Convert Depreciated Apartments to Condominiums for Gen Z

---

Summary

• Attractive multifamily apartment rentals converted to condominiums will address the affordable ownership needs of Gen-Z, seniors, empty nesters, and divorcees, resulting in improved local tax revenues and an upgraded neighborhood community.
• Converting these fully depreciated multifamily rentals into single-family residential condominium units makes sense for the owners and purchasers.

Grace Cary via Getty Images

Jump to:

---

---

Today’s residential housing market seems stuck in the mud. Baby Boomers are reluctant to downsize and sell their homes because of the lack of desirable choices under $500,000, combined with a significant degradation in their current standard of living. On the other hand, Gen Z, or Zoomers, cannot afford entry-level homes due to excessive tuition debt and a lack of well-paying entry-level jobs. In the meantime, well-appointed multifamily rental properties have saturated the market. We need to correct this imbalance of a lack of affordable homes for purchase and an oversupply of desirable rental apartments. These multifamily rentals need to be converted to attractive, affordable homeowner condominiums.

Multifamily Rentals Are Attractive

To attract tenants, today’s high-end rentals are packed with amenities that a buyer of a stand-alone single-family residence cannot afford. Large swimming pools, club rooms, exercise facilities, and excellent urban or suburban locations are typical and very affordable when spread out over multiple condo owners.

Converting these apartments into individually owned condominium units requires a declaration, bylaws and a set of rules and regulations, all governed by state or local legislation and overseen by a homeowners association with an elected board of directors or trustees. So, why aren’t these rentals being converted to affordable housing?

Why Convert a Successful Rental?

Multifamily developers rely on tax depreciation to make their profitability work. When depreciation is exhausted and deferred maintenance begins to set in, selling makes sense, but only as an apartment building. If the property is converted instead, the property owner’s capital gains turn into ordinary income. Multifamily owners, however, retain their capital gains tax treatment if they sell their property to a third-party conversion developer. If the owner creates their own conversion development company to solve this tax issue as an alternative, they often overlook the risks that experienced conversion developers know how to avoid. A successful sale of all units should take no more than three years. If it goes on longer, something is wrong, and word spreads.

---

---

---

---

Has it Been Done Before?

Converting attractive rentals to condominiums is not new. This is exactly what was done in the mid to late 1970s, starting in Chicago, when the city’s entire Gold Coast was converted by one experienced developer. The practice then spread nationwide to 41 different markets under American Invsco, the nation’s leading condominium converter at the time. Residential renters were given first choice to buy their own unit at an attractive below-market price before it was sold on the open market at much higher prices.

Why was this approach so successful in some cases but not in others? If the developer upgraded the building to make it even better than when it was built, pride of ownership among the new homeowners replaced transient renter leases after a conversion. If the developer failed to make this major upgrade investment, and the units were overpriced, the conversion would fail. American Invsco knew this, and its” goal was usually six months or fewer, remarkably with little or no advertising!

A Win-Win for Everyone

Baby Boomers in the 1970s, like Gen Z today, can afford quality one- or two-bedroom, 800- to 1,100-square-foot condominium units. These units offer entry-level ownership as well as appreciation when later sold for a down payment on a higher-priced home. Similar benefits apply to today’s seniors who do not want to live in a seniors-only independent living facility but prefer a community with neighbors of all ages. It also works for empty nesters and recent divorcees seeking smaller, affordable housing, but not a rental.

Converting these fully depreciated multifamily rentals to single-family residential condominium units makes sense not only for current property owners and new individual purchasers with significant upgrades made to their housing but also for the stability of the overall neighborhood, as increased real estate tax revenues support local schools, parks, and community development.

Is it time to convert? Yes, especially if mortgage rates fall, making this form of housing even more attractive to everyone.

---

Endnotes

---

Author

Daniel John Homick

Daniel J. Homick, is an attorney and retired GE Capital financial service executive. Before his last employer's company was sold, Dan was serving as General Counsel for HigherSchool Publishing, HigherSchool Tutoring, and...

View Bio →

---

Author

Daniel John Homick

Related Content