Creating Vertical Subdivisions for Fun and Profit

By: Sandra E. Krumbein and Martin A. Schwartz

Vertical subdivisions are an urban concept allowing multiple separate parcels containing separate uses to be stacked in airspace under a single roof.¹ Sometimes referred to as mixed-use development, vertical subdivisions are becoming more prevalent as Florida becomes more urbanized. Why would a developer choose a mixed-use project? Because the sum of the parts may be more valuable than the whole. Such a structure may increase the value of a proposed project by making the individual components more valuable when tied together in a single structure. For example, a project containing both a hotel and residential units may allow residential buyers access to hotel services, such as housekeeping and dining, making such units more valuable. In addition, the hotel may benefit as being the most convenient accommodations for those visiting the residential occupants. Also, from a utilitarian view, it may make a residential project much more desirable when there is ground-floor retail space to service the residents.

There may be issues regarding whether slices of airspace are recognized as separate fee interests in real property. The U.S. Supreme Court has previously opened the door to this concept by limiting ownership of airspace associated with a parcel of land to the airspace below navigable airspace to permit commercial aviation.² Thus, airspace has already been sliced between navigable and non-navigable airspace.

From a textbook perspective, however, there is some question on the ability to slice airspace into separate pieces.³ There is an absence of Florida caselaw determining whether slices of airspace can be separately conveyed. Despite the absence of caselaw, however, title companies will generally insure an interest in airspace. Such an approach is consistent with severing below-ground mineral interests from the surface of the property.

The Florida Condominium Act, however, does recognize that a condominium can be created in airspace.⁴ In such case, each unit may consist of a parcel of air. A related discussion on the use and transfer of airspace for purposes of development can be found in an April 2015 Florida Bar Journal article, “It’s Up in the Air: Air Rights in Modern Development.”⁵

Creating Vertical Subdivisions
Unlike horizontal subdivisions, there is no legal authority to plat a vertical subdivision. Vertical subdivisions are created in one of two ways: 1) by transfers of title to airspace parcels each with a separate metes and bounds legal description utilizing elevations, i.e., creating three-dimensional legal descriptions; 2) or by creating a condominium regime.

• Metes and Bounds with Elevations — Vertically subdivided parcels require a three-dimensional legal description because the drafter is describing a column of air. Added to the typical two-dimensional metes and bounds description are elevations. These elevations have a lower elevation end point and an upper elevation ceiling. However, within this envelope of air, the two-dimensional legal description may change: consider an office building in a wedding-cake design with multiple setbacks. This fact requires the drafter to verify three components of the legal description rather than two, requiring an elevated level of care.

The issues in a vertically subdivided project will be described in more detail subsequently, but it requires some form of declaration of covenants, restrictions, and easements to unify the various pieces of airspace so that a building containing the airspace parcels functions as a unified whole. For example, easements have to be imposed for support, availability of utilities and access for each of the separate parcels. This type of arrangement will be described as a “fee simple vertical subdivision” or “FSVS” for short.

• Condominium Regime — The Florida Condominium Act permits subdivision of airspace. It raises two possibilities for creation of vertical subdivisions: 1) a mixed use condominium containing units with different uses in a single condominium; or 2) a master condominium in which each of the units consist of a separate use with some or all of the units each subdivided into a separate condominium. In these cases, there are two levels of condominium ownership, the master condominium and one or more subcondominiums created out of a condominium unit in the master condominium.

An example of the first type of condominium structure might be a residential condominium containing retail condominium units on the first floor. A master condominium might consist of a building containing hotel, offices, and residential parcels where each parcel is a separate condominium unit. Each residential, hotel, or office parcel could then contain a separate condominium located in such master condominium unit.

• Choosing the Subdivision Method — There are advantages and disadvantages associated with using any of the methods for creating vertical subdivisions. The drafter will have to weigh these considerations in relation to the dynamics of each specific project. The choice of structure may depend on the composition of the project.

