What does it take to pull off a successful condo conversion in these tight economic times?
While the answer to that question seems to have eluded many experienced Washington area developers over the last several years, one D.C. tenant group has found it to be a combination of tight organization, luck, good business sense, sound advice and, perhaps most important, a willingness to take significant risks.
Early last month, the tenants' association at the General Scott Apartments completed the purchase of their 181-unit building, located at One Scott Circle in Northwest Washington. On Sept. 16, all but two of the eligible tenants voted in favor of converting their property to condominiums. On Oct. 1, the residents signed for a $2.15 million conversion loan on the structure.
Those steps capped a struggle by the tenants that had cost them more than $300,000 over 2 1/2 years. During that time, the residents watched in despair as the D.C. condo market deteriorated to a near depression, threatening all of their efforts.
In February 1980, the building's occupants were first notified of the owners' intention to sell.
Within a few days, one of the renters, Peg Stone, sent a memo to all the other tenants proposing a meeting to discuss alternatives open to them.
Stone had lived in the building only a few months and was determined to stay. "I was mad," she explained. "I'd just moved in November. I'd searched for a building with a large apartment that I could afford.
"It was a personal thing: No, dammit, I'm not going to move."
At that initial meeting, a large crowd of tenants decided to organize an association and set up a nine-member steering committee. Within a short time, more than 80 percent of the residents had joined the group, which elected Stone its head.
The organization began gathering information from the D.C. government, community groups and other tenants' associations. The group accepted the steering committee's recommendation to have a feasibility study done at a cost of $5,000. Tenants contributed $50 each to finance it.
After a series of interviews, the residents selected an attorney and a real estate consultant who had worked with other tenant groups converting their properties.
The steering committee evolved into the tenants' association's board of directors. That group spent a great deal of time passing information on to other tenants.
Much of this liaison work was done by eight floor captains. Some of them had earlier been floor captains for the Christmas funds used to buy gifts for the building's employes.
When the feasibility study indicated that a successful conversion might be possible, the residents voted to proceed with their effort to buy the building.
Much of the support came from long-term occupants, some of whom have lived in the building since the 1940s. "We have a large population of people 62 and over," said Stone. "I told them, 'stay and join the tenants' association.' There was never any attempt to move them out.
The tenants and their attorneys began extensive negotiations with lawyers representing the two estates that owned the property.
The high percentage of membership in the tenants' association was a factor in the residents' favor. "Those meetings went on for hours and hours," said Stone. "In them, I said, 'We have 88 percent membership [in the tenants' association] and they'll go along with whatever we okay.'"
Despite their length, the negotiations were generally amicable. "I really believe the owners wanted to make it possible for the tenants to purchase the building," commented Emerald VanBuskirk, the tenant association's second chairman. "They saw how serious we were from an early point in the negotiations."
Finally, in April 1981, the residents signed a contract to purchase the property, with settlement scheduled for December of that year.
Because of the deteriorating conditions in the Washington condominium market, the tenants were unable to meet that deadline and had to have the contract extended and amended several times.
A major decision point came in March of this year. The tenants had already invested an average of $1,400 each for the tenants association's expenses. Moreover, their professional advisers told them it could cost at least that much more before they could purchase the building and obtain conversion financing.
Many banks, however, were already holding in default loans from condo developments. Much of the success of the General Scott conversion depended on whether the tenants could successfully market units to the public, because a lendor would be willing to help finance the conversion only if there were a guarantee on the public sales.
John Hoskinson, the real estate consultant advising the tenants, approached several lendors, all of whom were reluctant to make a conversion loan to the residents' group.
Through their extended negotiations, however, the tenants' association had been able to persuade the building's owners to take back a $3.1 million loan on the property at 12 percent interest. At the time, the market rate was 18 percent.
The tenants had to decide whether they should risk putting up more money for additional development costs and whether they should offer the 12 percent financing to public purchasers, to attract more buyers as quickly as possible.
Before they could obtain conversion financing, the lendors wanted the residents to make rehab plans, obtain a fixed-price construction contract, prepare the condo documents, vote in favor of conversion and line up a large percentage of tenant and public purchasers.
Even their real estate consultant wasn't sure of what path the tenants should choose."At the time, their deal wasn't significantly better than the public's," Hoskinson said. "As their professional adviser, I didn't know what they should do."
When the vote was taken, the majority decided to go ahead.
By offering favorable financing and prices competitive with other projects, the group obtained reservations on 80 percent of the units.
With these commitments, the tenants' association again approached several of the reluctant lendors. American Security Bank agreed to provide the financing. On Oct. 1, the residents signed for the $2.15 million conversion loan.
Before they secured the loan, the residents had raised and spent over $300,000 for development costs -- an average of $4,000 each -- without any assurances they would be able to complete the conversion or that they could get back even a portion of their monies.
Of the 181 efficiency and one-bed-room units, 73 were sold to original tenants. Investors have reserved 41 of the apartments and will continue renting them to their current elderly and low-income residents. Of the 67 public units, only 23 remained unsold at the end of last month.
The public units went for an average price of $43,000.The original tenants will pay an average of $33,000. The interest rate on the tenant apartments, however, will not be determined until the residents settle on their loans sometime next year, after the renovation of the building is substantially completed.
Tenant adviser Hoskinson is aware of the residents' significant achievement in a real estate market that has confounded many real estate professionals. "They refused to proceed until they had a deal that would work in the most adverse market conditions," he said. "This tenant group has done better than many developers."
Even while waiting to find out what interest rate they will pay on their units, the residents are proud of their accomplishments and the major risks they accepted.
"We wanted to make the project work, at a time when we saw that many other projects were failing because of the cost of money," explained VanBuskirk. "It was more important that the entire project work even if we ourselves wouldn't get a lower interest rate."