Multifamily developer looking at mixing condos in with an apartment project. Looking for the downsides.
I have been strictly a multifamily developer up to this point. But I’m out on my own now and can take a different direction. I am wondering if anyone has done apartment rentals mixed into a condo project. What I’m thinking is ~100 units of apartments and ~90 condos. Condos would be townhome style, apartments would be 4 story wrap probably. I’m thinking the condos get you more immediate cash flow, help to pay down the loan, share in the expenses and amenities of the apartments which allows you to do a larger scale project. The apartments give you a trickle of cash flow and something to sell at the end. 

Anyone done this or at least see where the negatives of this lie. I have never done condos before so I’d really like to hear the downsides.
[{"id": "goko7ly", "text": "My guess is that the biggest hurdles would be financing and zoning. Lenders may not be into funding them together, but you might get lucky and find one happy to do a modified construction-to-permanent loan. \n\nIf the all the units are on the same lot, that may make title/ownership difficult. If separate lots, probably not a problem, but at that point it\u2019s just basically doing two separate projects. The problem there is as the condo sells out, you\u2019ll be paying taxes on those gains, which actually brings up one of the biggest questions: how to defer the CG taxes on the condo development. \n\nOne place to research is how developers in NYC or Miami structure deals that are hotel/condo buildings. Are they essentially mixed use and the hotel is just treated like any other commercial use?", "replies": [{"id": "gokqknb", "text": "You bring up a good point and also something that I actually have done in the past. I\u2019ve actually condoed (that can\u2019t be a word) out floors of a building, and parceled and created an HOA for a project with three separate parcels in case of one parcel selling. \n\nI would want the two projects to share amenities. That is the only reason I would combine the projects into one. I would probably phase the project though so financing wise I would likely treat them as two separate loans. The goal would to not be to do that though because I could probably pay off the majority of the loan if not all with the condo proceeds. So I need a bank that is okay with prepayment. Then it would just be my equity at 40% of the project which would get the cash flow from the apartments and sale of the apartments. \n\nGood point on the CG tax. How do condos normally handle CG tax?", "replies": [{"id": "gokvy5i", "text": "Zoning should not really be an issue. If it\u2019s zoned residential it can be sold or rented. \n\nFinancing will likely scare the banks a little with the condos but they should be open to it if you can underwrite everything as apartments and just sell the condos if the price is right.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "goljtxj", "text": "In my area, and I would guess everywhere in the US, unless these are distinct projects, the whole complex will consist of separately deeded condos. Sure you can keep 10 of them and rent them out. Only other issues are prop taxes tend to be higher on indiv condos vs. a rental building. Also, the property will have to managed by the condo assoc.- you won't have control. Not a bad strategy to get your money out of the deal and keep some cash flow. Most people I know, however, either build for a condo sellout or hold entire property for rental. Adding to that, I know people who do both, some properties get sold and some are held.", "replies": [], "depth": 1}, {"id": "golkmmp", "text": "Condorized? Condorated? Condoization? Condoification? Yeah, no idea what the actual word is either. You are proposing a complicated product, but it\u2019s interesting and could be very profitable.\n\nYou want to hear downsides, here goes:\n\n\u2022\t\u2060Bank loan terms for condos are extremely unfavorable to the investor: 125% release prices based on the greater of the sales price or appraisal stabilized value each time a condo is sold. Max LTC is around 60%, do that math waltz in your head. Condo projects are extremely labor intensive on the lending side, and no one likes to finance them, so condo construction is priced accordingly.\n\n\n\u2022\t\u2060Condo/Apt splits are notoriously bad at selling all of the condos. Not the case universally, but that\u2019s the reputation. You\u2019ll likely get stuck with renting out condos that don\u2019t sell. Which is fine, but condo construction is of a higher quality than apartment construction so you the odds of you making a big profit off of condos you intended to sell, but now have to rent, are minimal.", "replies": [], "depth": 1}, {"id": "gonen66", "text": "Freddie will only finance projects if 80% of the units are apartments - if you go outside of that ratio you\u2019ll get crushed on valuation at exit because a lot of lenders don\u2019t want the HOA risk, but YMMV. \n\nAlso the development loan for a mixed bag project like that is going to be super complicated. Stick with one product or the other. My $0.000002", "replies": [], "depth": 1}, {"id": "goshvcu", "text": "HOA structures, shared use agreements, access easements, and lending can get messy quick. My recommendation is to get a lawyer involved early that understands how to make everything play together - particularly one familiar with agency financing requirements. If the apartments can't qualify for agency financing when you go to sell, you're cutting off a major capital source and a lot of buyers. Plus you'll have the added benefit that if it meets agency requirements, there's a 99% chance that any other lender would do it as well. Developments like this work well and are often a good sell to planning committees (bringing owners into the neighborhood, not just renters).", "replies": [{"id": "gote2er", "text": "That\u2019s what I\u2019m hoping with the planning committee. Also it\u2019s 55+ and for some reason that like that more than just standard multifamily. \n\nI was running the numbers last night and was kind of surprised how good it looks on paper, makes me think somethings wrong with my numbers lol. \n\nWhat would you think would not make it eligible for agency financing? I have only done projects that do qualify for agency financing so I\u2019m not actually sure what would disqualify it.", "replies": [{"id": "gox8v98", "text": "Biggest aspect is control. If the condos and apartments are combined in a single HOA, the apartments need to have majority control over the HOA/building/property. Can't have the condo owners making decisions that the lender on the apartment wouldn't like. Someone else here mentioned the 80% ratio, which would come into play if the condos were intermingled with apartment units. \n\nI suppose if you have townhome style condos, you could split them off on an entirely separate parcel from the apartments (even if there was a shared wall) and setup an HOA that only governs the condos. I would keep any shared amenities on the apartment parcel (prefencial to lender and condo buyers wouldn't notice a difference) and record a shared access easement/agreement with the condo HOA that ran with the property. Condo HOA would pay towards use/maintenance and keep the lender happy. Either way, a good lawyer can flush out any issues better than my half baked brainstorm.", "replies": [{"id": "goxa4ln", "text": "This was helpful. I just talked to one of my lenders today and he discussed the need to finance this as two separate projects which I don\u2019t love but I understand. That is going to make this distinctly two separate projects so I\u2019ll update on how this goes.", "replies": [{"id": "goxf043", "text": "Good luck, keep us posted. I'm helping finance the acquisition of part of a tower right now with parking on the bottom, two floors of retail/office, 4 floors of apartments, and condos on the top 2 floors. Unwinding the ownership and HOA structure that was in place has been a 6 month mess with expensive legal bills. It pays to have a clean structure at the beginning of your deal.", "replies": [{"id": "goxvlau", "text": "Oh man. That sounds like a rough but pretty cool project. \nI\u2019ll make sure whoever acquires this doesn\u2019t have to go through that headache hah", "replies": [], "depth": 6}], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}]