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Condo Conversion Issues

Artcile written by Jack Carr, P.E., R.S., LEED AP, Criterium Engineers
 
There is a new wrinkle developing in Maine regarding the conversion of apartments to condominiums. Public policy has typically created city ordinances to protect affected tenants or future unit owners but the latest trend is to protect against the loss of the available affordable rental property city-wide.
 
Portland is the latest city to consider this matter with the city’s housing committee recently announcing its plan to advocate the future raising the present condominium conversion fee of $150 per unit to 1% of the first sale price for condos that by association bylaws cannot be rented out by the owners. Funds raised by this new policy would be earmarked for affordable housing projects throughout the city.
 
Though this new policy is targeted at the shrinking stock of low cost apartment housing, opponents are already lining up to point out that raising conversion fees will hinder future condo ownership which is viewed by many as the only affordable form of home ownership for many young buyers. Proponents, of course, will be countering with the argument the new policy would encourage many condominium associations to allow owners to rent their units and thus avoid this proposed higher fee.
 
Needless to say, this is all going on in a depressed real estate market with reduced condominium development, unit sales, or conversions. During the height of condo activity, conversions averaged in Portland at 176 per year while in 2007 and 2008 only 64 and 52 apartments were converted into condos, respectively.
 
Of course new public policy rarely develops out of thin air nor is it invented from scratch. I often remind myself when entering public policy discussions that understanding the environment that created the issue in the first place will go a long way to successfully resolving a matter. I recall attending a policy discussion on a new condo ordinance that was being presented at a York County city hall.
 
I felt the draft ordinance had a lot of problems and certainly was not in the best interests of the city. I came amply prepared with well reasoned arguments and when I addressed the city council I cited eight important elements I gleamed from other cities’ ordinances that should be in the proposed ordinance. My suggestions were largely ignored. Later a friend at the hearing pointed out that the draft ordinance had been crafted by one of the councilmen who was a tenant in the apartment that was to be converted which sparked the need for this new city ordinance. The ordinance met his needs.
 
I have often pointed out that condominium law, like most new fashion, seems to travel from the west coast to the east, gets hung up in Boston for a while, and then travels up I-95 before settling into Maine. This idea of higher condo conversion fees to protect dwindling available low cost apartments is no exception.
 
Having engineering offices all over the country, I have the advantage of watching these new condo laws and ordinances develop and drift in various forms in different corners of our nation. California by far has the most activity regarding the policy debate of condo conversion fees. The ability to convert an apartment to a condo is so prized in some cities that there are waiting lines. San Francisco not only has prohibited conversions of apartments of less than six units but also has established a formal lottery with elaborate rules of entry to determine who gets the next condo conversion application.
 
Portland’s proposed new fee of 1% of the first sale price is mild compared to some of the western cities’ conversion fees. Though many are at 1to 1 ½ %, some are as high as 5% of the first sale price. The highest fees (some as high as 12 ½%) are primarily focused on mitigating the impact to existing tenants being displaced by the conversion.
 
These variations are directly reflecting the value communities place on the variety of social and economic problems condo conversions create in their municipality. The least understood is the relationship of how a higher condo conversion mitigation fee will assist in replacing rental housing units, therefore, making it more difficult to justify the fee levels. This is why setting a specific fee based on a percent of the unit sale is so popular. Some cities have adopted a fee based on square footage of the unit which is simple to calculate but perhaps unfair to low-valued neighborhoods.
 
As Portland often is the trend setter in Maine, many of the surrounding communities will be watching closely what Portland decides to do. If higher condo conversion fees do come to Portland their nature will be influenced by the community’s desire to either protect existing tenants in the apartments to be converted or the future tenants in affordable housing throughout the city. Condo associations and developers should be paying attention as their contributions to this policy debate may make all the difference.    
 

© CRITERIUM ENGINEERS 2009