Renting that luxury condo

Too timid to take a plunge into a stagnant condo market? Can't sell your suburban ranch, but want to swap yard work for high-rise living? Or can't qualify for a mortgage because your credit isn't perfect?

The answer might lie in the misfortunes of condo developers who didn't time the market just right. Hundreds of for-sale condo units in the Twin Cities metro area are now being leased by condo developers who are trying to turn lemons into lemonade at a time when hundreds of new apartments are hitting the market.

It's the reversal of a trend that started just a few years ago when well- located apartment buildings, and even some that weren't, were converted into condominiums en masse.

"It's one of those good-news, bad-news things," said Brenda Hvambsal, marketing director for Steven Scott Management, which provides fee management for two developers who are renting out condos they couldn't sell.

The owner of the luxe Mist on Minnetonka condominiums, for example, came to the market just as it started drying up, and only 15 of the project's 116 units sold. The rest now are part of a lease program tailored toward finding renters who will love it so much they'll eventually become buyers.

"We wanted to make sure that we had a tenant base in the building that's as qualified as possible to become purchasers," said Matt McClain, marketing director for Equity Marketing Services in Chicago. To encourage that, renters who sign an 18-month lease can apply the equivalent of a year's worth of rent payments toward the purchase price.

McClain stressed that the program isn't an act of desperation; the owner of the building, Prudential, was a partner in the development. It acquired all the units from the developer and has deep pockets, so it could hold onto the units until the market returns.

Like many other unintentional rental property owners, Prudential doesn't have its sights set on long-term property management.

"The rental program will continue until the market turns around and we can start selling again," McClain said.

But when?

"My crystal ball is as good as any, and I'm hoping that next year we'll start selling and get back on track to our original absorption projections," McClain said.

That day can't come soon enough for Mark Dziuk, whose south Minneapolis condominium project, Le Parisien, withered as the broader condo market dried up.

When he saw the market screech to a halt a year and a half ago, he pulled his units off the market and canceled the six reservations he had already taken. The approach has been successful, he said, but not ideal. In just five weeks he rented 11 of the building's 13 units, most of them with 18-month leases.

Although he's happy to have income on those units at a time when several other developments are going into default, he's losing money. The rents, from $1,500 to $2,500, aren't enough to cover the building's costs. The renters are happy, he said, because they're living in luxury units that would have sold for $350,000 to $700,000 as vanilla shells. At this point he has no plan to sell the units.

"People love our building," said Dzuik. "It's not an apartment, it's a high-end luxury home and they get the benefit of this high-end home for the cost of an apartment."

The same is true at Mist on Minnetonka, said McClain, where the number of rented units recently hit 61. "People are renting $450,000 condos for $1,800 a month and they're getting the benefit of a high-end home," McClain said.

Still, the units are coming into a market soon to be flush with traditional rental apartments. By the end of the year 1,082 new apartments are expected to hit the market in the metro area, according to Brent Wittenberg, vice president of GVA Marquette Advisors. Another 1,300 new units are expected during 2009 including 570 in Minneapolis alone.

And while this "shadow market" -- the condo-turned-rental market -- is a concern for property owners near such buildings, it isn't having a negative effect on the broader market. In downtown Minneapolis, the average apartment vacancy rate is a healthy 5 percent, Wittenberg said.

The heat also is on in the western suburbs, where there already is a high concentration of condominiums and new apartments and condo rentals in projects near Hoigaard Village in St. Louis Park.

"It's been a very dynamic market due to this, both negative and positive," said Hvambsal. "All of us have competition that we didn't plan for."

Individual condo owners in these buildings have been caught by surprise, as well. They've watched as their property values have fallen and the units they thought would be occupied by long-term neighbors are suddenly occupied by renters who might not have the same commitment to the building. That's why the Mist on Minnetonka is doing full background checks, including criminal checks.

"We didn't want to turn it into party central," said Mist's McClain. "We want it to be what it was intended for: a high-class residential building with great amenities."

"In some ways they're upset with their own position right now," he said. "Some may want to sell right now and they would have a difficult time doing that, but in the long term, this property is going to be very successful."