Why This Investor Is Focusing on ‘Broken Condo Units’

Granite Realty Partners has completed fundraising for an investment vehicle that will de-covert condominiums. The company’s strategy is to purchase what it calls “broken condo units,” and convert the property from condominium complex into an apartment building.

Granite has already been busy purchasing qualifying condo units. The company currently owns 1,500 units in Illinois and Florida, and it has already completed the condo de-conversion business plan in four properties. Plus, Granite has a current pipeline of four projects totaling more than 1,200 units. These properties are well located but have not been successful as condo projects due to timing or home buying market conditions.

There has been past investor interest in what has been called fractured condo properties. Following the Financial Crisis in 2008, many condo projects were forced into apartment structures when the units didn’t sell. In some cases, a portion of the units had sold, while others were leased, but in all cases, the original property had been entitled and build as a condo project. In 2016 and 2017, there was increasing investor interest to purchase these deals. Berkadia, for example, purchased $60 million in fractured condo deals in Florida back in 2016 when these deals were growing in popularity.

In many ways, these properties were stigmatized for their failure to launch, and presented challenges in purchasing them and securing financing. MetroGroup Realty Finance once spoke on the matter, saying that any fractured condo deals would need to be “structured in a manner that gives the lender all of its normal underwriting sizing guidelines, while also providing the operator the flexibility to execute its business plan.”

Many of these investors, however, purchased condo properties operating as apartments with plans to convert them back into condos as the market improved. More recently, the opposite trend has also been true. Growing demand for for-sale housing has made well-located and high-end apartment buildings investor fodder for a conversion from apartments into condominiums. This trend has been popular in coastal markets, like Los Angeles and San Francisco, with limited developable land and strong buyer demand, according to a report from the Los Angeles Times.

Granite’s broken condominium de-conversion projects, on the other hand, are a new take on this trend, because the firm is focusing on properties that are currently struggling to operate as built. Granite started operating in this space in 2017 with the purchase of individual condominium units at the Village at Town Center, in Davenport, Florida. The property, much like the fractured condo units, was built in 2006 as a condo project, but failed to sell due to the Financial Crisis and had not been converted into an apartment building. Granite gained control of the units and converted the property into an apartment complex, generating a 20% return on renovation costs. The first deal illustrates the potential profitability of these projects.

Granite completed two similar projects in 2018 under the same business model, and has continued to grow its pipeline since. It is specifically targeting struggling condo communities in good locations that would benefit from a change in ownership structure.

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