To multifamily developers: what specific policy changes would be required to make you build condos instead of apartments?
In the early 1970s, 30% of all new multifamily construction was for-sale condos. Between the and now that number has dropped to below 5%. 

I'm trying to understand what policy changes may have taken place to cause this - or, at least, what policy changes *could* take place to *reverse* this.

What would be, in your opinion, the single or couple biggest policy changes that would make you sell your developments rather than rent them out?
[{"id": "i54anyd", "text": "Rent control. Increase in multi cap rates while condo prices stay the same or increase.", "replies": [{"id": "i54b9hf", "text": "Rent control would be the \"stick\" approach, but based on the few markets in north America with very strong tenant protections, this doesn't seem like it would have exactly the desired outcome, if it just results in *really expensive* condos being built. The goal of increasing condo production is increasing affordable home ownership; do you have any \"carrot\" approaches to suggest?\n\nAs a side note, I often hear people say that the statute of limitations on construction problems is much shorter for apartments than for condos, but how does it compare to your every day detached single family homes? Is it that apartments have particularly short statutes of limitations, or that condos have particularly long statutes of limitations?", "replies": [], "depth": 2}], "depth": 1}, {"id": "i54atz9", "text": "Not a developer, but in Denver we had some massive lawsuits in the early 2000\u2019s which held the developer liable for tons of construction issues. Things like moisture on the window were the issues I can recall, which cost developers tens of millions, in addition to the fact developers offered to fix the issues at no cost but that didn\u2019t serve as remediation and the lawsuit still stood.", "replies": [{"id": "i54bh37", "text": "Are construction quality laws for condos significantly more stringent than, say, single family homes? I know apartment construction quality can be more lax than condo, but is that because we made it easier to build apartments or because we made it harder to build condos?", "replies": [{"id": "i54cfra", "text": "In my experience, it's not so much the laws. It's that condo associations are run by HOAs, and HOA s notoriously under fund preventative maintenance, which makes the building far more likely to have issues than an apartment complex. Add to that that developer risk is higher in condos, and you really need to be getting a substantially better margin.", "replies": [{"id": "i54dq2j", "text": "Does this not happen when developers build SFH neighborhoods with HOAs? A planned community near me was built by a single developer, almost all SFHs, and they manage/set up the HOA. Is this different from condos?", "replies": [{"id": "i54egam", "text": "Not really. The cost of maintaining a single family house is contained to the buyer of the house. The hoa really just maintains small common areas like medians or the pool and sometimes landscaping. The cost of maintaining condos involves things like landscaping contracts, paint jobs, garage sealant, elevator services, maintenance and replacement of high tonnage hvacs, etc. It's expensive, so rather than fund these expenses and raise taxes on your neighbors, most HOAs underfund the budget... Then they're shocked when an unmaintained garage cracks from water intrusion or settlement, or the roof goes bad, or the balconies leak. The cost of fixing the damage is even higher than the maintenance would have been, so the HOA sues the developer to try and avoid levying special assessments on their neighbors.", "replies": [], "depth": 5}, {"id": "i54ekha", "text": "SFH are a lot less complex than 5+ story buildings", "replies": [], "depth": 5}, {"id": "i553620", "text": "Different. Usually max liability period is a one year warranty with SFHs.", "replies": [{"id": "i591c6r", "text": "So maybe the policy answer, other than reducing the time for developers to be sued or to have a very strict standard for what developers can be sued for (i.e. only something that would result in catastrophic failure of the building), is to have state laws requiring HOAs to fund a certain amount regardless of what the HOA board wants? Like a minimum fund for maintenance of the building including contingencies?", "replies": [{"id": "i592jjt", "text": "Probably won\u2019t make a difference. The maintenance piece is mutually exclusive to the developer liability piece. \n\nAlso, in almost all parts of the US, demand for SFHs greatly outpace the demand for