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530 Woodlake Circle • Chesapeake, VA 23320 (757) 523-1900

Robert L.

Individual “Robb” Riddle, CCIM Member The Riddle Report

Condo Conversions–A Good June 2017 The developer can build a for mortgage interest and 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 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 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 . 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 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 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 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 . 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 . 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 • . 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 . 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 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 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. It could also these approaches to value contained in the report. have service type operations such as dry cleaners, While the other two should have some bearing on the restaurants, gasoline stations and often a minor value, the Income Approach would be given the most repair shop for automobiles. attention. • In the well-planned center of today, there will Existing Leases be a unified architectural design with the stores The existing leases could have an effect on future connected by malls. Newer centers have these income, even if a good estimate of current value has malls completely enclosed and air-conditioned. been obtained. Some things to look for in the existing • It always will have large parking areas, often leases in a shopping center would be as follows: covering more than half of the entire site. 1. Do the leases contain rent escalation clauses? On • Built into the original design are special facilities what are they based? to service the stores, with loading docks and plat- 2. Are tenants required to keep their stores open, forms as needed. or merely pay the rent? A major chain store could • There will usually be a merchant’s association find that the store that is losing money could in larger centers, responsible for the maintenance be less of a loss than just paying basic rent for the of common areas, lighting, cleaning parking lots, balance of the lease. landscaping, security and other items of common 3. Are all of the expenses or common-area mainte- interest. nance shared among the tenants of the center? How To Set The Value 4. Do the leases have the provision that tenants When a person is either a buyer or a seller of a must be members and contributors to the center’s shopping center, the question of value for a sale merchant’s association? is paramount. How do you appraise such a prop- 5. Do any of the leases place any burdensome erty? In commercial , there are three restrictions on the owner? Are there exclusives? types of approaches to value commonly used. They are: The Market Data Approach, The 6. Do any leases contain options for renewals? If so, Cost of Replacement Approach or The Income what are the terms? Approach. 7. Do any of the leases allow the tenant the right to The Market Data Approach to appraisal is cancel? seldom used in a shopping center. It relies on a Since leases with major tenants were originally nego- comparison of sales of similar properties. Since tiated skillfully with legal experts on both sides, they this type of property may be unique in an area, should now be evaluated carefully by an expert real there usually are just not enough properties to estate broker and attorney. compare with it to establish a true value. This is the very basic data to start an owner or buyer The Cost of Replacement Approach to appraisal into a transaction on a shopping center. On a specific is computed on a per-square-foot basis of construc- property, you should be guided beyond this by your tion costs to replace the buildings with the current real estate professional. o Landscaping For Profits And Image Owners and property managers must watch the nickels ones. A good design will combine the factors of function, and dimes as well as the dollars that are spent on balance, and symmetry. Function, for example, considers the property. Save one dollar in operating costs and such things as the placement of walkways, parking lot (assuming a 10% cap rate) value of the property increases access, and building entrances with safety in mind. Things by $10. That is why owners are always looking for new like trash receptacles can be screened by planting ever- ways to economize. In addition to saving money, we are greens and hedges in front of them. A good design might always looking for a way to invest a little in the property include: for a good return. Repetition. This is the repeating of a plant or a theme to A well-planned landscape has a recovery value of 100% give the impression of one continuous landscape and tie to 200% in increased rentals at the typical suburban office the property together. building. In addition, the owner gets back more than just Focal points. An area is highlighted by a tree, garden, or dollars spent; the landscaping dramatically influences an sculpture for visual appeal and eye direction. owner’s positive image in the community. Balance/scale. Plants are placed symmetrically and sized A well-maintained lawn, pruned shrubs with splashes of in proportions so as not to overpower or diminish an area. colorful flowers help an office building have “curbside appeal”. It says to prospective tenants, visitors, clients, Compatibility. Species of flowers and shrubs are selected and the community at large that the building’s owner that will complement the colors, textures, and forms in is stable and intends to stay around a while. Clients both the landscape and the building. instantly have confidence that “these people can handle Long Range Thinking my needs”. The professional landscaper will select trees and bushes When a property has poor grass, weeds, and unimagina- that will not obstruct traffic when they are fully grown. tive shrubs, it sends the message that the owner doesn’t Fast maturing shrubs can detract from the overall design care. The owner is often perceived as someone who unless they are carefully thought out in advance. probably takes short cuts. And if the owner neglects the The owner has other options to choose in addition to landscaping, prospective tenants wonder will the details natural growing plants and flowers. He can select stone- of the leases, repairs, and overall maintenance of the work, cascading water, and lighting accents to create a building itself also be neglected? favorable impression for the building. o Good Design Overplanted landscapes are as hard on the eyes as sparse

Real Estate Investment Consultants When you need professional advice and help in management of real estate commercial real estate you must come to our office. More are turning to real estate consultants as a We are experts in values and knowledge of the entire means of providing a sounding board for their ideas as market in this area. If you have been looking for a well as expertise in the planning and construction stages certain type of property we probably have the full for their projects. information on several like it already. Feasibility studies are essential for commercial office, Today’s investor in real estate must have a grasp of industrial, resort and hotel investors. With this kind of market conditions and potential that is usually beyond information, planning is better and there is less chance their own available time to attain. Investors need for error. assurance about the true condition of the market. With increased competition, the market place is becoming is not just the structure and the land. more complicated. As your professional commercial It is investing in the type of property that you want at the real estate advisors, we are in the position to represent price and terms that suit you at the time you want to make you in real estate transactions by setting up sales, the purchase. exchanges, leases, purchase and sales of options, and We can be your consultants. o

A CCIM is a professional real estate practitioner with proven technical expertise in . A CCIM is a person truly committed to the fundamentals of effective commercial-investment brokerage. The CCIM has completed a full sched- ule of Post Graduate Level Courses in investments, taxation, development and marketing all types of commercial-investment properties. The designation of Certified Commercial-Investment Member is unquestionably the highest degree awarded in the commercial-investment real estate practice. “This publication is designed to provide accurate and authoritative information in regard to the subject covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice is required, the services of a competent professional person should be sought.” - From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations. © 2017 All Rights Reserved