer in Condominium & HOA law by Leading Lawyers Magazine from 2018-2020, an award given to less than 5% of the attorneys in Michigan each year. He represents community associations, condominium associations, cooperatives, homeowners associations, property owners and property managers throughout Michigan. He may be reached at (248) 478-1800 or firstname.lastname@example.org.