It sounds like a dumb question – they exist because people like the security of owning a home combined with the services and lower costs that apartments offer, duh! But upon further reflection, condominium-style tenure can be a bit problematic.
The main problem, as I see it, is that a building that’s been carved up into condo units can almost never be redeveloped. So much so that preservationists have been known to cheer on developers doing condo and co-op conversions of historic properties:
Indeed, sometimes preservation advocates look to condo developers as white knights. Since the Bialystoker Center for Nursing and Rehabilitation on East Broadway closed last year, Laurie Tobias Cohen, the executive director of the Lower East Side Jewish Conservancy, has been “extremely eager” for a developer to buy the historic building and convert it to co-ops or condos. The closing of the nursing home was a great loss, she said; the goal now is to prevent the demolition, or further deterioration, of the building. “What we don’t want,” she said, “is to lose any more of the built historic fabric.”
This is no doubt an elegant solution to the problem of unprotected historic buildings, but what about the less-than-stunning condos and co-ops that have been built in the US – and pretty much every where else in the world! – since the end of World War II?
Why are condo buildings impossible to redevelop? Simple: gravity! You can’t keep your apartment on the 17th floor while someone demolishes their 5th floor unit. In Canada, Australia, New Zealand, and Singapore, they call condos “strata” apartments, which reflects what they really are: floors of apartments layered inseparably atop each other. To redevelop a condo or co-op building, you have to buy every single unit, after which you can dissolve the condo structure and own the property in fee simple (i.e., ownership over both the land and the structures on it – the way you own a detached or attached single-family home, or a landlord owns a building). And buying up every single unit in anything but the smallest of buildings is next to impossible.
So in theory, carving a building into condos should diminish its property value. All buildings are depreciating assets (long-run historic potential is too far into the future to matter), but when you own property in fee simple you can replace the buildings on it, ideally with bigger, more valuable ones (although not always “bigger” ones…more on that later). This option basically doesn’t exist for condos and co-ops (which for the purposes of this discussion are the same). One would think that dividing a building into separately-controlled residential condos would be so damaging to property values that nobody would ever do it, and yet, at least in the United States, it happens quite often.
The federal enabling legislation for the condominium form of ownership didn’t actually exist until 1970, when it was enacted for the benefit of Puerto Rico, and not, I believe, because of pressure from mainland developers. There had always been co-ops, at least in New York City (like the Dakota), and I’m not sure if these prewar co-op buildings were ever redeveloped (anybody know?), but they were only for the very wealthy and were much rarer during New York’s unregulated prewar growth period than they are today.
But condos didn’t become popular on the mainland for another 10 years after the 1970 enabling act (remember, the federal legislation was not passed in response to demand by mainland developers), so the oldest condos in American cities aren’t more than about 30 years old. But these are beginning to age – aesthetically, functionally, and density-wise – and I think in the not-so-distant future we are going to begin to feel negative repercussions from buildings that basically can’t be torn down without violating someone’s property rights. (I’ll also discuss later how Singapore does exactly that to get around the problem of a nearly 90 percent home ownership rate in a city-state chock full of multifamily buildings and a culture that has no love for second-hand apartments.)
I should also add that the inflexibility that comes with dispersed ownership in condos and co-ops can be problematic even before redevelopment. I once spoke to someone at a firm that did energy retrofits for prewar buildings in New York who said that even when the return on investment is obvious, it’s sometimes very difficult to get co-op and condo boards to approve the upgrades. But apartment landlords, he said, are much more economically rational, and are therefore willing to invest money when they see the savings. That seems borne out in this NYT article about a highly polluting heating oil used in New York that the city is trying to convince apartment buildings to phase out. It doesn’t mention rentals vs. co-ops/condos specifically, but all the drama in the article revolves around trying to convince co-op boards – not landlords – that it’s in their financial interest to do the retrofit. (I don’t think those sorts of oil furnaces were still around by the ’80s when condos became popular.)
So, back to the original question: why the hell do condos exist?
Though most of the (very smart!) real estate professionals I’ve talked to about it had never thought about it, I’ve read a few theories, and have a few of my own, which I’ll list, but I encourage readers – especially those with knowledge of foreign property markets where incentives and outcomes differ – to chime in. (I’m interested especially in East Asia, where the value placed on new housing is much higher than in long-built out American and European cities.)
