Has anyone dealt with a condo-to-apartment conversion?
Context: The prior owner acquired an apartment complex and converted 50% of the units into Condos. After a few years of trying to sell them off as individual Condos, they have accepted they can't execute this business plan. Now approx. 45/75 Condo units are sitting vacant. They are now looking to sell off the 60% of vacant condo units in a lump transaction.
Our business plan is to come in and do a pretty heavy Capex lift on these units and convert them back to apartment housing with the expectation to acquire the other 40% within the next 2-5 years.
However, we are left scratching our heads on how we can obtain financing for a deal like this. Obviously, we could go to a debt fund that charges a high premium for their money (especially in today's market) but we are looking for a bank or institutional lender that has more favorable terms. Many of those groups though, haven't dealt with fractured condo conversions previously and typically shy away from going out on a limb.
Curious to know if you have any recommendations on where we can get favorable financing for a deal of this nature.
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Unfortunately, I highly doubt you'd find a lender willing to do this besides debt funds. Especially in the current financing environment. Even during stable times, I'd be shocked if a traditional lender would finance this type of project due to the number of moving parts and lack of control - you'll only control 18% ( 45 * .6 / 75*2 = 18%). You'll have to get approval for everything you do which could require essentially infinite additional capital outlay (at least from a lender's perspective) and you'll need a clause in the initial PSA giving you the right to buy the remaining units (issues: the seller could raise the price substantially). I'm sure you have solid answers for these issues but traditional lenders hate hair and this project is a woolly mammoth. Out of curiosity, what spreads are you being quoted?
Sorry for the confusion - We would be buying the 45 vacant units (45/75=60%).
Spreads have been all over the place - Some debt funds have been anywhere from 9%-12% with 2-4 points of origination (With those that have been willing to take a look). Haven't had much success with local/regional banks yet. Getting term sheets from those guys is like pulling teeth sometimes.
I've done this on two deals. Relationship, regional banks are willing to do this, though it is expensive and shorter term with a lot of structure. Typically there are three facilities: initial advance, capital improvement, and condo buyback facility.
Where are you based? May have some local lenders for you.
While not condos, we've done a solid amount of conversions of flagged and non-flagged hotels to multifamily recently.
I'm out of Dallas, TX. The deal is in IL.
So there are 75 units total in the Condo association, and you’re acquiring 45 at close? I brokered a fractured condo loan with a debt fund in March. The borrower acquired 60% of the units at close. Our loan was 75% of purchase price + 100% of CapEx + a future condo acquisition facility at 75% of cost, SOFR + 3.90%. We signed the loan app ‘in early January.
The debt landscape has obviously changed since
then but If it underwrites well, we may be able to do something similar in the SOFR + high 400s range. If you’re willing to sign recourse and depending onto he size of the loan request, local banks will be the better option.
Fannie and Freddie will selectively finance fractured condo deals where the borrower has control of the condo association and ownership of 80% of the units…so the key is having a clear path to control and ownership in 80%+ of the total unit count
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