1) Typical Condominium: If the project consists of one primary use and another ancillary use, for example, a residential building with ancillary retail on the first floor, a typical condominium structure may make the most sense. It is relatively simple and straightforward and the Florida Condominium Act provides the structure for the project alleviating the drafter having to create a structure. Each of the retail units would be a unit in the overall condominium and would be allocated a percentage ownership interest on the same basis as the residential units. A condominium association maintaining the building with the ability to assess unit owners for operating expenses would be already baked in. The only additional issue to address would be whether to allocate the cost of maintenance of any recreational facilities to the retail units. Such units would not typically share in such costs. The drafter would then need two separate budgets: one for the recreational facilities allocating such costs only among the residential units, and one for all other costs, which would be allocated among all of the units. In addition, there would be two separate sets of assessments: one for the recreational facilities, and one for all other costs.

While this structure may have the benefit of simplicity, it creates a regime in which the commercial units will be governed by the residential unit owners. Such a governance structure is usually an anathema to commercial component owners. However, if the retail component is small, it may not be a significant issue to the commercial component owner(s). Any attempt to flip the governance structure would likely run afoul of F.S. §718.404, which prohibits control of a primarily residential project by the commercial elements in most cases.

2) Master Condominium: Another approach is to create a master condominium pursuant to F.S. §718.406.⁶ Each unit in the master condominium can consist of a separate use. The units may thereafter be further subdivided into one or more separate condominiums. Such a structure would permit an office portion of the building to be subdivided into office condominium units and a residential portion into a residential condominium.

The advantage of such a regime is the ability to rely on the Florida Condominium Act to provide the structure for the operation of the building. Under this statute, the master declaration would afford each of the master units typical necessary easements. The condominium association would be responsible for operating the building’s common areas and structural elements. The disadvantage of such structure is being locked into and restricted by a condominium regime. Such a regime brings with it many trappings that may be unwanted by the developer and the owners of the individual units in a multi-use project. Such elements may include operating through a board of directors with the necessity of regular open meetings, control issues, and a turnover requirement. This last element is usually the most significant reason to avoid a condominium regime since it may devalue the worth of the main component of the project. For example, in a mixed-use project consisting of a retail component, a hotel, and a residential component, it may be impossible to secure a “flag” (a licensed name for a well-known hotel operation, e.g., a Marriott Hotel) when the hotel cannot be assured that brand standards will be adhered to because other uses are responsible for running the building after a turnover. This may not be an issue if the developer intends to sell the major component of the project to a third party who can control the project by reason of having the most votes.

3) Fee Simple Vertical Subdivision: This structure will be discussed in greater detail in the next section. Here, the drafter is painting on a blank canvas creating a regime specifically tailored to fit the requirements of a particular project. The regime is accomplished through the creation of three-dimensional legal descriptions for each use and a declaration tying together the whole building. Such a structure allows for maximum flexibility in operation of the building. The drawback, however, is that the drafter has to create the entire universe. Each element for operation of each of the components has to be addressed or the project will face operating problems.

Creation of Fee Simple Vertical Subdivisions
In Florida, most FSVSs are not accomplished through a condominium regime, although one or more of the use components may be a condominium. As previously indicated, the principal reason for not employing a condominium structure is to avoid, among other Florida Condominium Act statutory requirements, the turnover requirement. Here, the drafter will create three-dimensional legal descriptions, which may or may not include a portion of the surface of the property. The governing document will be a declaration of covenants, easements, and restrictions, which may or may not provide for an association to operate the building. Frequently, there is one master component, such as a hotel or office component, which is responsible for the overall building structure, foundation, exterior walls, roof, and building-wide systems, and, in essence, operates the building. Such operating entity is given contractual assessment and lien rights to ensure that the other portions of the building make an appropriate contribution to general operating expenses.

• Real Estate Taxes — Described below are elements for the drafter to consider in preparing a FSVS. One element that may not be in the drafter’s control is real estate taxes imposed on the project. A number of tax assessors have taken the position that air rights cannot be separated from the surface of the property. Therefore, they will not render separate tax bills for different air rights parcels. This means, in some cases, a building having several different components with separate ownerships receiving a single tax bill. It creates a serious problem in allocating the taxes among the various parcels and protecting against a failure by a parcel owner to pay that parcel’s allocated portion of the tax bill. Further, it makes financing for the individual parcels problematic or challenging.