So, without further ado, a few possible reasons why condos and co-ops exist…
Tax subsidies. Henry Hansmann at Yale Law wrote a paper in 1991 arguing that condos and co-ops exist mostly for their tax advantages, and that absent these, there would be far fewer. I emailed Henry recently asking if he still believes this, and he was nice enough to respond that he did, but that he hadn’t really kept up on the issue since 1991. But the paper is pretty persuasive, with the caveat (as always) that the math is beyond me. Here’re the first two paragraphs of the paper, which is available as a free PDF:
Twenty-five years ago, cooperative apartment buildings were uncommon in the United States, and condominiums were virtually nonexistent. Since then, however, both forms, and particularly condominiums, have spread rapidly through the real estate market. This article explores the factors responsible for this development. In the process, it also assesses the relative transactional efficiency of consumer ownership and investor ownership in multiunit housing.
I argue that two factors appear principally responsible for the recent spread of cooperatives and condominiums. First is the large tax subsidy to owner-occupied housing that has existed since the Second World War and that has been particularly large during the past two decades. Second is innovation in the forms available for organizing ownership in multiunit dwellings. A variety of considerations suggest that the first of these factors has been more important than the second and that, in the absence of the tax subsidy, cooperatives and condominiums would occupy a much smaller share of the housing market than they do at present. In support of this analysis, this article offers the first sophisticated calculations of the magnitude of the pure tax subsidy to owner-occupied housing, as opposed to rental housing, and of the changes in that subsidy over the past fifty years.
In support of his tax theory he mentions the relative paucity of commercial condos, where ownership is not privileged in the tax code over renting. In fact, I recently worked with a New York City developer who bought and carved an aging postwar skyscraper across from the United Nations into condominiums to market (very successfully, it turned out) to foreign countries for their permanent missions to the UN, specifically because they don’t have to pay property taxes by virtue of their sovereign status, while their landlords do.
Rent regulation. In certain cases it appears obvious that condos and co-ops were created because rental profits were artificially capped through rent controls. This was definitely the case with the massive wave of co-ops that appeared in the ’80s in New York City. Landlords realized they couldn’t make much money renting the units at regulated prices, so they sold them to tenants at unregulated ones. Because the current tenant was the only person they could sell to, the tenant had an unusual among of pricing power (especially in the ’80s, before prices started skyrocketing and, at least I assume, raised the possibility of luxury decontrol so that landlords gained the upper hand), and therefore many got “insider deals” – that is, they bought their apartments as co-ops for less than market value.
I once read – but cannot confirm – that rent controls in prewar Europe had a similar effect on tenure choice in new construction. Rents were regulated but sales prices were not, so many builders (and maybe landlords with already-built buildings?) decided to simply sell the units outright as co-ops or condos (can’t remember which) at prices that were unregulated. Then again, in Europe there is (and was) also the aforementioned issue of restrictive land use regulation, which was introduced earlier than in the US (where the really restrictive stuff didn’t start till the 1960s), so it may have been a factor in encouraging condos/co-ops. (Someone who actually knows what they’re talking about regarding Europe, rent regs, and housing tenure – please validate me and/or set me straight!
Restrictive land use regulation. This is one that I thought of on my own, although I don’t think it’s as solid as the tax subsidies and rent regulation explanations. Redevelopment can only happen if the government lets it happen, and though zoning doesn’t (usually) forbid you from razing and rebuilding, it does often prevent building a bigger structure. Some will eventually redevelop their property even if they can’t raise the square footage, but they’re much less likely to do so. And if your right to redevelop is curtailed anyway by land use regulations (even more so if it’s got historic preservation protection), then you’ll have less compunction about giving it up entirely by carving your property into condos.
Time value of money. Economists dating back to the School of Salamanca have taught that a dollar today is worth more than a dollar tomorrow, and that a dollar in a million years is practically worthless. Redevelopment is by definition far into the future from the time that the developer is making the choice between rentals and condos. The “option to redevelop,” as one developer I spoke to called it, may simply be too far into the future to matter, and especially to overcome the benefits of owning your own home without having to maintain the grounds and, at least in cases where the units are stacked on top of each other (i.e., in an apartment building), without having to pay for your own plot of land.
