Rep. Benjamin Rosenthal (D-N.Y.) has proposed a two-year moratorium on condominium conversions and a series of changes in federal tax law designed to stem what he calls "an urban Klondike fever in rental real estate."
The proposals are the product of a two-year investigation of the condominium conversion trend conducted by the House commerce, consumer and monetary affairs subcommittee that Rosenthal chairs.
"Condomania is sweeping America, displacing those on fixed and limited incomes, providing windfall profits to developers and speculators, eroding the stock of available rental housing, and escalating inflation in the housing market," Rosenthal said, in a statement this week accompanying his legislative proposals. "This runaway process must be stopped, the speculators controlled and the American people protected."
Rosenthal has been one of the few congressional members to devote attention to the condominium conversion situation, though there is growing concern within local governments about the trend. Nevertheless, it is unlikely that in the Capitol Hill environment, consumed with the administration's budget and tax-cut proposals, that the condo-conversion issue will get quick consideration.
Nevertheless, Rosenthal's proposals and a study of condo-conversion issues released by the subcommittee staff provide evidence that the trend is continuing and is unlikely to abate without congressional action.
Rosenthal's proposals include:
The Residential Rental Unit Conversion Moratorium Act, legislation designed to block conversions of both condominiums and cooperatives across the country for a two-year period. To meet that aim the bill places restrictions on loans from federally chartered institutions. The ban would not affect either the construction of new condominiums or cooperatives or tenant-run efforts to put together conversion packages.
The establishment of a one-year presidential commission to study the conversion situation. Despite extensive studies by the Department of Housing and Urban Development, the Cabinet agency has issued no recommendations for dealing with conversions, the subcommittee staff said.
A reduction of tax incentives that the subcommittee staff concluded encourage conversions through building sales to "middlemen." According to the staff analysis, the profits from the sale of individual units of a rental building to tenants are taxed at ordinary income rates, while the profits on the sale of the entire building to outsiders is taxed at the lower capital gains rates.
The Rosenthal proposal would change the law so that the gain from a sale to converters would be taxed as ordinary income if the building converts within three years of the sale. The tax plan would provide favorable capital gains tax rates for sales by landlords either to a tenant cooperative or to renters currently in a building.
In addition, the tax changes would deny owners of three or more condominium or cooperative units the right to tax deductions for mortgage interest or property tax payments and would deny deductions based in excess of gross income on the units, a proposal designed to reduce speculation.
The proposals and accompanying staff study underline the nationwide conversion trend, noting that in 1970 there were only 85,000 condominium units in the United States. Today metropolitan Chicago alone has that many. Estimates show that 160,000 units were converted nationwide last year, 10 percent higher than 1979 and that 366,000 units have been converted since 1970. About 71 percent of these conversions have taken place in the last four years.
The Washington area, according to studies by Rosenthal's staff and others, is one of the nation's fastest-developing condominium markets. In fact, a major focus of the subcommittee's investigation was the conversion of Bethesda's Promenade Apartments by American Invsco, which the study says was purchased by the Chicago company for $49 million. After the units at that building are sold, the "sellout" is estimated to be between $95 million and $100 million.
Further, the subcommittee's study says that 41,500 units have been converted in the Washington area, No. 3 in conversions after Chicago and New York. According to testimony before the subcommittee, "condomania is gobbling up close to 50 percent of the housing market in areas of Southern California, Chicago, Boston, Philadelphia, New York and Washington."
"The conversion trend is broadening and becoming significant in new markets," the panel's staff concluded. "Small towns and suburbs which previously reported virtually no conversion activity suddenly have experienced a dramatic rise in conversions."
The committee study, noting HUD reports, concludes that there is "no evidence that conversions are concentrated in metropolitan areas with higher-than-average rental vacancy rates or depressed rent levels."
The study also concluded that, although most conversions take place in luxury buildings, moderate- and low-income buildings are being converted in rising numbers. "As the cream of luxury buildings disappear from the rental market, the condo converters increasingly look to the next level of building to convert," the study said.
Fewer renters can afford to purchase their apartments as moderate-level buildings convert. The study said that about one-half to three quarters of apartment dwellers cannot afford to buy their units, placing a further crunch on the already tight rental market in major cities. The national rental vacancy rate is 4.8 percent. Washington is among the most strained rental markets, having a 2 percent vacancy rate.
"Because conversions decrease the supply of rental units without decreasing the demand for them, rents in continuing rental buildings tend to rise," the staff study concluded.