Conversion busters

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September 26, 2005 // UPDATED 1:58 pm - April 26, 2007
By: Jeremy Stratton
Jeremy Stratton

Condo conversions are all the rage -- and affordable-housing advocates want city action to control them

Condo conversions are wiping out any gains in affordable housing, tenant advocates told city leaders Sept. 16.

Affordable apartments are being converted faster than new affordable units are being built, advocates say -- adding that the phenomenon hurts not only tenants but condo buyers and surrounding neighbors.

Councilmembers and Mayor R.T. Rybak reacted with a sense of urgency during the two-hour study session. The "M" word -- a citywide moratorium on condo conversions -- came up numerous times.

In the session's wake, the moratorium's prospects are fading. However, it appears leaders have recognized that after a two-year surge in conversions, city leaders may do more to protect the affordable housing supply, dislocated renters and potentially nave buyers.

Solutions could include renter assistance, stricter disclosure rules for converters and further regulation of the process.

Affordability by the numbers

Housing Preservation Project (HPP) attorney Christine Goepfert led the Sept. 16 presentation.

Developers of condo conversions -- if they were in the audience Sept. 16 -- did not comment at the study session. They and independent analysts have not reviewed the study's data, put together by HOMEline, a local housing advocacy group, from data from the city and other advocacy organizations, real estate records and a vacancy list.

According to the study, 3.2 percent of the city's apartments have been converted to condos since 2000 -- 2,334 units in 178 known projects.

About 2,000 losses occurred in the past two years: 1,064 in 2004 and 974 through Sept 14.

Of the 2,334 units lost, 1,350 -- or 58 percent -- were affordable to tenants making 30-50 percent of the metro median income (MMI), the study said. Another 318 units -- 14 percent -- were within reach of those making 30 percent MMI or less.

In 2005, the metropolitan median income for a four-person family was $77,000 -- so 50 percent of MMI is $38,500 and 30 percent is $23,100.

Since 2000, Ward 7 -- which includes much of Downtown -- has lost 94 units that were affordable to people making half the MMI. In that time, most losses have been in Southwest Minneapolis, where most conversions have occurred.

So how dire is the affordability problem?

A 2004 city Affordable Housing Initiative evaluation charted affordable units built and demolished in projects receiving city assistance. Using the 50 percent MMI standard, 232 affordable units were built and three destroyed -- a net gain of 229 units.

However, if you throw in the 402 units housing advocates say were lost to conversions that year, that gain becomes a 188-unit loss.

The decline drops to 68 units if projects built without city help are included, based on 2004 data from the Family Housing Fund.

Even if there are fewer affordable units, does that mean there's too little affordable housing?

The city's 2005 Consolidated Plan tries to measure that. It compares the number of units available to how many families need them.

Using 2000 census data, the city found a surplus of 28,537 units for people making 50 percent of the metro median or less. That makes 1,350 units lost to conversions seems like a trifle -- buttressing converters' claims that they are merely removing apartments from a soft rental market.

However, that overall surplus masks a specific shortage.

There's a 42,036-unit surplus for people making 30-50 percent MMI -- but 13,499 too few units for those making less (no more than $23,100 for a family of four).

The city estimates four in 10 households at 30 percent MMI can't find units they can afford.

Meanwhile, city's highest-income crowd -- at or above 80 percent MMI -- also faces a shortage: 44,583 units, according to the city report. That's pushing them to buy the surplus units in the 30-50 percent MMI range. However, the city's poorest do not have that luxury.

Councilmember Robert Lilligren (8th Ward) turned the study session to what he called "the human capital -- citizens impacted by the upheaval of a condo conversion."

Trish Brock, a 20-year resident of 1801 1st Ave. S. in the Stevens Square neighborhood, faces displacement after getting a conversion notice. Brock, a renter in the city's poorest group, doesn't know where she'll go.

"I have made a commitment to my neighborhood... and my building," Brock told city officials. "We were the long-term, permanent residents this community is seeking."

Mayor Rybak called 1801 1st "a classic example of the kind of property we want to protect."

City officials and affordable housing developers see hope in preserving existing affordable housing. That can be done through renovation by affordable housing developers such as Central Community Housing Trust (CCHT), or by insuring that housing subsidies don't go away. The Family Housing Fund reports 422 rental units preserved in 2004 -- 318 of them at the 30 percent MMI.

Alan Arthur, CCHT's executive director, compared the costs of new construction versus preservation. It costs $200,000 to build a new unit, but only $100,000-$120,000 to renovate existing housing. "It makes sense to extend our existing affordable housing stock," Arthur told city officials.

From rent to own

Councilmember Paul Zerby (2nd Ward) noted during the session that the city wants to promote home ownership while increasing affordable housing.

According to the Family Housing Fund, a family of four at 50 percent MMI can afford a $115,900 home. An HPP study found that fewer than 25 percent of 2004's converted condo projects had units priced that low -- and many were one-bedroom units.

Presenters used the example of a 3540 Hennepin Ave. S. conversion. There, one-bedrooms rented for $750 a month. Once converted, those units sold for $183,900, with monthly mortgage payments ranging from $1,228-$1,462 per month, according to Financial Freedom Realty, a conversion developer that is doing the 3540 Hennepin project.

(However, 3540 is an example of how not every converted apartment is an affordable apartment. If a single person lived a one-bedroom apartment there, the $750 monthly rent wouldn't be considered affordable at either 30 percent or 50 percent MMI.)

Arthur notes "there are problems with [conversion] legalities and finances, and there are not good rules and regulations."

Rules that do exist require that developers give tenants at least a 120-day notice and that existing leases be honored. Of 112 conversion projects listed by the city in 2004-2005, presenters said only 52 percent gave such notice to tenants. They noted that there is no penalty for failure to comply with requirements.

Buyer beware

New buyers -- many of them first-timers -- can have problems, as well. Dan Mack of Mack Mortgage said the problem comes when a run-down property is bought for below-market value and then sold to an unsuspecting buyer with little improvement, but for a big profit. In some cases, it can constitute fraud.

Mack said in an area booming with conversions, inflated market values create an illusion that can force buyers to react without thinking.

Developers may not tell buyers about needed repairs to common areas such as roofs and heating systems -- despite Truth in Sale of Housing disclosure requirements that "don't inspect for everything," according to Assistant City Attorney Jeff Nillson.

Nillson said that Realtors admit privately that such "high-ticket items" are often not disclosed, and that buyers are often too nave to understand. That navet/ can cost the buyer later through condo-association fees and costly assessments for big-ticket repairs.

Councilmember Gary Schiff (9th Ward) said that if interest rates rise and housing values slip, new homeowners could be "upside down," where they would owe more on their mortgage than their property is worth.

Lilligren noted that "a mass of conversions in the early ['80s] saw a mass of foreclosures."

That would leave a building or neighborhood pocked with foreclosed units, bringing down surrounding units' value, Mack noted.

"Let's make sure that somebody's the watchdog," he said.

Schiff said he wants relocation assistance for misplaced tenants. Schiff and Rybak mentioned expanding the city's Truth in Sale of Housing requirements to protect uninformed buyers. Rybak said he is "reluctant to go to regulation" but would rather address the issue at the city approvals process.

Goepfert said that advocates might still lobby for a moratorium, but Schiff said he would not propose a moratorium because it would push off potential policy advances until March 2006.