* * *
While the problem of impossible-to-redevelop condos is most acute in apartment buildings, where you physically cannot redevelop one unit without disturbing the rest, it has also hindered non-stacked condo units. Lydia DePillis (peace be upon her) recently noted an example in DC’s ritzy Logan Circle neighborhood of non-stacked condos, usually found in more suburban locations, that were originally built as affordable housing, but now can’t be redeveloped because the owners can’t all agree to sell. Which is a reminder that condos’ lack of redevelopment potential is not only a problem for a city’s overall affordability and fabric (and aesthetics, in many cases!), but it also really sucks for condo owners who’d like to cash out but can’t because of their intransigent next-door neighbor.
Now onto the case of Singapore. Singapore has highly encouraged homeownership as a means of social engineering (despite its free market bonafides, Singaporean housing policy is highly interventionist), and has been very successful at it: at 87 percent, its homeownership rate is trumped only by former communist countries that simply deeded people’s state-owned apartments to them after the fall of the wall (which I’m sure is going to become a huge problem once Eastern Europeans become wealthy enough to want to redevelop their infamous housing blocks).
But Singapore is also an incredibly dense city-state where the vast majority lives in multifamily buildings, so “homeownership” means owning your own strata unit (their term for a condo, also used in Australia, New Zealand, and Canada). And like all strata and condo buildings, the owners will almost never reach an agreement to sell, so they cannot be redeveloped by conventional means. Combine that with the ugliness of the buildings and the fact that Singaporeans, like all East Asians, place a high value on new homes, and you can begin to see the problem. (Worthwhile to note that en bloc sales were not allowed until a few decades after the homeownership policy took off, and it wasn’t private investors who built the unredevelopable strata towers in the first place – it was the government.)
So to solve it they instituted something called en bloc sales in 1994. The basic idea is that if a certain percentage of a designated building’s residents choose to sell their units (it used to be 90 percent, now it’s 80), then the developer wins the option to buy all the units (including apartments belonging to the “minority owners,” or those who did not approve the sale), which he can exercise at whatever price the supermajority agreed to.
The policy started with buildings that were built by the state-owned Housing Development Board, which is responsible for the vast majority of housing in the city-state, but I was told by Dr. Alice Christudason, an associate professor in the Department of Real Estate at the National University of Singapore, that private developments became subject to en bloc sales with less-than-unanimous consent in 1999 under the “Land Titles (Strata) Act,” which “supersedes any contracts made,” which of course didn’t contain any provision allowing for non-unanimous en bloc sales. (Not sure if newly-built private strata buildings contain any en bloc provisions?)
En bloc sales are very controversial, though (there’s even a TV show about them), and I can’t imagine a non-authoritarian country like the US or Japan tolerating that sort of routine violation of property rights quite the way Singapore does it.
It’s also worth noting that in some ways, a lack of redevelopability can be a positive externality. The ugliness of a 30-year-old condo building next door is mitigated by the fact that it won’t be replaced with a larger one that will take more of your light and air. And if the building is attractive – like the New York City co-ops of the turn of the last century, or possibly 1980s condo towers in the year 2100 (who knows, it could happen!) – then it’s not such a bad thing that it can’t be torn down. A lot of people much smarter than me don’t seem too concerned about the issue: I talked to NYC real estate guru Jonathan Miller about this a few months ago, and his thought on it was that it just contributes to a skyline that reflects all the layers of New York’s history.
But I do think that at some point it’ll become problematic, at least in East Asia. Thirty years from now, for example, is a 90 percent-urbanized China really going to want today’s unattractive, shoddily-built, auto-oriented condo towers marring the skyline and taking up precious land? Authoritarian China may adopt Singapore’s en bloc method of redevelopment, but what about democratic countries like Japan and South Korea that have more respect for property rights? (I’ve been told Japan didn’t have the condominium form of ownership until the early ’70s, but that means the older buildings are starting to become ripe for redevelopment.) Eventually I suppose everything will become attractive in an historic way, but what about the intervening years? (Or am I overestimating the number of condos in East Asia, and they’re actually a relatively rare form of housing tenure in multifamily buildings?)
