When Is Commercial Space Not Commercial Space?

By: Stephanie Diana Gast- Wilson
So, it is industry common knowledge that federal lending agencies regarding condo project financing only lend in condo projects that are primarily in residential complexes. However, there is a tricky question that keeps coming up regarding this vague principle keeps coming up. The question being if apartment complexes in condo projects count as residential or commercial space? And if they do count as commercial space what about in the case of affordable housing projects and apartments?

Picture by Stephanie Diana Gast Wilson

First let’s define what a residential property is. As noted on US Legal.com found at https://definitions.uslegal.com/r/residential-property/
“Pursuant to 16 USCS § 410x-2, [Title 16. Conservation; Chapter 1. National Parks, Military Parks, Monuments, and Seashores; Minute Man National Historical Park] the term residential property means “a single-family dwelling, the construction of which began before July 1, 1991, together with such land on which the dwelling and appurtenant buildings are located as is in the same ownership as such dwelling and as the Secretary designates as reasonably necessary for the owner’s continued use and occupancy of the dwelling.” — US Legal.com
So, where the confusion comes into play is particularly with new construction projects that have apartments since builder and property management jargon have commercial space defined a bit differently. Logic dictates apartments are residential as they are buildings where people live. However, lending is a slightly different world. As an apartment complex is not designed to really make for owner occupancy but; rather as units that can be rented out that makes the building commercial space. Even in the case of the apartment complex being affordable housing rental projects.
This being the case commercial space in a condo project must not exceed the total square feet being more than 25% of the total square feet of the total residential square footage. This includes above and below grade commercial space such as parking.
Although to get a little political there really needs to be an adjustment to this guideline to make exceptions to affordable housing apartment complexes being in a project that also has market value condo projects. As detailed on section 8 housing.org https://section-8-housing.org/Section-8-Waiting-Lists-Section-8-Housing notes on the topic of wait lists for affordable housing can be up to 10 years! Ten Years! Part of this stems from a lack of affordable housing to access. If exceptions were made to allow affordable housing apartments to be in a condo complex not being considered commercial space would help ease this issue. It would help developers and make projects more saleable without waivers. Please check out CondoLand’s blog post on waivers.
But; as it stands affordable housing apartments are still considered commercial space. And there are other avenues for funding affordable housing apartment complexes. If interested in these topics touch base with your mortgage underwriting or real estate professional to gain some additional information on those avenues.
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