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Condo Conversions2023-02-26T17:16:29+00:00

Condo Conversions

Condo conversions can maximize the value and flexibility of your multi unit real estate investment

Converting a multi unit property to the condominium form of ownership can have a number of benefits in the right conditions, such as:

  • Maximizing net resale price in certain markets. For example if you purchase a 6-family building in the Jersey City heights neighborhood, with the intention of renovating and flipping the property,  it will usually be much more valuable on net to sell the units to end-users as individual condo units than selling it to an investor as a rent-controlled apartment building.
  • Maximizing net sale price of new construction in certain markets. Sticking with Jersey City heights as a particularly good example, it is often not economically viable to purchase a vacant lot and construct a 2-family house for sale as a 2-family house. The price of a vacant lot is just too high compared to the net sale price of a 2-family in this neighborhood. So developers almost always elect to convert their 2-family house to two condo units and sell them that way. The price per square foot of a condo in this neighborhood is simply much higher than what a 2-family house would sell for.
  • Maximizing flexibility. A condo conversion can allow partners to split their investment into separate units they each independently own, avoiding the risks and limitations a long term partnership can entail (such as if one partner wants to sell some day but the other doesn’t), and also keeping 1031 options open and avoiding the limitations of a “drop and swap” in the future.
  • Creative/useful financing options. Some developers who purchased with hard money/bridge loans may have limited refinance options, or may want to pay off their loans while keeping a portion of their real estate. A condo conversion can allow such a developer to sell a few units, to pay off financing, while keeping the other units mortgage-free. Or the developer can refinance the units as individual residential condo units, which has significant benefits over the commercial loan that would be necessary to refinance the building as a single commercial apartment building.
  • Can be done for both commercial and residential units. Even mixed use and commercial buildings can be condo-converted.
  • A condo conversion for buildings with less than 10 units is fast and cost effective. Buildings that qualify for a PRED exemption, meaning they have 9 units or less, can be converted in 2-3 months or less. The total cost is usually between $10k-15k including all legal, architectural, survey and recording fees. Obviously it will cost less if you already have a survey and/or floor plans from an architect from your purchase or recent construction.

Some Considerations and Down Sides of a Condo Conversion

Condo conversions can have some limitations, complications and down sides, such as:

  • Condos are not always more valuable on net than an apartment building. Going back to our Jersey City example above, a condo is usually a good idea in the Heights neighborhood. But this same market logic would probably not apply in the Greenville neighborhood. No matter where your property is located, you should discuss the net value post-conversion with a realtor or other professional before converting, to make sure the numbers work.
  • Condo conversions can sometimes result in a moderate property tax increase. Remember your taxes = value of the property X tax rate. If a condo conversion raises the net value of a property by 20%, then the theoretical property taxes will also eventually go up by 20% the next October when an “added assessment” is issued. This is not guaranteed to happen in all cases and is very fact dependent, it just depends what the assessment was at time of conversion and what the value of the units will be post conversion. We can help you estimate what the taxes will be before you start the process, so you can update your numbers accordingly.
  • Selling units post conversion is always doable but can be logistically complex. It is usually a good idea to have the same attorney who handled the conversion, handle the sale of any units post-conversion. Issues such as escrows for added assessments, amendments of condo docs for particular institutional lenders and others, are best handled by an attorney with a background in condo conversion law.
  • Financing during the condo conversion process itself requires coordination with lenders. If the property being converted has a mortgage, you will need to either re-finance as condos, or make a deal with the existing lender. Such a deal often allows the units to be sold, with all proceeds from the first sales going to the lender until the underlying mortgage is paid off. But not making these arrangements in advance can lead to problems later, so you must coordinate with your lender and have a game plan.
  • Insurance must be updated. Although the net insurance cost is often comparable before and after conversion, it is very important to have the insurance updated prior to the filing of the master deed and by-laws that make the property a legal condo building/association.
  • Post-conversion tenants retain certain protections from owner-occupant evictions. In New Jersey an owner who seeks to owner-occupy a condo unit can evict its tenant at the expiration of the lease. But an owner who seeks to owner-occupy a unit in a 6-family apartment building cannot, due to the NJ Anti-Eviction Act. Converting a 6-unit building to condos will not allow an owner to evict the tenants who were in place at the time of the conversion, for owner-occupancy of a condo unit. Their protections in this regard get grandfathered in. But any tenants who move in after the conversion can be evicted for purposes of owner-occupancy.

We specialize in all areas of real estate and probate law. If you have any questions at all, please don’t hesitate to contact us.

Call (201) 354-9305 now to speak directly with an attorney, or feel free to e-mail your inquiry directly to office@cecininilaw.com. We welcome your questions!

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