Update: Here’s an article from March that @graemebone on Twitter sent me about Vancouver strata buildings facing this exact issue, with ballooning maintenance costs being the trigger. British Columbia passed its “Strata Titles Act” in 1966, so they’re facing these issues a few years before we will in the US. Some interesting bits about how they’re just now starting to deal with it:
“There is an implied provision in the Act, which is that if you have more than 10 units in a project, there will be one jerk,” says lawyer Patrick Williams, one of the city’s premier condo-law experts. “One jerk can bring down the whole house of cards, hold everyone to ransom.” Gioventu, from the owners association, is also less than reassuring: “If you live in a 64-unit building, think of those other 63 people you have to sell with as being like your in-laws.”
Until now, those dysfunctional relationships have been tested over familiar stresses: leaks, maintenance reserves, noise, pets, prostitution, grow-ops. Williams knows of just two cases in B.C. where judges have issued decisions on impasses between owners who want to stay and those who want to demolish and sell the land. (In both cases—one a three-owner condo in Kitsilano, the other a larger project in Burnaby—the judges ruled in favour of the owners who wanted to demolish over those willing to keep pouring money into maintenance.)
Even getting to those decisions hasn’t been easy. “The Strata Property Act here is really in its infancy,” explains Williams. Buyers don’t realize how fuzzy the law is when it comes time to shut it all down. It also sets the bar high for how much agreement is needed: 100 percent. Condo owners who can’t get that in their buildings have to go to court—as the Cypress Gardeners have done—to try to get a judge to order a sale. As if that weren’t enough, there’s another hurdle: the institutions that hold the mortgages may not go along with the deal.
And here’s some interesting research on en bloc sales in Singapore, in the same article:
In search of other jurisdictions where condo dismantling is further along, UBC professor Tsur Somerville and a group of colleagues looked to Singapore. “This is where we’re all headed,” says Somerville. They looked at the sales of 285 condo buildings after 1994 (when the government introduced regulations allowing developers looking for low-density properties to tear down and rebuild at higher densities). Their study found that the more units in a complex, the less likely the owners would agree (and the less likely a sale would happen). They found that another factor blocking sales was the difference between the smallest and largest units in a building: where units were similar in size (and, consequently, price), sales were more likely. Buildings that were owned mostly or entirely by investors reached sales agreements more easily. And sales became more likely when Singapore changed its law, reducing the owner consensus needed from 100 percent down to 80 or 90.
All this makes me wonder: why do condos/strata exist in Canada? Were they given tax subsidies similar to those in the US?
Guan Yang saysJuly 1, 2012 at 9:56 am
I’d love your thoughts on what the real alternative to condos is. It seems to be that the real alternative is long-term residential leases so tenants are somewhat secure against being kicked out because they can’t afford the apartment or the landlord wants to redevelop. My understanding is that they are not very common in the US. Why?
In the longer term, some co-ops might have a way to redevelop. The proprietary leases that actually allow shareholders to live in their apartments have to be renewed regularly. This almost always happens, because it’s impossible to get a mortgage if the proprietary lease expires soon, but I think the co-op has a lot more options available if they actually let the lease expire.
Stephen saysJuly 1, 2012 at 1:12 pm
“The main problem, as I see it, is that a building that’s been carved up into condo units can almost never be redeveloped.”
This is demonstrably false, particularly in European cities where condominiums (or ‘copropriétés’) are the norm. People break down walls to expand apartments, build them to split units into smaller divisions, pool their money to afford upgrades like elevators, and main floors are often converted from residential to commercial spaces.
Eric Fischer saysJuly 1, 2012 at 1:26 pm
It doesn’t make much difference in the overall argument, but the California law enabling condominiums was passed in 1963. I don’t know what the circumstances were, but it wasn’t just Puerto Rico that had them in 1970.
My take on the attraction of condos is that most people don’t care about redevelopment potential—they want to live in their houses or apartments, not tear them down and rebuild them later—and the condo form often gives you some freedoms (repainting, replacing appliances, having pets, not worrying about rent increases or eviction) that are not necessarily available in rentals.
Doji Star saysJuly 1, 2012 at 3:37 pm
Many Asian, or even European, condos are not freeholds. As far as I know, none are in China, although they will surely be ripe for development before 99 years are up.
