When John Krengar decided to purchase a 14-unit building at 4339-45 N. Kenmore Ave. on Chicago`s North Side, the building was in foreclosure.
Krengar took a good, hard look at the vintage property. The two-bedroom, two-bath units ranged from 1,200 to 1,800 square feet and featured wood-burning fireplaces and secured off-street parking.
”The building was set back from the street, so there was a nice yard, and back porches. All the hard renovation work had already been done, and the market in the area seemed to be at a good place,” Krengar noted.
In other words, it was an opportunity. Krengar bought the building, finished up the renovation work and converted the building to condominiums this spring. He has just begun to market the units, which are priced between $85,000 and $135,000.
Like other real estate developers who specialize in condos, Krengar belives now is an excellent time to be in the condo conversion business, whether the property contains hundreds of units or only a handful. The convergence of such factors as an oversupply of rental units, very low interest rates and a strong first-time buyer market has made for a strong condo market, experts say.
Another factor is the cash that lenders have made available for condo projects. According to Marvin Romanek, a developer who with then-partner Gene Golub converted thousands of apartments in the late 1970s, the recent spate of condo conversions has as much to do with nervous lenders looking to get their money out as it does with lenders looking to invest in this development trend. ”Money`s got nowhere to go these days, and like water it seeks(its own)
level,” said Romanek. ”There`s always pressure to get it out, and if
(lenders) can`t put it into shopping centers and office buildings, they`ll put it into condo conversions. (Condo conversions) are the new hot thing. It`s faddish, but these lenders think it is the thing to do now.”
Developers are scouting every rental building in the downtown and Near North areas, hoping to put together a conversion deal, experts say. Even 111 E. Chestnut St., considered by many to be one of the premier rental buildings in terms of location, is being considered for conversion in the near future.
According to Anthony Casaccio, senior vice president of the Inland Group, which has an ownership interest in 111 E. Chestnut, the building is under contract for sale to Nick Gouletas, chairman of American Invsco, who is considering converting the property.
”That building and the I. Magnin building are owned by the North Michigan Avenue Limited Partnership, and Inland is the general partner of that partnership. Prudential Realty Group owns the land. We don`t know yet whether Nick is going to be able to reach a deal with Prudential,” Casaccio said.
Bernard C. Buchholz, vice president of asset management for Prudential Realty Group, declined to comment on the potential sale of the land to Gouletas.
”One-eleven East Chestnut has an incredible location but has been poorly managed over the years,” said one developer. ”The building is a tragedy, but it is perfect for a condo conversion because you`re going to have to fix the problems anyway. There you have a decent apartment in a superb location. If you can modernize it and market it in a medium price range, then I think it can be very successful.”
Casaccio said Gouletas had been interested in the building for several years, but it was the Hyatt Hotel chain`s decision not to build a hotel on the site next to 111 E. Chestnut that provided the impetus for the deal.
Add the pieces together and the sum is perhaps the most fertile condo conversion market since the ”condomania” days of the mid- to late 1970s.
In the space of a few years back then, several developers took what was a fairly obscure concept and converted thousands of apartment buildings into condominiums. Romanek recalls converting more than 3,000 Gold Coast units in a single weekend. During 1977, which some experts say was the hottest year for condo conversions, nearly 30,000 units were converted, according to published reports.
Condomania swept through the Chicago area because it suddenly became clear that it was as cheap to own as it was to rent. Many developers and brokers believe that`s where the market is today.
”We think condo conversions are back because there is an affordability factor that was nonexistent in the last few years,” said Stan Lieberman, president of the Lieberman Group Ltd., a marketing and development firm that specializes in conversions.
Lieberman`s firm was hired by developer Ed Carlson and attorney John Cox to take over the marketing for Shannon Courts, a two-phase conversion project with 98 units in two five-story elevator buildings in Streamwood.
”At Shannon Courts, for example, we can deliver a completely redone unit, approximately 1,100 square feet with two bedrooms and two bathrooms that rents for about $750,” Lieberman said. ”A buyer can own that unit for $597 per month, including mortgage payments, taxes and the condo assessment.”
”And it includes heat,” he said, adding that the unit sells for $59,900.
Romanek said he learned early on that he could not sell a condo without proving to the buyer or tenant that owning a condo was more to their financial advantage than renting.
”We had to prove it over and over again to each buyer,” Romanek said.
”Here is your rent and this is what it will cost to live in this condo with this assessment, mortgage and tax benefit. If we came close, we had a sale.”
Richard Kaplan, president of Syndicated Equities, is about to begin converting his fifth project in the last 2 1/2 years. He also believes pricing is the key to a successful project.
”I think there`s a small niche for first-time buyers in the under $150,000 market who want to get good value for their dollar,” Kaplan said.
”And that`s it, unless there`s a project like a Lake Point Tower, which was a very special project. And that still took the developers many years to sell.”
Kaplan has sold 82 of 92 units in 18 months at his last project, at 71 E. Division St. The units that remain unsold range from $71,500 to $137,500. His new project is at 2700 N. Hampden Ct., which contains 95 one- and two-bedroom units tentatively priced from $64,500 to $149,500.
The units range from 750 to 1,100 square feet, and when finished will feature new kitchens, baths, windows, carpeting and decorating. The building`s mechanicals will either be upgraded or replaced. The building has a pool, indoor parking, a sundeck, laundry facilities and a bicycle room. In addition, most of the building`s units feature unobstructed east and west views of the city.
”We`re going to price them just under $100 to $110 per square foot, which is where I think the market is,” Kaplan said. ”We think the public recognizes a value and will buy into it.”
