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The Riddle Report 530 Woodlake Circle • Chesapeake, VA 23320 (757) 523-1900 Robert L. Individual “Robb” Riddle, CCIM Member The Riddle Report Condo Conversions–A Good Investment June 2017 The developer can build a condominium for mortgage interest and property complex from scratch. The time will vary taxes can be beneficial in bringing This publication is not on the location, but it may take years from down the monthly cost of the unit a solicitation but is an the start of the first unit. For a quicker time below a rental unit of the same size information service from period, the alternative might be a condo and quality. this office. conversion. There are buyers for condo units in The Condo Conversion most communities. Young singles When an investor is seeking an invest- and couples looking for a first home ment in a new condominium project, the that is affordable make up some of In This Issue possibility of purchasing an existing rental the buyers. Professionals and empty property for conversion to condominiums nesters that can afford the more up-scale units make up another phase • Condo Conversions should be considered. While building a –A Good Investment new property can be profitable, there are of the market. These groups still want the convenience of living in down- many benefits to converting the existing • Establishing Value In property. town or close-in locations because of the benefits of the urban environment. A Shopping Center There could be a number of reasons why an owner of a rental apartment property Benefits that an owner or purchaser • Landscaping For of an apartment property or would want to convert his project to Profits And Image condominium ownership. For example, commercial building that could be he could want to convert because his tax converted to a condominium might • Real Estate seek are: shelter may have changed because of tax Investment Consultants laws. He could be at the point where an 1. Profit. The per-unit value of a increase in rents should be made, but that condominium for sale is usually could heighten the risk of vacancies and higher than the value of a rental unit. turnover in tenants. The owner could just (Value of a rental unit is based on want to make the conversion for profits. the cash return from the rental of the The Demand property. Sale prices are based on a comparable house or unit sales based When ideas in tax and other The demand for condos has remained on square footage and amenities.) legal areas in this publication strong. Condos can be more affordable, seem to fit your situation, particularly for first-time homebuyers. 2. An excellent way to free funds for it is recommended that you new investments. discuss them with your In many markets throughout the country professional advisor before condominiums are still strong competitors 3. The owner may be offering his taking action. to rental apartments. For many people, a units for sale in a market in which third alternative—owning a condominium there is a high demand for purchase of apartment—is the answer. Tax deductions housing vs. a low demand for rentals. ß (continued) If the apartment or commercial building has an older mort- After the purchase, the former tenant now has the usual gage with interest that is lower than the current market, the advantages of ownership: A tax deduction on the portion of lending institution could be helpful with financing. With the monthly payment that is interest. The benefits of appre- the conversion completed, the old loan could be repaid ciation of value of the unit in the future. The reduction of before maturity, with the lender then able to reinvest the loans each month from the principal payment. money at current rates. Also, the lender would be able to Above all, the new unit owner is free from the problems of invest in mortgage loans on the condominium units, which rent increases. The monthly payment is an amortized loan, have been very sound investments over the years. which does not change during the life of the loan. There The Condominium and Co-Operative Abuse Relief Act could be small increases in the charge for common area of 1980 (P.L. 96-399) seeks to minimize the impact of maintenance, but this is not in the same league with rent conversions on low-income, elderly and handicapped increases. tenants. The law is restricted to conversion or rental prop- Ideal Conditions for a Condo Conversion erties and does not cover projects that were originally built as condominiums or co-operatives. The federal law is not The investor cannot just pick any apartment property applicable if any state or local government opted out of the that is available. Not every property can be a successful federal scheme of regulation by enacting appropriate laws. condo. There are certain conditions that should exist for a successful conversion. Here is a checklist of some of the Advantages of a Conversion most important factors that should be considered before When an owner converts existing rental apartments to a starting a conversion of an apartment property: condominium project, there are certain advantages over • The location would preferably be in a highly building a new property. Some of these are: desirable residential community. The local market for 1. FINANCING. Since the structure is already single-family homes and apartments should be active and there, loans may be easier to secure. doing well. If there are other condominium projects in the 2. MARKETING. The owner is estimating market area, they should be checked to see how sales are moving. conditions for selling the units only weeks or months • Vacancy factors and turnover in rentals to tenants ahead rather than years. are important. If the building is not desirable as a rental 3. MATERIALS AND INFLATION. Cost factors property, who will be the buyer of a unit? Both the turnover will be easier to estimate, again because of the shorter time factor and vacancy factor should be low. span. This reduces problems of cost spiraling of labor or • Zoning. Ordinarily, a rental project that complied materials, labor strikes or shortages. with local zoning and subdivision ordinances will not face 4. LESS FACTORS IN PLANNING. As in zoning problems when the building is converted, since the item #1, since the structure is already there, many less conversion is not considered a change in use. cost factors will come into the planning. Only permits, • Check the leases. When do leases expire? A few engineering, legal and selling costs, etc., will come into long leases scattered throughout the building could play planning. havoc with a planned conversion. Do the lease applications 5. LOCATION can be a definite advantage. Owner of the present tenants show people who are prospective can pick older units near a downtown or other desirable buyers? location where no open land for construction is available. • Demand. Is there a demand for housing in the 6. SALES. Units can be offered at prices that projected price range of these units? are competitive. Units that are in a sound structure built • Size of units. Units should be larger than the years ago can offer greater values than newly built units, average local rental apartment. The prospects will be most even after major improvements and refurbishing. Often, likely ex-renters who want more space, or previous home- according to HUD data, 25% of the units can be expected owners who are used to having plenty of space. to be purchased immediately by the existing tenants. • Amenities. Location, as we said. Air conditioning, 7. LESS PROBLEMS. The structure is already new carpeting, appliances. Each unit offered for sale should located in an established area and shouldn’t be affected by be returned to “like-new” condition. density or zoning requirements. • Condition of structure. A well-built, high quality Benefits to Tenants in a Conversion building is best. Make sure the roof, wiring, plumbing, etc., As stated, only about 25% of the tenants will be expected are in good condition. Hire an engineer for the inspection. to purchase one of the units. There are advantages for this • Experience. If the owner is not experienced in tenant to make this purchase, and this should be communi- condo conversions, have a real estate agent or attorney who cated in sales information to tenants. is. This type of action is more of a legal problem than a The property is located in a familiar area. The tenant construction or real estate problem. o already knows this neighborhood. Establishing Value In A Shopping Center The shopping center of today is a change from value of land added to the formula. This type of the centers built originally. They were a collection appraisal might be a little closer to the current value of stores for retailing, rather than a newer, more than a market data approach. modern mix of businesses and entertainment. The Income Approach to value would usually be the The average shopping center or mall has had most appropriate method for a shopping center. The certain characteristics in the past: appraiser would use the net income from the current • The stores in the center usually complemented rents, capitalized at a determined rate to establish the each other rather than competed with one another. value. The value would then be based on what the A large center often had a major department store property is actually doing financially, and would be or supermarket as an “anchor” tenant. It may more accurate than the other two approaches. also have had stationery, drug, hardware, variety A good appraisal would usually have all three of stores and other retail operations.
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