Condo conversion?

Question

Condo conversions typically take a multi-family property and convert each unit to individually titled units that can be bought and sold independently from one another. Ideally, a lot of equity can be created. Anyone have experience with this, residentially or even with retail or office condo conversions?

I've identified a building where this could be the highest and best use, but have no experience with it other than owning condos in the past.

Ingrid Nagy · Answer

Jon, I worked on condo conversions about 20 yrs ago.  I'm sure times have changed however there are certain things you would need to investigate and be ready for.  I'm sure laws vary from State to State.  In NJ you need to hire an attorney to draft a Public Offering Statement which will consist of engineering statements, architectural drawings, proposed Budget of Operation and Management Contract etc.  Most States require approval of the POS by a Department of that particular State.  When a POS is approved the tenants are notified of their option to purchase.  In NJ senior citizens are protected and cannot be evicted even if you sold their unit.  The tenants are also protected by rent control in many municipalities limiting potential for future market rental income if you have investors looking at those protected units.  Your budget must also establish a reserve fund for capital improvements of the building and the sponsor (you) are normally required to post a certain dollar amount in reserve for use by the condo assn in the future.

I'm not saying condo conversions are not viable; many can be very successful.  I happen to have the opinion at the moment however that marketing and selling them at this point in time regardless of price structure would be difficult with the current state of the economy.  People still need loans to buy and many lenders don't want to touch condos or require FNMA approval of the project or require a certain percentage of the builiding be under contract before they will lend.

I just leased up 36 units for an owner in NJ who built them.  It was not a conversion.  He marked for 4 months and got one contract.  Lots of people were interested; no one could get financing.  He could no longer sit empty so we turned it into a rental for now to at least support the debt service.

Jon Klaus · Answer

Thanks for the good info Ingrid.  I agree that this is not a great time for a residential condo conversion.  What I have in mind is a commercial office building conversion targeting health care practitioners; dentists, doctors, chiropractors, etc.  Health care seems to be "healthy."  I see condo shells (new) on the market for $200/SF and I think if we marketed a quality product in a good location at $125/SF we might sell them within a couple of years.