Dan saysJuly 1, 2012 at 4:53 pm
That’s different from the kind of redevelopment that the author is talking about, which is tearing down the building and putting something new in its place. Or even other kinds of building-wide upgrades to the structure. I have no doubt that some cooperatives agree to pool money to do things build a new elevator, but its much much harder f you have to get everyone in a building to agree – the temptation to say no and try to free-ride is to high. And in the case of tearing down and rebuilding, being the old hold out can be very lucrative.
hoostus saysJuly 1, 2012 at 5:02 pm
“it wasn’t just Puerto Rico that had them in 1970.” The original article pulls a little sleight of hand by saying “federal legislation” was in 1970. By 1967 49 of 50 states had them. (34 of the creating their laws between 1961 and 1963, which speaks to me of quite a lot of mainland pressure to enact federal equivalents.)
hoostus saysJuly 1, 2012 at 5:08 pm
“why do condos/strata exist in Canada? Were they given tax subsidies similar to those in the US?” If — as the paper linked claims — the biggest subsidy is about failure to include imputed rental value in personal income then I would imagine that is true for every country on earth. I have a feeling that your “time value of money” hypothesis plays a big part, too, though.
Lord saysJuly 1, 2012 at 5:14 pm
Congestion and growth plays a part. This ensures prices, and costs, track incomes in congested areas. Since most peoples real income only rises in their early years, once past this point rental increases are very hard and really painful once retired. Ownership allows locking in their largest expense and is generally the only ownership option available/affordable in dense city centers. The alternative is moving out to suburbs or countryside which some do but others would prefer not to.
Ryan Miller saysJuly 1, 2012 at 5:39 pm
There are at least two further factors, whose weights are probably less than the tax subsidy but perhaps greater than others you mention: through the magic of securitization it was probably cheaper to get loans on 40 condos than on one large apartment building (which doesn’t mean that was rational) and also in the wake of studies correlating home ownership with civic virtue (or at least wealth) city zoning boards have often been more favorable to condo projects than apartments.
Cameron Murray saysJuly 1, 2012 at 5:58 pm
People are willing to pay more to own than rent. So an owner of a whole building gets more than the capitalised value of rent by selling each apartment separately. In Australia there are
CharleyFerrari saysJuly 1, 2012 at 7:03 pm
I left a related comment on one of Matt Yglessias’ posts related to “The Rent is Too Damn High,” where he explains that existing home owners also have an incentive to see development restrictions relaxed even though you would think they wouldn’t given the fact that it leads to lower housing prices. He made the comparison to living above an oil well, and the windfall you would receive if government restrictions on drilling were relaxed. I pointed out that this holds for single family homes, but condo owners don’t have this incentive. Since they’d need to make a group decision to redevelop, which will almost never happen, they will only see the downside of apartments being cheaper. So, the presence of condos not only restricts the redevelopment potential of their own units, but breeds NIMBYs who (rightfully so given their incentives) oppose redevelopment in the neighborhood as a whole.
Interesting line of thought though. I always assumed condos exist simply because there because there are some people who demand the benefits of home ownership along with the density of apartment living. Another explanation, which I’m sure is true partially because of the current demographic inversion of metro areas, is that urban areas are changing at an unprecedented rate, and home ownership is a way to receive the externalities created by this change.
Philip Brasor saysJuly 1, 2012 at 7:15 pm
Japan has had for-sale apartments since the 1960s, when the government’s housing authority started building them as part of its “new town” policy. Almost all were in buildings that were no more than five-stories high. In the late 70s more private condos went on sale and were dubbed “mansions” for their aspirational appeal. Land is and has always been at a premium in Japan so condos broadened the opportunity for more average salarymen to buy their own homes, especially in cities. Development and economic stimulus were the priorities of the authorities, and since land prices were always very high the quality of the buildings suffered. In the go-go 80s condo sales skyrocketed. The problem is that many of the condos built in the 60s and 70s are now quite old, and unlike in the West, where it’s expected that property values will always increase over time, many in Japan are not worth much of anything unless they’re in the center of major cities. Until 2002, there was no specific law dealing with redevelopment of resident-owned condominium buildings, so if residents wanted to tear their building down and put up something new they had to gain 100% approval in accordance with the Civil Code. But in 2002 the government passed a law allowing for redevelopment if four-fifths of the owners approved. Some believe the law was pushed by the construction and real estate industries to spur more development. As pointed out in the Market Urbanism article, Asians seem to prefer new buildings, and in Japan there is virtually no incentive to buy used condos. Though there have only been about 160 such redevelopment projects carried out on old condo buildings in Japan, the number may increase as more buildings become superannuated. What usually happens is that a developer talks to the condo owners’ association and makes an offer that normally involves tearing down the building and putting up something bigger, which in most cases is allowed since local governments have been increasing capacity and occupation rates over the past few decades to attract more development. The old owners may not have to pay much more to move into the new building if the developer can add enough extra units to pay for the construction and make a profit. In any case, this article gives a slightly better explanation of the process and politics involved.
