The Condominium Conversion Process

Falcon Real Estate has been carrying out a number of condominium conversion projects in various markets around the United States during the past year. This conversion process is extremely detailed and complex, and varies from one location to another. As a result, Falcon has created a "Condo Conversion Team" within the company to focus on these projects. With two conversion projects underway in Florida at the present time, together with two in Phoenix and one in Seattle, it is necessary that the Team have a well-documented set of procedures to insure that all aspects of the conversion process are carried out successfully. Some of the principal steps in the conversion process are as follows:

1. 1. Identifying an appropriate apartment property.
2. 2. Obtaining financing.
3. 3. Dealing with the public approval process.
4. 4. The renovation process.
5. 5. Marketing and sales of the individual condo units.

These matters are discussed in more detail below but it should be emphasized that the entire conversion process involves a great many more detailed steps..

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1. Identifying an Appropriate Apartment Property:

By its very nature, a condominium conversion deal is a relatively short-term investment, typically lasting 12-18 months. When looking for a conversion candidate, the principal objective is to locate and purchase an existing apartment property that can be converted to individual condominium units and sold at a profit. As a result, the selection process must include variables such as:

a. Market conditions - One of the most important factors that has to be considered when deciding on the possible purchase of a condo conversion property is the conditions within the local market. Markets such as Phoenix are looked upon favorably since the economy there is strong and population growth is well above the national average. Consideration is also given to the present and prospective competition in the local condominium market.

b. Relative quality of apartment property - Falcon usually recommends purchasing condominium conversion projects that can be marketed in the lower price ranges, where condos will sell at prices below what individual houses in the local market would sell for. This demand is usually strongest in growing communities. However, while we generally recommend carrying out conversions in the lower price ranges, we feel that it is extremely important to have a superior product within that range. Since the ultimate intention is to sell the individual units, our experience indicates that having a better product (which means being more attractive, better built and with more amenities) will lead to quicker sales and greater profits. To achieve the desired quality level, it is almost always necessary to carry out significant renovations to the property. It is essential that accurate estimates be prepared of the cost of those renovations and the time that will be involved to carry them out.

c. Financial Analysis of Transaction - As with every real estate transaction, the ultimate success of the deal will depend on obtaining the property at a reasonable price. In addition, very detailed analyses have to be prepared of all the renovation costs, the marketing expenses, the interest expense during the conversion process, and a long list of other associated costs. Since condo conversion projects usually obtain short-term, floating rate loans, the estimated time period to complete the conversion is also exceedingly important.

2. Obtaining Financing:

A critical part of the conversion process is to obtain financing that is sufficient not only for the purchase of the apartment property, but also provides funds for all of the renovation and other costs associated with the process. As a result, the financing that is obtained will be much larger than a normal mortgage, and may even exceed the purchase price of the property. This will be a relatively short-term floating rate loan that is repaid as the individual condominium units are sold. Interest rates will usually be set at between 250 and 300 basis points over LIBOR. Lending institutions are typically much more demanding as to their requirements for providing this type of financing, as opposed to conventional mortgage financing, and it is frequently necessary for the condominium developer to provide various guarantees covering certain specific items associated with the financing.

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