Legislative proposals being considered in the District and in Montgomery County to control condominium conversions will create problems rather than solve them. Local legislators need more creative responses than simplistic and probably unlawful blanket moratoriums.
The cycle of conversion of apartment buildings to condominiums is well on its way in the District and is just beginning in Montgomery. Owners of well-located, higher-rent buildings seek to extricate themselves from rent controls that have held down the values of their properties. The recent reduction in the federal capital gains tax rate has eased the tax burden inherent in the sale of older buildings.
Many people benefit from condominium conversions. In higher-rent properties where residents can afford to purchase (and which in the District are customary), typically almost half purchase their apartments, often at effective 20 to 50 percent discounts off final prices. For examples, this past week we extended the settlement date for a tenant purchaser in one of our buildings, who as a result has the opportunity to purchase an apartment at $46,000; the current market price is $70,000.
Existing and future residents of the city benefit from the physical improvements made in the conversion process, which invariably exceed those likely to be made during rental operations. Such new capital investment effectively recycles these properties for another 10 to 20 years. This replenishment of the existing housing stock is essential because high construction costs and the fear of controls have chilled new apartment construction in our area.
The immediate neighborhood benefits, because residency in a condominium is no longer transient in nature. The interests of home owners and condominium owners are relatively identical. New resident apartment owners have a vested, long-term interest in the social and political fabric of their neighborhood.
For city hall and homeowners across the city, the threefold to fourfold increase in real property-tax revenue that results from the assessment differential of a rent-controlled apartment, compared to its value as a condiminium, creates a tax-receipts bonanza. Increased revenues from west of the Park help provide social services east of the Park.
These benefits of conversion are manifest and would be choked off and disrupted by moratoriums designed for rhetorical rather than problem-solving purposes. Nevertheless, we ought to address the difficulties created, too. Residents who choose not to purchase or who cannot afford to purchase have to move. In the District, many have found equivalent accommodations within their neighborhoods, but relocation may entail, in some cases, moving farther away.
Although most tenants can find alternative accommodations without undue hardship, the shock of displacement-both psychic and economic-to senior citizens is of special concern. Many of these citizens are fixed incomes that limit their flexibility to move.
The focus of city leaders should be on this constituency. Legislative responses should be tailored to the specific need of these people, not to a shotgun approach that will harm purchasers (including tenants), the business community and the city itself.
Harnessing the revenue generated by conversions as a partial source for financial assistance to the elderly can provide a real answer to a real problem, in the form of loans to elderly residents to help them purchase their apartments. These loans could be interest-free to the recipients during the term of the loan; the interest (at below market rate) would accrue and be repaid to the city together with the principal upon sale of the apartment, with the owner realizing any appreciated value above the loan. Upon recovery of these loans, the city would relend these funds to then qualified applicants, in effect establishing a revolving fund.
Private initiatives to maintain rental apartments in converted buildings can also be helpful. At the Van Ness North (a cooperative) we are reserving 10 percent of the apartments (as rentals for a minimum of three years) for elderly residents who do not qualify for purchase. This initiative could become widespread if the city would provide real estate tax abatement to owners of apartments in conversions reserved for rental to the elderly.
Equally critical is the curtailment of legislative proposals that stampede owner decisions to convert their properties. My experience in purchasing buildings for conversions is that most owners are reluctant to part with their properties. In 75 percent of the transactions I have consummated, extrication from rent control has been the primary motivation for sale. A threatened moratorium, however, precipitates the panic now evident in the District, where owners with no prior interest in sale are filing for eligibility certificates. A carrot, not the stick, would be more effective in slowing the pace of conversion. Vacancy decontrol in the District, for example, would retain more properties as rental accommodations than would a moratorium, which provides building transfers rather than stops them. CAPTION: Picture, no caption