But sometimes it proves a harder sell than that. That`s what Jules Marling has found out at 345 W. Fullerton Pkwy., a twin-tower property about a half-mile south of Kaplan`s project on Hampden Court.
Marling said he bought the property in October, 1989, for $20.5 million, or about $89 per square foot. There are 216 units, 187 of which have two bedrooms and two baths.
Of the 216 units, only 30 have sold in the year that Marling has been marketing the property. The units are priced from about $160 to $220 per square foot and are listed for $167,000 to $242,000, which Marling says will allow for a 20 percent profit margin, after the cost of improvements is factored in.
”There was a lot of (physical) work that needed to be done to the building. We put on a new roof, put in a new lobby, refurbished the elevators, fixed the concrete exterior, changed the heating system from electric to hot water and put in a new air conditioning system,” said Marling, who estimates that his company spent approximately $3 million on the property`s renovation. Marling said he has priced his property to fall directly within the price ranges of competitive resale units. The numbers were based on market studies conducted by a local real estate brokerage firm.
But that strategy has not worked, and it`s not one that everyone agrees with.
”You cannot price a conversion property at market (value),” said Lieberman, whose company has converted several thousand units in the past five years in the city and the suburbs. ”You must price it below market to show that it is a quality building with real value attached to it.”
The opportunities in Chicago also have lured Inland Residential Sales Corp., which is one of the Inland Group of Companies and has converted hundreds of condos in the last few years in the northern and western suburbs, including Mt. Prospect, Glenview and Niles.
Nick Helmer, president of Inland, says his firm spent more than a year studying reports on Chicago markets before deciding to take the plunge with its first city conversion.
That project will be at 230 E. Ontario St., which was built in 1970. According to Helmer, the 144-unit building, which Inland has managed since 1983, was in need of serious repairs too costly for a rental building to afford.
Units at 230 E. Ontario range from a 670-square-foot convertible studio to an 870-square-foot one-bedroom unit. Prices are set between $110 to $115 per square foot and range from $69,900 to $89,000 for a convertible studio and $79,900 to $99,900 for a one-bedroom.
”We put in a new chiller for the air conditioning system,” Helmer said. ”We`re going to repair and refurbish the elevator cabs. We`re completely refurbishing the lobby, the exterior and the hallways. And, we`re going to give the owner essentially a brand-new unit.”
Instead of providing buyers with a prefinished unit decorated in traditional white, Helmer and Marling are allowing buyers to choose the color schemes and finishes for their units, a popular trend that has been borrowed from new-home construction. Upgrade packages are also offered.
Almost all condo converters offer tenants who stay in their units or move within the building a flat discount off the price-usually about 10 percent, Helmer said.
In addition to the ”off-the-top” discount, Helmer said he will offer tenants a free upgrade package or a cash credit at closing.
”And, of course, we hire professional movers to move them to their new units,” he said. ”It`s obviously the best for us to be collecting rent up to one day and then have the mortgage payment kick in the next day. We want to get as many tenants as possible to stay on and become owners.”
According to Christine Williams, vice president of the Real Estate Research Corp., there`s an understanding in the industry that ”if 50 percent of the tenants buy into your property, then you`ve got a successful development.”
”That`s true,” noted Helen Jaeger Roth, broker/owner of her own real estate firm and a frequent consultant to real estate developers. ”But projects that get half of that can still be successful.”
Lieberman agrees. ”You won`t see many conversions in this market with 50 percent of the tenants turning into buyers. A lot of successful projects will start with 25 percent turnover. If we can get that at Shannon Courts, it will be very good.”
”We`re projecting 30 percent tenant retention for 230 E. Ontario because we know all the residents and we know their rent-paying ability,” said Helmer. ”Fifty-six percent of our tenants could qualify to buy today. There is an additional 12 to 14 percent who marginally could buy.
”In addition, they`re a stable tenant group, most of whom work at CBS or the Merchandise Mart or up and down Michigan Avenue. They want to live there. Our job is to make them see the value of ownership.”
According to Helmer, Inland believes 18 percent tenant retention is acceptable, although its average is 27 percent.
Marling said only 10 percent of tenants at 345 W. Fullerton bought units. But he says the low figure was somewhat expected based on the building`s tenancy.
”It had a rowdy tenancy, probably because the rents weren`t particularly high. There were a lot of roommates and college kids who didn`t have the wherewithal to purchase units here,” Marling said.
But some industry experts believe Marling`s conversion didn`t retain a greater number of tenants because of the high prices he is charging for his units.
”(Marling) paid too much for it and the numbers don`t work well for buyers,” said one broker.
Marling doesn`t deny that the conversion has gone more slowly than expected.
”When we started marketing the property last July, we thought we`d get more like 15 to 20 percent of the tenants to buy. Then the market went completely flat in October, and I`m not sure anything could have been done to accelerate the sales,” Marling said.
But Marling, whose company has also been marketing the sales at the Chicago Place Condominiums, said he feels the tide is about to turn.
The company has been running ads recently advertising a buydown for units purchased at the Fullerton property. A buydown is a stepped reduction in a mortgage paid for by a third party. In this case, Marling`s company would pick up the cost of the buydown, which effectively reduces the first- and second-year interest rate of the loan.
A similar advertisement for the Chicago Place Condominiums brought 10 buyers within two weeks, Marling said.
”We feel this new buydown program is going to give the same kind of jump-start to our condos as at Chicago Place,” he added.
Krengar, who has converted about 150 units in 10 years, said he`s looking for a quick start-and a quick finish-at his property on North Kenmore.
”For me, converting condominiums is a quick way of raising cash if it works,” Krengar said. ”You`re in, you`re out, like a subdivision developer. The security is that if it doesn`t work out, you can lease out the units and cut your down side.”
