BUILDER
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Condo conversions. To many builders, they represent one of the few solid opportunities in the multifamily market. But, to many tenant and community groups, condo conversions represent a real threat to the low and moderate-income residents of rental buildings.
With rent control spreading, with utility and maintenance costs increasing and with rent increases generally lagging behind the rate of inflation, there’s certainly pressure on builders to convert more and more rental buildings to condo. And as more and more buildings are converted, builders can expect more and more opposition from well-organized, articulate activist groups. Already, in cities like Chicago and Washington, D.C., the debate is heated.
Here, a proponent of condo conversion – Jack Studnicky – and an opponent of condo conversion – Daniel Lauber – debate the issue. Studnicky has been involved in conversion projects around the country, and Lauber has lobbied for legislation to limit conversions in Chicago.
PRO
BUILDERS, BUYERS AND THE COMMUNITY BENEFIT
Jack Studnicky is president of JPS Associates, Inc., a New York City firm which specializes in condominium conversions nationwide.
Condominium conversion has been one of the most important and successful developments in the real estate industry in the latter part of this decade. It’s only the beginning! Its future growth will be explosive. The reason: It’s a good thing. It’s good for the owner, good for the present renters, good for other buyers and good for the neighborhood where the conversion takes place.
The impetus for a program to convert a rental project to a condominium ownership is the desire of the owner to sell the project. The owner must determine whether an outright sale of the project in its present rental status would mean a better return than would a condominium conversion.
And in today’s market, condominium conversion usually will generate greater profit than an outright sale of a rental building. Why? Because it enables the owner to capitalize upon the greater value buyers place on ownership versus rental.
The benefits of home ownership over renting have been widely accepted. Home ownership provides a hedge against inflation as well as tax benefits.
We’ve seen this ownership preference in many apartment rental projects we have studied. As rents increase some residents move out, thinking that at that rent they can afford something “better.” While in the past many of these move-outs might have moved into more luxurious rental apartments in better neighborhoods or single-family homes, more and more move-outs now buy condominiums or cooperative apartments.
A projection of the proceeds on a condominium conversion should be broken down into two parts. The first phase of the sale is to the building’s present residents. In general they are offered the units at a discount price. In deciding whether or not to buy, present renters will compare the annual cost of ownership to the present annual rental cost. In most cases, the price discounts allow present renters to enjoy the benefits of ownership at an after-conversion annual cost of about equal their present rental costs. Sellers also can offer building residents decorator allowances that can be used to make their apartment look almost new.
In short, a properly planned marketing program for the sale to present renters will not threaten the security of their basic shelter. Instead, conversion will offer renters the opportunity to own their apartment and achieve a greater sense of security.
The second phase of a condo conversion sales program is the sale of units to outside buyers. These buyers are most interested in comparing the prices of units in one condo building to those in another converted building. Location is another important factor, as is the quality of construction and appearance of the building.
Once the projected proceeds for a conversion have been determined, it’s then necessary to project expenses. Expenses include sales commissions, program administration, the development of a sales office and model apartments, and an advertising and promotion campaign. In addition, site improvements, exterior and interior alterations, and upgrading of common areas may be necessary.
However, we have found that the net sales proceeds generated by a condo conversion, even when extensive improvements are necessary, will in most cases be greater than those realized by an outright sale of the building as a rental property.
Remember too that condominium conversion gives building residents the opportunity to manage the building. Often that means a better maintained building, and that in turn helps to improve the character and quality of the entire neighborhood.
We very strongly believe that a properly planned and professionally executed condominium conversion will mean greater profits for the building owner.
In addition, it will give present renters an excellent opportunity to enjoy the benefits of home ownership. It will add to a much-needed supply of multifamily housing available at market prices. And it will in many ways improve the neighborhood.
These conclusions are supported by the ever-increasing number of successful condominium conversions occurring throughout the country.
One other point; given the need for housing, what better way to provide it than by converting existing rental buildings? It’s hard to match the location of older buildings and it’s impossible to build from scratch comparable units that could be sold at comparable prices.
CON
RESIDENTS ARE PUSHED OUT, HOUSING COSTS ARE PUSHED UP
Daniel Lauber is a nationally recognized expert on the effects and regulation of condominium conversions. A member of the Board of Directors of the American Planning Association, he is principal consultant with Planning/Communications Associates in Evanston, Ill.
There’s nothing wrong with condominium conversion by itself. Yet conversions are drastically altering the nature of many cities. In just a few years, unlimited conversions have changed who can live in certain communities and how they live.
Conversions have forced untold thousands of renters into ownership positions they neither desired nor needed. They’ve caused massive displacement of long standing residents from their communities, disrupted already stable neighborhoods, raised the overall cost of housing and increased the need for subsidized housing.
Conversion’s major adverse effect is displacement. Studies by HUD; Palo Alto, Calif.; Washington, D.C.; the Washington Council of Governments; Tenants Organization of Evanston (TOE); and Evanston, Ill. Human Relations Commission independently document that, on the average, between 76 and 88 percent of a building’s tenants do not purchase their converted units.
These studies cite two reasons why tenants generally do not purchase.
On the average, the monthly cost of owning compared to renting the same unit doubles.
Tenants know the condition of the building and believe that the work developers promise to do will not cure basic deficiencies.
Housing experts note that a rental vacancy rate of four to five percent is essential for displaced tenants to find replacement housing, while HUD and the American Planning Association report that a very low rental vacancy rate is a prerequisite for condominium conversions to succeed. That means in active condo conversion markets building residents are almost forced to buy their units if they wish to remain in the community.
Conversion supporters claim that conversions stabilize neighborhoods. However, most conversions occur in already stable neighborhoods. The Evanston studies found that displaced tenants had lived in their current apartments an average of 7.2 years and in Evanston for almost 21 years.
The tenants most likely to be displaced are the elderly on fixed incomes for whom ownership offers virtually no advantages. Also likely to be displaced are young persons in entry level positions and middle income as well as low and moderate income households which simply cannot afford the high cost of condominium ownership. In Chicago’s northern suburbs the median cost of a condominium was $62,500 last year.
No evidence suggests that conversions necessarily improve the quality of the housing stock. The HUD study found that “little renovation is actually done in most conversions.”
In many cities conversions are the single greatest cause of the overall increase in housing costs. Not only does the monthly cost of owning compared to renting increase substantially (tax breaks come nowhere close to making up this difference), but the rents in the remaining rental units usually skyrocket because demand is still high and supply diminished due to conversions.
Low- and moderate-income rental units are converted to higher-priced condominiums. As a result more subsidized housing, paid for by all the taxpayers is needed so these Americans can have decent shelter.
Despite the excuses developers and lenders make for conversions, the basic reason, according to the HUD study, is clear: “Developers are motivated to undertake conversions primarily because of the large potential profits which can be made in a short period of time.”
The need exists to limit or even halt conversions in cities where low rental vacancy rates combine with widespread conversions to create displacements of tenants. And continuing conversions only make the problem worse.
Because the condominium form of ownership was created by state governments’ horizontal property acts in the 1960s, these same governments, or municipalities acting under home rule powers, can limit or halt further conversions.
Condominium conversion is a privilege, not a right. As long as this privilege continues to be abused, we will continue to fuel the current inflationary spiral and plunge headfirst into the most serious housing crisis since the end of World War II.
