How to Understand Condo Docs – The Basics

You’re buying a condo on Oahu. It comes with a big fat pack of boring but important documents that cost $300-$500 (usually charged to the seller). But let’s be honest. You really only glance at the docs with glazed eyes. If that. Let’s talk about what these docs are and why they’re important.

condos

the relevance

When you’re investing in a condo, it’s wise to understand the basics regarding what common interest community documents — condominium documents, in most cases — consist of. You don’t have to be a lawyer to get the gist of the docs.

the takeaways

Condo docs come in two basic flavors: the rules docs and the operational docs.

The main thing to understand about the rules documents is that they come in certain hierarchy. Channelling the game Rock-Paper-Scissors, the hierarchy goes like this:

  • The declaration beats the articles of incorporation.
  • The articles of incorporation beat the bylaws.
  • The bylaws beat the rules and regulations.
  • The rules and regulations beat the whims and desires and complaints of individual condo owners.
  • A recent amendment of a document beats prior amendments and the original document.

Operational docs like financial statements and the property information form give you a picture of what’s happening currently in the community, assisting you in discovering any major red flags.

 the meat

Common Interest Communities

A common interest community is any set of condominiums, town homes, or single family homes that is governed by the same set of privately constructed rules. You know what I’m talking about. The Bluestone or Ka Malanai condos in Kailua, the Makaha Valley Plantation complex over on the leeward side, and the Keola La’i high rise in Kakaako all fit the bill, as do the countless other condo complexes on Oahu.

Even true single family homes, like those in new developments in Kapolei, can find themselves in common interest communities.

Let’s get something straight at the outset, though. I’m using the term “common interest community” loosely because that’s the term used throughout the country to generally describe any community with a homeowner’s association and some kind of real property commonly owned by the members of that particular community. In some contexts — in Hawaii and elsewhere — “common interest community” has a specific legal meaning, so just keep that in mind.

Each common interest community has roughly the same documents. Typically real estate agents call them all by the shorthand “condo docs” or just “docs,” even if the community isn’t technically a condominium property.

Rules Docs

Declaration

A “declaration” is a foundational document. This is what an attorney drafts and files down at the Bureau of Conveyances. The document can go by several different names like “covenants, conditions, and restrictions,” “CC&Rs”, the “decs,” or some similar verbiage, but they’re all the same thing.

CC&R = declaration = decs = covenants

The declaration creates the common interest community and establishes some basic rules. For example, the declaration will define the real property being affected and will lay out rules regarding common elements (e.g., common grounds, common ducts or piping, recreational equipment, hallways, etc.), insurance, procedures in the event of governmental condemnation, maintenance, and several other matters. If there are restrictions on rentals of condominium units or provisions relating to timeshares, they’re probably in the decs.

While it is probably the most important in terms of establishing the basic outline of the community, it is also the least likely document to be read by anyone who isn’t forced to do so.

Articles of Incorporation

The declaration will call for the common interest community to be operated by an association of owners in the community, otherwise known as a homeowners association or HOA. Usually, this takes the legal form of a nonprofit corporation. The articles of incorporation usually get filed with the state (the Business Registration Division of the Department of Commerce and Consumer Affairs, to be precise), and that is what creates the legal entity.

Association ≈ homeowners association ≈ AOAO ≈ AOUO

So, just as the declaration is a “creation” document with respect to the common interest community, the articles of incorporation create the legal entity that is the HOA (thought there are exceptions to this). The “HOA” will go by different names in different contexts. Sometimes it’s the “association of apartment owners (AOAO),” or it’s the “association of unit owners (AOUO),” or maybe it’s the “community association.” No matter; they’re roughly all the same type of thing.

Bylaws

Every corporation, including homeowners associations, needs to set up rules to govern how they work:

  • Who sits on the Board of Directors?
  • Who are the officers?
  • How do they all get elected or hired?
  • How do you remove them?
  • When do they meet?
  • How do they get stuff done?

All of these things get addressed in the bylaws.

Rules and Regulations

Because the bylaws deal with boring items like the election of the directors, most residents in the community won’t actually read them. For the most part, what people need to know is the day-to-day stuff:

  • How late is the pool open?
  • When is trash day?
  • Can I hang a picture of my cat outside my front door?

And most importantly for anyone with a 70 pound bulldog:

  • What is the pet policy?

Very often common interest communities put this kind of information in a set of house rules rather than in the bylaws. Again, there are several names — “rules and regulations,” “house rules,” “community rules,” etc.

rules and regs = house rules = community rules

These house rules do not typically get filed with any government agency. While these are binding on all residents of the community, they comprise the most flexible of the rules documents and they change the most frequently.

Amendments

And that brings up an important point. These rules docs can be amended from time to time, so it’s important that you ensure you have the original docs plus any and all amendments to those originals. Amendments govern over prior versions, so if you don’t get these, you could easily miss something important.

Master Associations

Just for fun-sies, some common interest communities find themselves nested within other common interest communities. Here’s what happens.

A developer buys up a big chunk of land. It’s too big to be just one, say, 200-person community, so she breaks it into several different developments. Maybe there are some single family homes over here, some condos over there, and some town homes in between. Each smaller development will have its own set of docs and its own HOA, but each will be part of the larger community.

For example, much of the Village Park/Royal Kunia area has a master association tasked with maintaining common recreational facilities — ballparks, clubhouses, etc. For that master common interest community there is a declaration, articles, bylaws, and (maybe…I’m not quite sure in this case) house rules.

But each condo complex, like Kulana Knolls for instance, has its own docs — decs, articles, bylaws, etc. — that govern just that piece of the bigger community.

This helps to explain why with some transactions you get extra large condo doc packets. Case in point: Makakilo has the Palehua Community Association, which is the master common interest community in which several smaller condo complexes and town home communities sit.

Similarly, the Pu’u Ali’i and Poha Kea condominiums on the windward side sit within a larger master association that governs the recreational facilities. (Actually, that development is a bit more complex, but the same idea holds.)

When there is a master association, the hierarchy of the rules documents goes like this:

  • Master association docs beat all smaller association docs.

Pretty straight forward, really.

Operational Docs

In addition to the rules docs outlined above, in a standard transaction you’ll also receive several other condo docs. These tend to be less rules-based and more action- or operations-based.

For example, you’ll typically see financial statements, minutes of meetings, and the property information form (also called the RR105c). The RR105c discloses to the lender and the buyer the relevant current goings-on in the community, addressing items like lawsuits (look for “lis pendens”), insurance matters, dues delinquencies, services or utilities included in the maintenance fees, and so forth.

opinion alert!

Outside of the pet policy, which is probably in the house rules, the RR105c is the main document a buyer should be evaluating during due diligence.

These operational documents can all be important for evaluating the financial strength of the HOA and for getting the general gist of what the major issues are in the community.

Wrapping Up

Condo docs can be long and boring. But now that you know the hierarchy and the basic coverage of each doc, when you’re wondering what a particular provision relates to, you can scan the document headings and find an intelligible answer.

Go forth and enjoy those condo docs!

Note: This article was crossposted on Oahu Real Estate Advisor.