MarketUrbanism saysJuly 1, 2012 at 9:38 pm
Stephen, you missed a big one that is so cleverly hidden. In almost all places, for- rent multifamily pays property taxes at a much higher fraction of assessed value. When I say much higher, I mean almost double in many places.
One wouldn’t know this unless you analyze rental cash flow and tried to understand property taxes.
Basically, it’s another way of pandering to the owners, who are more likely to vote compared to renters. Plus renters don’t really know how much of their rent goes to pay property taxes. Landlords should start telling them – they’d be pissed and start voting… But maybe they’d buy a condo and move out if they did know how much they are being taxed.
I’d be interested in seeing how the taxing varies in different cities.
MarketUrbanism saysJuly 1, 2012 at 9:53 pm
Then again, I should concede that investment real estate enjoys many tax benefits that partially narrows the gap compared to owner-occupied, the biggest being depreciation…
gwern0 saysJuly 1, 2012 at 10:16 pm
> To redevelop a condo or co-op building, you have to buy every single
unit, after which you can dissolve the condo structure and own the
property in fee simple (i.e., ownership over both the land and the
structures on it – the way you own a detached or attached single-family
home, or a landlord owns a building). And buying up every single unit in
anything but the smallest of buildings is next to impossible.
Well, that’s OK. Coase’s theorem and the free market guarantees that condo buildings and individual units will flow towards the agents who can derive the most value from them, so if it’s impossible, that’s good! Right?
John McDonnell saysJuly 1, 2012 at 10:29 pm
> most people don’t care about redevelopment potential
It’s not really the people buying the condos that have this concern, it’s the people building the condo building and selling it as condos instead of selling it to a rental management company. Basically the author saying it’s surprising that something that destroys so much value is still viable economically relative to the alternatives.
Mathieu Helie saysJuly 1, 2012 at 10:43 pm
Sounds like a non-problem to me. Why would you need to redevelop a multi-story building when there are plenty of low-rise buildings with single owners around? It would take a total failure of the system to make it necessary to redevelop the lot (has happened in some older Parisian suburban condos such as in Clichy-Montfermeil, where apartments are being seized because condo fees are rising to meet upkeep increases).
Condominiums are likely the end-state of an urban lot – they complete the process of land subdivision (see http://emergenturbanism.com/2009/06/30/modeling-the-processes-of-urban-emergence ) by multiplying the lot into multiple stories and applying a final subdivision. If a city has reached this kind of density, it’s because it has matured and stabilized. The amount of energy expended to redevelop a condo is astronomical compared to any other redevelopment, so it makes sense that it would appear impossible.
But the whole point of urbanism is that you can fix problems by adding in some adjacent space, not by destroying everything and starting over.
Oliver Neukum saysJuly 2, 2012 at 3:34 am
For the buyers: They could not afford a house, yet they want the security of ownership. For the developer: He gets the money now and can buy another property.
baklazhan saysJuly 2, 2012 at 4:07 am
Perhaps the building is not in good shape, 19/20 residents want to demolish and rebuild, and 1/20 refuses. That seems like a problem to me.
Shlomo saysJuly 2, 2012 at 5:35 am
Israel is much more densely populated that the US but is not as dense as Singapore. Israeli urban areas mainly consist of 3-4 story condo buildings constructed as far back as the 1930s. Recently an “en bloc” type law was passed (called “pinui-binui”, i.e. evacuation-building) requiring just 75% of owners to agree in order for a building to be destroyed and a new, taller building built on the site. I think all original owners are guaranteed ownership of a unit in the new development once it is finished. This has been used to replace many decaying buildings in central areas which where wholly unsuited for the current high property value of the site.
Mathieu Helie saysJuly 2, 2012 at 10:29 am
They can raise condo fees until it makes no sense to hold on, or they fail to pay up and their apartment is repossessed. (Already happening in derelict old condominiums in France, as I mentioned.)
