Slowdown Causes Condo Conversion Aversion By KEMBA J. DUNHAM June 7, 2006; Page B1
One of the first signs that the Gateway Club at Orchid Lakes was going condo was when the owner of the Boynton Beach, Fla., apartment complex closed the gym within the past year. Tenants became suspicious when they couldn't get a clear answer why they no longer had access. Their fears turned out to be well founded. Residents complain that they were later offered steep "insider" prices to buy their units -- $400,000 for a $1,500-a-month rental in one case. Some declined and moved out. When would-be buyers were wooed at a luau at the pool, existing tenants were excluded. "It was like we were the redheaded stepchildren," says Jack Carney, a 41-year-old salesman who lives at the Gateway Club with his wife and three children. Now, Gateway's owner, faced with slow sales, is reversing course and reverting to apartments. Although one-third of the 319 units had been upgraded in anticipation of sales, no deals were closed. The owner had to refill the complex with renters, so incentives -- like lower rent -- were offered. Current tenants say they weren't given the same perks when they looked into resigning their leases. As double-digit housing-price appreciation cools in many markets, rental apartments once seen as ripe for conversion into more lucrative condominiums are beginning to return to their roots. Michael Cohen, a research strategist at Boston real-estate analysis firm Property & Portfolio Research Inc., dubs the reversions "repartments." "It's definitely becoming a problem," he says. "Some of these projects probably don't look as attractive as they did six months ago when developers were buying the conversions." So far, the reversions are dwarfed by the number of units that have been converted into condos in recent years. But an emerging trend is evident as developers stuck with slow-selling condo units struggle to recoup part of their investment and as tenants gripe about being caught in the middle when their building swings from apartments to condos and back again. "It was the wrong market, wrong time," Jenny Reidy, Gateway Club's rental manager who recently left the company, said in an interview in the spring. The complex's owner, MSP Enterprises of Boynton Beach, didn't return requests for comment. In south Florida -- where the condo-conversion craze has been particularly frenzied -- eight converted complexes containing 2,156 units have reverted to rentals in Broward and Palm Beach Counties, according to Jack McCabe, chief executive of McCabe Research & Consulting in Deerfield Beach, Fla. That compares with about 62,904 units that have been converted or have begun to be converted into condos in the area since 2004, he adds. Mr. McCabe expects the trend to spill over to San Diego, Washington, D.C., Las Vegas and Phoenix -- all areas that have experienced among the sharpest increases in home prices over the past few years. The San Merano at Mirasol, a 476-unit apartment complex in Palm Beach Gardens, Fla., is a case in point. The luxury development adjacent to a country club was built and developed by Kolter Communities LLC of West Palm Beach, Fla., as an apartment complex several years ago. Not too long ago, Kolter had started running newspaper ads pitching the units as condos and sending letters to existing residents alerting them of the switch, but it called off plans a few months ago after getting nervous about the rising number of competing condos. None of the units were sold as condos. "I knew we were in trouble when the guy who delivered my television a few weeks ago said he had bought two conversions [in the area] and was trying to flip them," says Kolter chief operating officer Peter Donnantuoni, pinning most of the blame on speculators for driving up prices to unreasonable levels. Industry watchers say the repartment trend isn't necessarily a bad thing for the apartment and condo markets. The rush to switch to condos in some markets led to a dearth of apartments and caused rents to increase. Units coming back on the market as rentals could ease upward pressure on rents. But the financial pressure on would-be condo converters can be intense, analysts say. For conversion properties, typically they've been willing to pay 35% to 40% more than their value as rental apartments, says Coral Gables, Fla., real estate analyst and consultant David Dabby. If the project cannot be converted, it becomes a substandard investment being run as a rental property. And if the investment was highly leveraged, the converter risks losing the property, adds Mr. Dabby. In some cases, developers are selling and renting in the same complex. At the Estates at Stuart, a 237-unit development in Stuart, Fla., nearly half the units, now priced between $166,900 and $402,900, have sold since Philadelphia-based Philadelphia Management & Cos. started selling them as condos last year, with sales slowing markedly in recent months. Now, in addition to a sales office, the property has an on-site leasing office, renting units between roughly $995 and $2,000 a month. Tenants often feel left in the dark. Earl Kratzer, a 68-year-old retired policeman, bought his unit at the Estates at Stuart last year for about $263,000. Like other buyers intent on immediately selling for a quick profit, he put it up for sale for $295,000 right after he closed in October. No luck. Then he tried to rent it for $1,400 a few months later. That didn't work either. Mr. Kratzer later discovered the owner of the Estates was renting units as well as selling them, but some at a much lower price. He says he was ultimately forced to drop his rental price to around $1,100 to match the Estates listings. He finally found tenants last month. "It was just a mess," he says. Officials at Philadelphia Management declined to comment. At the Gateway Club, Adam Culp, a 39-year-old programming manager, says he received mixed messages about the price to buy his nearly $1,200-a-month, two-bedroom apartment. First the sales office told him he could buy it for $320,000. Then the price dipped to $260,000 and eventually shot back up to $300,000. "I still can't tell you what the final offer price was," he says. Mr. Carney, the salesman, was told he could purchase his $1,500-a- month, three-bedroom Gateway Club unit for $403,000. He has 16 months left on his lease and plans to assess his children's school situation before deciding whether to move even though the complex will remain as rentals. He thinks some of the new renters aren't desirable neighbors. "They've always tried to rent to the family type, but with all these promos and things," he says, some new tenants play loud music and drink beer at night in the parking lot. On the bright side, he notes, the gym -- with new equipment -- has reopened to tenants. Write to Kemba J. Dunham at [EMAIL PROTECTED] ------------------------ Yahoo! Groups Sponsor --------------------~--> Protect your PC from spy ware with award winning anti spy technology. It's free. http://us.click.yahoo.com/97bhrC/LGxNAA/yQLSAA/Y2tolB/TM --------------------------------------------------------------------~-> Yahoo! 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