condos. There\u2019s a much greater buyer pool out there for SFHs.", "replies": [{"id": "i596911", "text": "Don't you think the fact that that's the only thing being built and the only thing allowed by-right in most zoning codes in most residential areas is part of that? SFHs cause enormous environmental damage due to their sprawl, and they are unaffordable for many, many people. As a country we used to build a lot more condos, townhouses, and multiplexes, and we stopped doing that around 40-50 years ago. The obvious consequence of that is that home ownership is much more difficult to obtain than it once was and there's a housing crisis.", "replies": [{"id": "i59bkoc", "text": "No I think most people just don\u2019t want to live in condos. A small group does. Another small group is indifferent and would be open to it, but most of the people in the country do not want to live in condos.", "replies": [], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "i54cg1k", "text": "Renters don\u2019t sue, they just move out. Condo/home owners have skin the game and will go after the developer if they can.", "replies": [{"id": "i55ohzy", "text": "What are they suing over? From a layperson's perspective, it's not like apartments are constantly falling apart/unsafe housing situations, and condos are supposedly built to a higher standard - what kind of defects cause so many problems in condos that the liability lasts so much longer? Is it a safety issue, or what?", "replies": [{"id": "i57hdwu", "text": "Surfside collapse should help you understand what happens when a condo building is underfunded. It is usually a caliber of construction issue AND a reluctance on the part of the condo HOA to spend money on what is truly needed by the building \u2014 even on safety issues.\n\nNo one wants to be told, \u201chey \u2014 you have a $2M structural issue, so you need to raise your HOA fees by $600/month.\u201d That\u2019s what happened at Surfside, with predictable results.", "replies": [{"id": "i57q0nd", "text": "but then why aren't apartment buildings collapsing left and right?", "replies": [{"id": "i58w8cf", "text": "No HOA board deciding on what to spend on, and apartments have to constantly compete to get new tenants.  A condo should not really care if someone can buy or sell a unit since that person still owes the fees", "replies": [], "depth": 7}, {"id": "i58xpwe", "text": "Because a single party is liable if something goes wrong. It\u2019s much less opaque. It is the landlords job ti make sure the building doesn\u2019t fall down.", "replies": [{"id": "i5911yq", "text": "So maybe the policy answer, other than reducing the time for developers to be sued or to have a very strict standard for what developers can be sued for (i.e. only something that would result in catastrophic failure of the building), is to have state laws requiring HOAs to fund a certain amount regardless of what the HOA board wants? Like a minimum fund for maintenance of the building including contingencies?", "replies": [{"id": "i591x9y", "text": "You\u2019d have a lot of very angry condo owners voting that down. Quickly. Especially in states where there are a lot of condos.", "replies": [{"id": "i595wgp", "text": "I'm less interested in worrying about the actual politics of a solution as much as I am finding some policy decision to reverse the disappearance of condos. We used to make a lot more condos than we do now; something has clearly changed, and as a result there is an enormous \"missing middle\" in housing, playing a not-so-insignificant part in the housing affordability crisis.", "replies": [{"id": "i597nug", "text": "I admire your desire to fix this issue and would be happy to discuss offline, if you send me a DM. Condos are of course part of the solution but there are broader issues to solve than only condos which we should discuss \u2014 zoning regs and parking requirements first among them.", "replies": [], "depth": 11}], "depth": 10}], "depth": 9}], "depth": 8}], "depth": 7}], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}, {"id": "i55v4vy", "text": "Condo defect lawyer comes in, starts pointing out lots of potential issues to owners/association, owners all get together and decide the lawyer is right and boom you\u2019ve gotta big condo defect lawsuit on your hands. This can happen years after the condos are built/sold so you need to be extremely well insured as a developer/GC.", "replies": [{"id": "i5f3cla", "text": "The attorneys will tear apart a unit find all the issues and extrapolate to the entire project. The HOA is obligated to sue the insurers and then everyone loses. We are seeing even in townhomes now. Insurance