Daniel_N saysJuly 2, 2012 at 10:49 am
Interesting topic. I suppose it’s possible for a condo deed restriction to have a “sunset clause” that would allow the condo association to sell off the building at any time with a supermajority vote. I’ve never heard of any with this, but perhaps there are some.
ohwilleke saysJuly 2, 2012 at 3:15 pm
Wrong question. Why didn’t the U.S. get condos sooner. You could buy them in Europe long before you could in the U.S.
There are lots of big plusses for condos relative to, for example, co-ops where you are held hostage to the good credit of your neighbors since all residents collectively service one mortgage (spreading risk too far and reducing alienability), and apartments where a consumer can’t lock in a good rent for a long period in most cases. Apartment buildings with long term leases (at the extreme, rent control) have similar redevelopment problems to condos. Henry Hansmann’s book, “The Ownership of Enterprise” actually explore all of this at some length. There are collective action problems in condos that aren’t present in apartments, but the financing issues are probably at least as important as the tax issues.
As you note, redevelopment is a lot less viable than it might seem, even in single family units. Try putting a new multi-family propery in a single family Levittown development and see how far you get. Zoning strongly cements current uses as destiny for the time frame that most property buyers have in mind, and most single family suburban development is limited by the need for approval from an architectural control committee with neighbors on it as well.
The issue of holdouts from redevelopment is pretty much a subtle point in condo declaration drafting (which has a potential out through supermajority amendments of the declarations over the objections of the holdouts), not a flaw in the institution itself.
citizen15 saysJuly 2, 2012 at 3:29 pm
I’m not sure why you characterize the en-bloc sales rules as authoritarian or disrespectful of property rights. My first thought when I started reading this post was that such a provision would solve the problem of a few holdouts. An acquisition of an entire condo building seems analagous to acquisition of a corporation, where 100% shareholder approval typically is not required. If a certain percentage of shareholders approve the sale, then the acquirer can acquire all the shares of the target company. That’s not really violating the shareholders’ property rights; it’s part of the corporation ownership structure.
I can certainly understand the objection to implementing an en-bloc provision after the fact, i.e., after the condo deeds are issued with no such provision. However, it seems a reasonable provision to include in the deeds of any new condos that are built going forward. For existing condos, maybe condo owners can agree now to amend their deeds to add an en-bloc provision that will take effect some time in the future, for example, 10 or 20 years from now. Presumably, it will be easier to get agreement from all the condo owners if the prospect of an en-bloc sale is so far into the indefinite future that no one knows now whether they will be on the side of wanting to sell or not wanting to sell.
baklazhan saysJuly 2, 2012 at 5:25 pm
Don’t the residents have to vote to raise fees? If there was a majority which was in favor of rebuilding, wouldn’t they want to spend the absolute minimum on maintenance?
And even if the fees could be raised, what happens when the apartments are repossessed? Are they resold, presumably at a very low cost? Does the association keep them? It seems like it would turn into a game of chicken, where owners could be driven out, until the last few would have control over the entire building, and could then cash in for a huge windfall.
Brian F. Kelcey saysJuly 3, 2012 at 11:42 am
Tried posting on this the other day at 4am and screwed it up.
Short version: there are some subsidies in the Canadian system: you don’t pay capital gains tax on a flipped residence if you’re the owner-occupier, and , and in some areas, there’s minor subsidies for residential heritage renewal. However, the biggest subsidy that Americans receive isn’t present in Canada: we can’t write off mortgage interest.
And in most cities I’ve worked in or checked, the property tax portioning system actually penalizes condo units in Canada relative to single-family homes by taxing their value at a higher mill rate (…for a range of reasons, the most obvious being the fact that politically, they can get away with it. Condo owners tend to compare their tax bill to single-family tax bills generally, and not on a value-to-value basis. And now that I’m typing this, I’m seeing that someone made the same point two days ago, so, clearly, I’m not crazy in making that observation. 🙂
Paul saysJuly 5, 2012 at 12:46 pm
In “up” real-estate markets (which we’ve had a lot of over the last, condo-heavy generation) a developer can make more by taking (and re-investing) the quick capital gain on building/selling a condo then by slogging it out through a generation of apartment ownership. Basically if it’s more expensive to buy than it is to rent, then if there’s a market for selling domiciles, that’s the business to be in. If/when the effective cost of renting exceeds that of buying I’d expect to see more rental units built. In Canada a further spur to the move to condos 30 years ago was the removal of some preferential capital gains treatment that had previously been applied to rental stock. But I think at core, the appeal of a quick borrow-build-sell-profit cycle and the relative profitability is all you need to look at.
