In New York City, buying a home is a daunting process. There are down payments, negotiations, inspections, unexpected fees, closing costs, and much more, and that’s in the midst of simply trying to find a home in one of the most expensive housing regions in the world. But condominium conversions have emerged as an option for renters that could be a promising solution to maintaining affordable housing stock in the midst of a housing crisis.
The city’s homeownership rate is well below the national average and has barely changed over the past decade, according to the New York City Comptroller’s office. This is especially true for Black and Brown and/or low-income tenants.
Condo conversions –– the act of landlords converting rental buildings into individual units that tenants own and pay a mortgage on in the same way they would a home –– have piqued the curiosity of home shoppers. Not all major landlords are enthusiastic about the prospect of turning over the reins to their tenants, but others see the benefits.
“If you look at buildings today, at what the income is on the rent stabilized basis versus the expenses. There’s very little income,” said President and CEO of FM Home Loans David Brecher, who owns several buildings in Harlem and other areas of the city. “But that unit, to be owned individually, at a little bit of a higher number. The numbers work out very, very well for the tenant because the big driver here is the low interest rate.”
The City University of New York (CUNY) Zicklin School of Business at Baruch College published a 2021 report about the impact of condo conversions and cooperative housing. Condo conversions have “historically” been a viable pathway for homeownership in the city, particularly for working and middle-class families that rent, but the practice dropped off gradually after the 2019 housing law changes, said the report.
The research also states that tenants typically receive discount rates of about 30 to 35% on average when buying, homeownership in neighborhoods with conversions increased, and that condos maintain a good resale price as well as appreciate greatly over time. This could be a significant avenue for an accumulation of wealth for existing tenants and outside low-income buyers, said the report.
History
The first “offering plan” for a condo conversion in New York City was submitted to the New York State Attorney General’s office for a Queens property in 1961, according to the report. The federal government passed the Tax Reform Act of 1969, a tax code on the wealthy, meant to help low and middle-income people. The tax law “reduced the maximum allowance of depreciation deduction on rental properties,” resulting in the ownership of multifamily apartment buildings becoming less cost-effective. This caused a spike in condo conversions in the 1970s and 80s.
When going through the conversion process, state laws require that the landlord first, notify their tenants and give them a chance to buy their unit before the sale of a building is made available on the market. Similar to the long-proposed Tenant Opportunity To Purchase Act (TOPA), the Affordable Housing Retention Act (AHRA), or the city’s Community to Purchase Act (COPA).
Usually, the tenant gets a discount and is eligible to deduct their mortgage interest payment and property taxes from their income taxes. If buying isn’t an option, then tenants should be protected from eviction under state law or in the landlord’s offering plan.
“Our analysis of the U.S. Housing Census data from 2015 to 2018 found that neighborhoods with condo conversions experienced an average homeownership rate increase of 1.3 percentage points compared to what would have occurred without conversions,” said Yildiray Yildirim, who is the director for the William Newman Department of Real Estate, in an email.
Things changed drastically in 2019 when the state passed the Housing Stability and Tenant Protection Act, which included Part N (or the Martin Act). This clause stated that landlords couldn’t go through with conversions until at least 51%, as opposed to the 15% previously required, of the tenants in the building agreed to buy as opposed. The act was intended to crackdown on eviction rates and protect low-income tenants.
“It’s such an easier way to actually create home ownership opportunities,” said Erica Buckley, who leads the Cooperatives & Condominiums and State Attorneys General practices for Nixon Peabody. “And again, we’ve had the Martin Act for years in New York, and we’ve had a lot of homeownership historically through rental to co-op and condo conversions. So we know this is like a tried and true way to actually create homeownership.”
Yildirim said that the 2019 law change “dramatically reduced” conversion activity. The data shows that five conversion plans, with 103 total units, were submitted from July 2019 to June 2020, compared to 22 plans with 2,324 units submitted from July 2018 to June 2019.
Knowing the difference between Condos and Co-ops
The simplest explanation is that condos are for the individual tenant to own within the building, while cooperative housing (co-ops) are for the collective of tenants to own and operate the whole building, said Arielle Hersh, director of policy and new projects at Urban Homesteading Assistance Board (UHAB). Her organization deals mostly with permanently affordable Housing Development Fund Corporation (HDFC) co-ops.
Both condo and co-op conversions have benefits and drawbacks. For one thing, the process to convert a building to a co-op can take years, and it is costly. Or, facing the weight of responsibility and ownership while navigating partnership in the building can be difficult, said Hersh.
Claudia Waterton, 44, a South Bronx resident, is one of several former tenants who purchased their 21-unit building from a corrupt landlord in 2022 with the assistance of UHAB. The building is located at 700 E 134th St. Although lauded as a historic step, Waterton confirmed that the building is technically still in the process of converting to a co-op. She said she is proud to be an owner, even though the conversion could take several more years to complete, and plans to leave her property to family members when she passes.
“It’s a longer process than I think most people realize. Longer than I realized,” said Waterton. “We started with 17 people and now we’re down to 11. It’s been such a long process that some of the people who left [life happened]. One guy was single, now he’s married, and they moved. One guy got married and had a baby, and they moved. The last person got lottery housing and left.”
Hersh posits that the sharp decline in conversions is a culmination of a post-COVID city, skyrocketing building material and rehabilitation costs, and higher interest rates.
Landlords making it happen
A condo conversion is a shorter, and slightly less bureaucratic process, said Buckley.
“Now we’re basically telling them, instead of paying rent, pay the mortgage,” said Brecher. “Now your name is on deed, you are the actual owner. You are the master of your domain going forward.”
Brecher is pushing for more condo conversions that are geared toward tenants since his New York-based mortgage lending company is promising competitive mortgage rates. He said landlords “aren’t making a ton of money” off this deal but should keep the affordability aspect intact for tenants.
He is in the process of converting eight of his own buildings and consulting on 20 additional properties. He sees condo conversions as a way of effectuating TOPA without the need for costly government subsidies.
Leveraging resources from the U.S Department of Housing and Urban Development (HUD) and U.S. Department of Housing and Urban Development (HPD), Brecher plans on ensuring tenants have the tools they need to buy. This might include access to downpayment assistance and conventional financing, offering legal counsel to residents who form a tenant association, and working with local and state elected officials in an effort to be transparent.
“I think one of the interesting things about New York specifically is that the condo value is so high,” said Brecher. “So delivering these units to the tenant, while there’s so much additional equity that they’re gaining day one, on top of that, really creates a scenario where it is affordable… When you’re the homeowner as opposed to the tenants, you’re going to make sure you’re going to protect that equity because that’s your generational wealth.”