Resenting the renters at troubled condos

<i> New buyers grow anxious that lessees will drag down values</i>

Few buyers who bought fancy condos in the last few years could have predicted that their building would end up as a poster child for the failed real estate market in the city. But at some buildings that’s exactly what’s happened.

Satian Pengsathapon, who is 30 and works in the advertising industry, purchased a unit in the Forté tower partly because he liked that the well-known architecture firm FXFowle designed the building. And having gone to school at the nearby Pratt Institute, he was also a fan of the neighborhood, Fort Greene.

“I haven’t had buyer’s remorse,” Pengsathapon said. “If anything, I wonder why people aren’t buying in this building.”

In August, the Clarett Group ceded control of 72 unsold units to its lender after notching only 37 closings since going on the market in early 2007; the future of the 109-unit building is unclear.

Still, Pengsathapon is clear on what he doesn’t want to see happen with those unsold units — and that’s for the lender, Eurohypo AG, to rent them out.

“I do worry about the building being turned into a rental, because then it could be difficult for potential buyers to get loans from the bank if I were to put my unit on the market for sale,” he said.

Faced with the reality of sluggish or even nonexistent sales, many developers have started renting out units in buildings that were planned as pure condominiums. The trend, which has taken root over the past year, sometimes involves renting out only a handful of sponsor-owned units.

In other instances, around half of a building’s inventory has been put up for rent.

As more buildings adopt hybrid sales/rental models, there is mounting anxiety among recent condo buyers about the extent to which their investments will be hurt by having renters live next door. As a result, buyers in buildings like the Forté are wary of welcoming renters into the fold.

Another buyer in the Forté, who asked not to be identified, said if the bank decided to rent the unsold units, it should offer money back to those who had purchased.

“I didn’t buy in this building for it to be turned into a rental,” said the owner. “If the bank did that, it would be very unfortunate for the buyers here because it would make the values go down, and they should offer to reimburse us.”

Often for a developer, renting out units is a last-ditch strategy. Most of the condo buildings that have turned to renters didn’t bite the bullet until they had been on the market for more than a year with little success.

One Brooklyn Bridge Park, for example, hit the market in April 2007, and didn’t start renting some of its units until several months ago.

As of the middle of last month, public records indicated that around 90 of the building’s 438 condos, a mere 20 percent, had sold.

Meanwhile, the Elan, a 32-unit building in Park Slope, and Clermont Greene, a 73-unit condo in Fort Greene, have also started offering rentals in the past few months.

At One Brooklyn Bridge Park, Ian Levine, RAL’s chief operating officer, disputed the notion that renting would be detrimental to those who have already bought there.

Sign Up for the undefined Newsletter

“In the best of circumstances, would we have been sold out?” said Levine. “Absolutely. But having rental [units] allowed us to retain our price integrity throughout the building.”

(The building’s current advertising campaign, meanwhile, touts that prices have been reduced by 30 percent on some of its unsold units.)

Another upshot to bringing in renters, Levine said, was that “they bring more life to the building” since they occupy spaces that had previously been vacant.

Levine said that 22 apartments in the building had been rented as of the middle of last month, and that “a handful” of the building’s renters had decided to purchase in the development.

Other condominiums, such as Williamsburg’s Northside Piers, have introduced rent-to-own programs over the past year, hoping to convert tenants into eventual buyers.

Although One Brooklyn Bridge Park’s offering plan allows RAL to take up to 25 percent of the building rental, Levine said that he doesn’t “see us going near that benchmark.” He said the building would “always be a condo.”

According to Jonathan Miller, president of the appraisal firm Miller Samuel, that identification is extremely important — on both a psychological and financial level — for those who have already purchased in a development.

“If you bought in a condo and expected it to be 100 percent owner-occupied, you also expected the building to be a kind of neighborhood” comprised of other buyers, he said. “If it’s a hybrid, then it’s not the same product you purchased.”

Beyond that, having a condo with a large number of rental units “might have financing implications,” Miller said, because if current owners want to refinance their mortgages, lenders typically require that 50 percent of a building is sold.

“It doesn’t mean refinancing is out of the question, but it might make it more difficult,” he noted.

Meanwhile, as the New York Times recently reported, some buyers are concerned that renters will not take as good care of their properties, or of the building’s common areas, as other owners would. The argument is that without the same kind of financial involvement and without concerns about selling their apartments when they are ready to move, renters simply don’t have the same incentive to make sure that their buildings are well-kept.

In addition, some sources point out that having a lot of sponsor-owned rental units in a building could drive down asking rents. That in turn can affect the amount of money individual owners could make if they chose to rent out their units.

The million-dollar question for most condo owners that now have renters in their building, however, is whether having rental units in the mix negatively affects a property’s long-term value.

It’s a question no one really knows the answer to.

“Rental-condos are an evolving trend,” said Miller. “What happens is that in a booming market, having buildings that are partially rental and partially owner-occupied doesn’t matter that much.”

Since the current market isn’t a booming one, however, it remains to be seen how much the presence of renters matters.