The New York Times
Sunday, December 2, 1979


Is pleased to announce
The completion of the final 145 sales at our
Hillcrest Towers condominium project
In Flushing, New York

Special recognition is due the
Creative excellence of our marketing team –
JPS Associates, Inc., of New York,
Washington and Miami—who
Produced $8.7 million in sales in less
Than 10 months

Congratulations to all who made
This success possible

Conversion to Condos Beats
An Outright Sale of Property

By Jack P. Studnicky,
J.P.S. Associates

Assuming that an owner of a building has made the determination that he wants to sell the building, and assuming that he wants to sell the building, and assuming that he has consulted with his professional accounting and legal advisors with respect to the procedure to follow in carrying out a condominium conversion – and that from a tax and legal point of view the same is feasible, the following is a preliminary economic feasibility projection of the results of a condominium conversion versus an outright sale.

This preliminary picture is based on gross figures and not a detailed apartment-by-apartment analysis. It also assumes that the marketing strategy calls for a sale initially to the existing residents at a price such that their monthly condominium charges upon acquiring ownership would equal their present monthly rental prior to the purchase of their unit.

The following is a hypothetical cash flow projection of the present rental income less operating expenses and debt service for the building:

Gross Rental Income

Total Operating Expenses
(Includes Real Estate tax)

Net Income Before
Debt Service

Debt Service Per Annum

Net Cash Flow






Next, let’s assume that the project can be sold in the prevailing market in the area at ten times the net cash flow or a total price of $1.5 million over the existing mortgage which we will assume to be $1.9 million or for a gross purchase price of $3.4 million.

The economic decision before the owner is whether the projected total net proceeds on a condominium conversion would realize a higher ultimate sales price to him for the building than an outright sale at $3.4 million.

Let us further assume that the law governing condominium conversion in the area and the marketing strategy agreed upon for the project dictate that an offer be made to the existing residents of the building for a period of 90 days in the expectation that at least 40 percent of the existing residents will accept the plan and purchase units.

We will further assume that the remaining 60 percent of the units will be sold to outside purchasers at a higher price which represents the actual market value of the units based upon comparable units in the market area.

In this hypothetical case we are assuming that the gross rental income of $850,000 is generated by 170 apartment units. 40 percent of these units or 68 apartments will be sold to the present residents. Let’s assume further that the rental income paid by the 68 residents is approximately 40 percent of the gross income or approximately $340,000 per annum. We also assume that the total operating expenses for the project will remain the same after conversion and that the share thereof attributable to the 68 apartments being sold to the existing residents would be approximately 40 percent of total operating expenses or $192,000 per annum.

Assuming that the average down payment made by these buyers would be 20 percent of the purchase price, a balance of $1,440,000 would be covered by individual mortgages to these purchasers financing their purchase. Based upon an assumed 10 percent constant annual payment, the total debt service per annum which these purchasers would be paying would be approximately $144,000 per annum which would mean that their annual payments of debt service plus their share of the operating expenses would be slightly less than their present annual rental.

The following will summarize this:

Total Annual Rent Paid
By 68 Apartments $340,000

Share of Operating Expenses
Attributable to 68 Apartments $192,000

Annual Debt Service on Purchase
Of 68 Apartments ($1440,000 at
10% per annum) $144,000

The average sales price for each of the 68 apartments sold to the present residents was approximately $26,470. Let us now assume that the prevailing market value for the units based on comparable projects in the market area would be $30,000 per unit average.

Sell Out at $4,860,000

Accordingly, the remaining 102 units would be sold at an average price of approximately $30,000 per unit or a total of approximately $3,060,000. The total sell-out of the entire project to the existing residents and outside purchasers would aggregate about $4,860.000.
Of course, in order to compare this gross sell-out on a condominium conversion with the outright sale of the property for $3.4 million it is necessary to deduct from each the expenses involved in effecting each type of sale. Assuming that the expenses of an outright sale were approximately $200,000 then the total net realized on such a sale would be $3.2 million.

In order to project the expenses of a condominium conversion of this type, we must realize that this will vary greatly from area-to-area and project-to-project. The amount of construction and improvement work that must go into a given project depends in part on the physical nature of the product and its amenities in relation to comparables as well as the demands for improvements that are made by the existing residents as a condition of their acceptance of the plan and purchase of units.

Fees Vary Greatly

Also, the expenses involved in professional fees and in the marketing agency arrangements vary greatly depending upon the amount of work and the difficulties encountered. But since we are dealing with a hypothetical case and assumed numbers, we will project the following expenses in o with this conversion:

Construction (Improvements)
Sales Commissions
Professional Fees (See Note)
Administrative Expenses
Sales Materials
Repair Reserve Fund
Extra Vacancy Factor
During Construction
Financing Costs
Miscellaneous and Contingency


Deducting the $625,000 from the projected conversion sell-out of $4,860,000 leaves a net sales proceeds of $4,135,000 compared to a net sales proceeds of $3,200,000 on an outright sale. Therefore, the owner would obviously elect to proceed with the condominium conversion rather than an outright sale, subject to professional advice on tax consequences.

Note: Includes legal, accounting and engineering fees.

Reprinted with permission of Multi-Housing News