on those are 3x a single family detached. Makes it more viable just to build for rent in the current environment.", "replies": [{"id": "i5farcq", "text": "And if you\u2019re going to build condos the only way to make it pencil is to build very high end product with high quality of construction and margins.", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i54bsls", "text": "Most big GCs won\u2019t touch condo projects anymore due to historical litigation, exits on condo projects are taxed as income vs cap gains on MF (this is timing dependent) so limits equity partners, some states have super unfavorable condo laws for the developer basically making you liability in perpetuity even years after exiting a project, not a lot of banks want condo debt as it\u2019s higher risk because if you can\u2019t sell enough condos and go under water then you end up with a fractured condo regime. \n\nTLDR: Limited LP interest due to unfavorable tax treatment, limited or more expensive debt interest due to heightened risk, lack of GCs willing to build a for-sale product, and unfavorable state laws that keep a developer on the hook in a perpetuity.\n\nFederal level would be to incentivize tax structure for a for-sale product instead of for-rent.", "replies": [{"id": "i54dihl", "text": "Would the federal tax law change be as simple as taxing the income from condos as capital gains instead of income? Is that what you're saying? Is that feasible? \n\nI'm trying to figure out if the issue is that condos are treated very differently from single family homes in laws and regulations, making it harder to deal with, or if apartments are treated very differently from condos and SFHs, making them much easier to build than either of the two. Based on condo/apartment/SFH construction rates, I would assume it's the former rather than the latter.", "replies": [{"id": "i54mwql", "text": "No, they are treated similarly, it's just their intricacies. If you build an apartment and sell it within one-year of operation you'd be taxed on an income basis rather than capital gains, the clock starts from CO not ground break. Same goes for a condos but you can't cash flow a condo for a year prior to sale so you'd be in trouble, also your lender probably had a pre-sale requirement  (pre-CO / pre-construction start) anyway so you couldn't hold back inventory for tax reasons even if you wanted to. I've never done SFH development so can't speak to that world but in theory the taxes are the same unless you're flipping out of the land either pre/post site improvement (infrastructure/replat).\n\nThe other funky part is because sale income trickles in during sell-out you can't 1031 easily unlike a MF sale where you'll know 1) when you'll get those $$ 2) Know how much those $$$.\n\nIf I were a federal politician I would make condo development (20+ units / acre) tax exempt as long as a material % of the homes are homesteads then write bullet proof HOA docs enshrining that with some big stick if not enforced.", "replies": [], "depth": 3}, {"id": "i54o20p", "text": "Florida is also interesting because you can use pre-sale revenue to finance construction and mitigate two of the problems 1) LP interest 2) Debt interest. This is only feasible really for high-end development and you can't do something like this in every state, Texas for example.  Florida has not seen a lack of condo development over the past decade because of this law.", "replies": [], "depth": 3}], "depth": 2}, {"id": "i591hec", "text": "So maybe the policy answer, other than reducing the time for developers to be sued or to have a very strict standard for what developers can be sued for (i.e. only something that would result in catastrophic failure of the building), is to have state laws requiring HOAs to fund a certain amount regardless of what the HOA board wants? Like a minimum fund for maintenance of the building including contingencies?", "replies": [], "depth": 2}], "depth": 1}, {"id": "i54ce78", "text": "Follow the returns. If a multi family developer can make x under current policy, there\u2019s only so much policy you can impose before they stop building. Then from there it\u2019s a matter of time before demand really outgrows supply in a given market and then policy has to be loosened back to probably where it was before or even more.", "replies": [], "depth": 1}, {"id": "i54ctd7", "text": "Laws in many states were enacted around 2010 called construction liability laws, in response to a number of lawsuits in the 2000-2010 decade. The lawsuits and the laws together made it more expensive and more difficult to build condos.