MarketUrbanism saysJuly 5, 2012 at 1:43 pm
Developers still build apartments to flip for quick capital gains, it’s just for a different customer: apartment investors. Some apartment developers build to hold, others build to sell…
John Thacker saysJuly 7, 2012 at 2:25 pm
“I can’t imagine a non-authoritarian country like the US or Japan tolerating that sort of routine violation of property rights quite the way Singapore does it.”
Is the way Singapore does it particularly worse than the way the US did it in Kelo v. New London? Eminent domain for pure economic reasons seems to be pretty close to this.
Stephen Smith saysJuly 8, 2012 at 12:16 am
Well if you see my most recent post, it turns out that Japan does do it, but the process is encumbered by courts in a way that it isn’t in Singapore…I’d say we’re both half right and half wrong.
In individual cases it’s definitely not as bad as Kelo-style eminent domain, but inappropriate eminent domain in the US is much rarer (in proportion to population, of course) than en bloc sales are in Singapore. A market of just 5 million people can support a whole TV show whose drama is derived from an en bloc sale!
Eminent domain is horrible and very frustrating – my own half of hometown’s real estate market is basically ruled by the Bryn Mawr Hospital, which uses the threat of eminent domain to buy up whatever property it wants (and then, naturally, demolishes what’s on it and turns it into a grass or parking lot, waiting for money to build that may or may not ever come). But it’s used much more rarely than en bloc sales are in Singapore, so people give it a pass, I think.
Stephen Smith saysJuly 8, 2012 at 12:17 am
*Eminent domain abuse is horrible and very frustrating
TheTysonsCorner saysNovember 17, 2012 at 9:33 pm
It also disregards the fact that there are companies that purchase condo units and rent them out over the 5+ year process of buying a depreciated building. The real issue with this article is it makes no differentiation between a building which is aged and showing and a building which is very livable and frankly shouldnt be redeveloped. When a building starts showing its age it is often not as difficult as the author makes it seem to buy it out.
Frankly it is no different than buying a single family neighborhood for redevelopment, trade vertical for horizontal. The key becomes WHY is the person buying it. If it is just to tear it down to replace it with the same amount of space but renovated then yes the economics dont make sense. If it is tearing it down, paying a premium to do buy out in an orderly way, and building a structure on the same land but with two times as much space and possibly for the purpose converting to a full rental then the economics become more favorable.
Charlie Oxford saysDecember 16, 2012 at 9:51 pm
I agree. Many people look for comfort and condos are very good way to achieve this. Forestville condo offers many facilities and great amenities that one is looking for in a condo, including a nice big community pool.
DMalcolmCarson saysMarch 4, 2014 at 3:57 pm
Simple: renting is almost always a losing proposition long-term, and yet, there are plenty of people who don’t need/want a single family house.
wi11iedigital saysJuly 10, 2016 at 8:10 pm
Exactly, there are companies that specialize in this. Rarely is it self-organized by the HOA, but no reason it couldn’t be with an active board with some real estate knowledge. And yes, MANY condo associations have supermajority clauses that lets the HOA do almost anything with a large enough majority. And for the holdouts, everybody has a price. You just buy them out. The ROIC on any condo redevelopment would be such that you can pay double the market rate for a unit or two and only have a minor impact.
hcat saysDecember 13, 2016 at 10:15 pm
HOA single family developments are really just horizontal condos. Same issue there?
hcat saysDecember 13, 2016 at 10:17 pm
We’ve had “leasehold” in some Irvine Company areas in California. I’ve also heard that rent control creates a situation similar to “leasehold.”
Marlese Adams saysJanuary 29, 2018 at 6:43 pm
In Chicago, it basically just goes by your bylaws. Many condo associations, particularly those that permit units to be rented out by investors, have a clause that if a certain percentage of owners agree to sell, generally 75%, then the whole building is sold. The owners each get a fixed price for their unit, regardless of condition, and the units are generally turned back into apartments. It’s called “de-conversion”. It’s uncommon in buildings were renting is not permitted because you don’t have as many disinterested investors.