Until the Florida Legislature mandates the separate parcel taxation and valuation of component parcels of vertical subdivisions, a potential work-around, whose success has not been finally determined, is to draw the parcels in a lollipop configuration. The stick of the lollipop touches the surface so that the legal description includes ground area. This land portion may be the bottom of an elevator shaft exclusively used by a parcel whose beginning floor starts several stories above the surface. Those intending to attempt such configurations would be wise to consult with their property appraisers in advance to determine if it is acceptable to create a separate tax folio.

• Other Elements — Some of the other elements that will need to be addressed in creating the FSVS are noted below.

1) Easements: The drafter will need to provide appropriate easements for the benefit of the airspace parcels for support, access, and installation of separate utility or security systems among other items.

2) Parking: Most projects need parking. How does each project component obtain its necessary parking? Does the building contain parking for each use? Is there an allocation for each parcel? Are parking spaces designated for exclusive use or for common use? Who determines maintenance standards and allocation of costs?

3) Trash: Does each project component have its own trash receptacle, or do they share one or more? If they each have an exclusive one, they will need appropriate easements to maintain the receptacle on another’s parcel. If they are shared, how are costs allocated?

4) Loading and Unloading: Are there separate loading and unloading docks for each project component or are docks shared? If they are shared, who determines when the bays become available to a particular parcel and how maintenance costs are allocated?

5) Common Area Maintenance: Who determines the maintenance standards for the common areas? How are costs allocated?

6) Utilities: Are there separate lines for each parcel or are there shared lines? Separate lines are better but increase the cost of the project. If there are common lines, how is usage determined and maintenance costs allocated? Can the users of shared lines be separately metered? Who bears the responsibility for repairs for common lines?

7) HVAC: Is there a single system for the building or separate systems? If a single system, how are costs allocated? Who maintains the system?

8) Security Services: Are there common security services for each parcel? Does any parcel owner need to provide its own security services or supplemental services? How are costs allocated?

9) Telecommunications: Do any of the parcels need access to cable or satellite dishes? Can they install their own equipment? Are roof easements necessary for roof-mounted equipment?

10) Life Safety Systems: Is there a single system for audio, video, and sprinklers or separate systems? If there is a single system, how are costs allocated? Which parcel is responsible for maintenance?

11) Signage: How are the separate parcels identified? Does each parcel have exterior signage rights and, if so, what is the location for the signage? Do the parcel owners need separate easements for signage?

12) Management: Does one of the parcels manage the building or are the parcel owners able to participate in the determination of management and management standards?

13) Casualty and Condemnation: This may be the trickiest part of the document. A residential unit sitting 10 floors above a hotel cannot restore the residences if the hotel is not restored. If each parcel owner has the right to make its own restoration decision and the hotel owner elects not to restore, what happens to the residential parcel? Can each parcel owner perform its own restoration work? This would be a recipe for a disaster if three or four separate contractors are rebuilding different portions of the building. If one contractor is doing the restoration, how do you allocate costs among the various components? Who is responsible for the costs of the footers and the foundation? Is the cost of the roof a cost of the uppermost unit or a shared cost?

Conclusion
Any drafter of a FSVS needs to consider the above elements plus others that may be applicable to the specific project. A failure to deal with any component in the operation of the building may create operating problems for the project, perhaps transforming a real estate project into a litigation project.

With the above considerations in mind, the prospective drafter of the project documents first needs to analyze the benefits and potential problems of each type of structure and discuss them with the client before determining the manner of documenting the structure. In this area, one size does not fit all so that blindly marking up a set of documents from another project may be a recipe for a disaster.


¹ The authors acknowledge that the subject of this article was part of a presentation at the University of Miami’s Ralph E. Boyer 42nd Institute on Condominium and Cluster Developments.

² United States v. Causby, 328 U.S. 256 (1946).

³ See Tiffany Real Property §583 (2011).

⁴ Fla. Stat. §718.103(18).

⁵ See Martin Schwartz, It’s Up in the Air: Air Rights in Modern Development, 89 Fla. B. J. 42 (Apr. 2015).

⁶ Condominiums created within condominium parcels, Fla. Stat. §718.406.

 
This article was first published in the March 2018 edition of The Florida Bar Journal (Volume 92, No. 3).