\n\nMy professional liability insurance went up in about 2003, if we designed a lot of multifamily, especially condos. Then, the laws came in and killed the condo market. \n\nAlso note that, now big money wants to own apartments. Less well capitalized developers will still be motivated to build condos, but the legal liability is stiff.\n\nI'm in Colorado and the construction defects liability period is 8 years, meaning the new residence owner can sue anyone involved in construction for anything for 8 years.\n\nWhat typically happens is that a certain percentage of every large condo project is purchased by an attorney's firm, that then gets a seat on the HOA. HOA's typically prepare to sue from the start of the HOA. No building is perfect, so there are always construction defects, so the question is, \"How bad is it?\"\n\nThere's talk of reforming the construction defects laws to make them less advantageous to the new owners and their attorneys.\n\nThe other side of that quality improvement for design and construction. This would cost money and mean change within the conservative construction industry.", "replies": [{"id": "i54dn3m", "text": "Thought we just recently changed our liability laws to make it less liability of developers less stringent?", "replies": [], "depth": 2}, {"id": "i58s0fd", "text": "In my metro the builder-investor operates as an apt for 5-8 years then sells them as condos. Is that common elsewhere?", "replies": [], "depth": 2}], "depth": 1}, {"id": "i54jz4z", "text": "Developer here. A few quick items:\n\n1. Entitlements for condos are vastly more complex. For example a single building of 5 units can be entitled with one title, one fee, one process. To entitle each of the 5 units in that building would require that process times 5. 5 is a small scale, imagine that X 300, or 500.\n2. Code requirements are restrictive. For example, to plat a condo might require a lot of 40'x100'. If the land can't support that lot size, it can't be done.\n3. Probably most importantly, capacity. Related to the above, if codes allows 35 units per acre as MF apartments, but only 10 units per acre as condos, obviously there's less efficiency, yield and scale by doing condos.", "replies": [{"id": "i57v01w", "text": "Okay, so then here's a potentially dumb question as a follow up - assuming zoning laws and code requirements were not an issue, and the only issue was financial feasibility, is there any scenario where it would make sense for an apartment building to go condo?", "replies": [{"id": "i59n1hk", "text": "That's a strategic question then based on the investor's exit strategy. EG, if the plan were to sell condos, and the ROI justified it to the investor, yes. Obviously this is very market-specific. Condos in one place might be worth less than apartments, in another place the opposite might be true.\n\nIf I understood the intention behind the question I might be able to be more clear.", "replies": [{"id": "i59nk8h", "text": "In some neighborhoods I know of, local legislators are in favor of and understanding of the need for dense housing and approve apartments frequently/zoned the area for density. Developers build apartments because it makes more money than condos. One of the consequences of this is that the only condos that exist here are extremely expensive, but most people who live in the area have to move out to another neighborhood if they ever want to own a home.\n\nFor the record, and to be transparent, the neighborhood I'm talking about is Crystal City area in Arlington, VA, but I also understand that there are a lot of neighborhoods like this across the country.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i54kjdw", "text": "This is an interesting thread for someone in Canada to read - right now condo is far more favoured for multifamily developers because rents haven\u2019t caught up with cost increases yet and it\u2019s almost impossible to make a deal pencil. Particularly in major metros.", "replies": [], "depth": 1}, {"id": "i54t64h", "text": "I think to make condos attractive would be creating special bonuses for developers in order to incentive ownership. For example, a city could lower impact fees, or increase the density of properties that are condos and with the restriction that would make it for mostly owner users (for example, all units would need to be in the name of the household, and would only be allowed to rent it for change of jobs, change on the family or any other change that indicates is a move issue and not with the intention of investment). I would also encourage retail on the bottom floor to be owned by the condo association for the profit to help residents with the HOA.", "replies": [], "depth": 