An Overview of Condominium Deconversion

​A 2020 housing report found that nearly 74 million Americans lived in homeowner association and condominium communities, with the New York metropolitan area representing the highest concentration of condominiums in the country. Condominiums, or condos, provide residents with several advantages compared to rental units and residential properties, although there are also potential drawbacks. Depending on the scenario, owners may be interested in condo conversion or deconversion.

Before learning about these processes, individuals should understand the condo industry in America. While “condo” is generally used to describe an individual unit, condominiums are large property complexes similar to apartment buildings. The major difference between condos and apartment complexes is that condo residents own their units, though there are often “community property” aspects of a condo that are collectively owned by the property’s management team. Condo management usually takes the form of a board composed of condo owners.

Condominiums have existed in one form or another since the end of the Middle Ages. They have been prominent in the United States since the 1950s, especially in populous urban areas. If a condo board or property investor feels it would be beneficial to transition from apartments to condos or from condos to apartments, they must undertake conversion or deconversion, respectively.

Condo deconversion is the process of converting all condo units in a building into for-rent apartment units. Deconversions are typically carried out as single-transaction bulk sales and are attractive for condo associations worried about a potential real estate bubble. Despite the terminology, a condo can be “deconverted” even if the property has never been used as a rental community. Deconversion is an ambitious and complex process, but it can be an invaluable tool for condo communities faced with exorbitant deferred maintenance costs.

Condo deconversions have grown in popularity in recent years. Condo boards have received several new restrictions from the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, such as the need to meet specific health standards before boards can receive loans for unit repairs and upgrades. This issue can be exacerbated by the fact that the older a building gets, the more repairs it needs. Without these repairs, condo boards struggle to meet health and safety regulations, resulting in a challenging, expensive cycle.

Condo deconversions can also help alleviate the nation’s rental property crisis. According to the National Low Income Housing Coalition, the country needs at least 7.4 million rental homes just for extremely low-income renters. Real estate investors can bypass the construction phase of new apartment units by purchasing and deconverting an existing condo community.

There are drawbacks to condo deconversions that must be considered as well. If condo owners do not secure any type of residential assurance following a deconversion, they will need to enter a hostile real estate industry in search of a new home. Florida is host to over 1.5 million condominium communities, and in recent years, the state has faced its lowest housing inventory levels in history. Condo owners will also need to assess the short-term gains of deconversion against the loss of long-term equity.

As mentioned, deconversion is often discussed in relation to condo conversions, the process of turning an apartment complex into a condo community. Conversions may also occur at hotels, office buildings, or even parking garages.

Robert Palley

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