1}, {"id": "i550jpr", "text": "You\u2019d need some kind of mechanism where the developer could exit with profit and be 100% guaranteed not to be liable. Maybe upon some kind of inspection or something.", "replies": [], "depth": 1}, {"id": "i558naa", "text": "Slightly off topic. Here on Maui we built almost exclusively condos and almost no apartments. For many of these properties 30 or 40 years have passed and it turns out that the HOA fees have become almost as large as the mortgages. That's because as those condos aged they needed more and more repairs - new elevators, new roofs, storm damage, flooding, you name it -- the result was additional special assessments. Many of the early  condos are way too close to the water and in danger of being undermined  by the increasing impact of sea level rise. Here we have only expensive homes, condos and rentals. There is very little here that the average working person could afford to rent, much less buy.", "replies": [], "depth": 1}, {"id": "i55g24p", "text": "I work for a large GC and we won\u2019t build condos due to the liability. Our warranty for projects is usually 1 year, sometimes 2. For condos from what I have been told is 10 years. That being said, my next project will have a condo tower. We won\u2019t do condos, or EIFS, until a customer wants to do a condo or use EIFS.", "replies": [{"id": "i591f1a", "text": "So maybe the policy answer, other than reducing the time for developers to be sued or to have a very strict standard for what developers can be sued for (i.e. only something that would result in catastrophic failure of the building), is to have state laws requiring HOAs to fund a certain amount regardless of what the HOA board wants? Like a minimum fund for maintenance of the building including contingencies?", "replies": [{"id": "i59mheu", "text": "I don\u2019t know what the answer would be. I do know for this project our upper management and the developer discussed having an escrow account for a \u201cmake them happy fund\u201d to fix whatever issues arise with condo owners.", "replies": [], "depth": 3}, {"id": "i5gqm2j", "text": "I\u2019ve been thinking about this thread the past couple of days. In the US, Texas in particular, I think if a more favorable policy for condo builders were to be enacted, it would be good for developers, and in turn good for first time home buyers. I bought my home (first home) 3 years ago. Due to the high demand in our market it would probably sell for $150K more than what I paid for it originally. First time home buyers are being priced out of buying due to the larger down payments required. Your average 4br/3 bath 2500 sf (all rough numbers) in DFW suburbs probably sold for around $250K 10 years ago. Now to get that today you are probably paying $450k-$500k minimum to get that. I think an influx of condos would allow first time home buyers to own property without having to save 10-20% for a down payment for a $500k home. \n\n\nWhat the policy changes are is complex and something I can\u2019t answer, but I can say it involves the liability duration being too long as is.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "i55hizt", "text": "What returns do condo developer go for? For apartments it\u2019s 5% yield. I\u2019m assuming for condos it is 20% total profit", "replies": [], "depth": 1}, {"id": "i578yfn", "text": "Legal liability needs to be limited. IE no one wants to get sued and historically everyone does get sued in a condo deal.", "replies": [], "depth": 1}, {"id": "i58dtvv", "text": "Rent control or increased rent control in an area would fuel the development of condos over apartments. \n\nExamples: \n\nIn San Francisco, pre-1995 all small multifamily properties were exempt from rent control but since 1995 only buildings built after 1980 were exempt. This made it an incentive for investors to convert apartments into condos or demolish the building and rebuild. Both instances; tenants lose.\n\nIn the 1970s, Washington, DC, saw its rental housing stock decline from 199,000 to less than 176,000 because fewer people were willing to rent their homes because of price controls.\n\nIn Santa Monica, California, in 1979, the number of building permits plummeted by 90 percent from just a few years earlier because\u2014again\u2014rent control laws made it unprofitable to construct new housing.\n\nhttps://www.bloomberg.com/opinion/articles/2018-01-18/yup-rent-control-does-more-harm-than-good", "replies": [], "depth": 1}, {"id": "i5tm8ei", "text": "I suspect so. That probably shakes out the problems,  pays back some loans and gets around (kind of) the construction defects laws.", "replies": [], "depth": 1}]