By BEVERLY ANN FLEMING

The gargantuan increases in the cost of single-family houses have made condominiums look extremely attractive to young householders. But rising monthly maintenance fees and other problems are giving some condo owners second thoughts.

[This is the third in a series of articles on Illinois housing problems. The first two articles explore single-family housing issues; this and following articles will discuss multi-family housing issues. The series is supported by a grant from the Ford Foundation made to Illinois Issues and the Center for Policy Studies and Program Evaluation, Sangamon State University. — Editor]

THERE'S NO DEBATE. Everyone agrees that Chicago has captured the U.S. title, "Condominium Capital." The sale of condominium units has been a major activity in Chicago area real estate for the past few years. What is debated is just how many units have been sold. The studies on the question all give different answers. Estimates range from 30,000 to 90,000 units. A more important debate is whether "condomania" is good or bad. It all depends upon whose point of view you take: the developers who make a tidy profit; the buyers who purchase the perfect housing unit for their lifestyle; or the buyers who have been "ripped off"; the tenants who are forced to move because of the conversion of an apartment building to condos; or, finally, the community that gains new revenues from property tax assessments, yet loses a portion of its rental market.

The condominium is often presented as the best of two worlds — sellers say that it offers the buyer the financial benefits and security of homeowner-ship as well as maintenance-free apartment living. In the struggle to stay ahead of inflation, condominium owners obtain the equity appreciation and tax deductions that are available to homeowners. Condominiums have been appreciating at the rate of about 12 percent a year in the Chicago area. Single-family houses are rising sharply in price, and condominiums offer a less expensive form of ownership, one which has initially eased the home-ownership crunch for some home buyers. However, the security of the inflation-immune mortage payment of ownership may be disrupted by the condominium's monthly assessment which is not immune to inflation.

The price

The current average selling price of a condominium in the greater Chicago area is $51,000; the average selling price for a single-family home is $87,000. Besides a lower price, condominiums frequently boast amenities (special recreational facilities, for example) unavailable in single-family houses. In the Chicago housing market, as in most large cities, condominiums are often the only viable ownership opportunity in the heart of the city. Consequently, condominiums attract three types of households: the "empty-nesters" (no children), those who prefer urban living, and those who desire homeownership, but cannot afford it.

For landlords, rising maintenance and operating costs (utilities, taxes, insurance) have made rental housing

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unprofitable, or at least less profitable than condominiums. Condo conversion is a happy solution. The Consumer Price Index during the period 1973-77 shows that housing costs increased an average of 8 percent per year, yet rent increases averaged only 4.7 percent. Part of the reason rental housing is unprofitable for landlords, says a 1979 report on the nation's rental crisis by the U.S. General Accounting office (Rental Housing: A National Problem That Needs Immediate Attention), is that rental units are typically older housing and cost more to operate and maintain than newer housing.

Increased rents also generate the possibility of rent control, although this does not seem to be as prevalent in Illinois as it is in other states where rapid condominium conversion is taking place. Until the 1969 federal tax reform act significantly reduced the tax advantages of rental property, landlords had some motivation to keep investments in rental property despite poor returns. An anticipated limitation on artificial tax losses (tax shelters) threatens to lessen the tax advantages of rental property even further.

The rising costs of new construction (see February, "Home building costs . . . up, up and away!") combined with escalating operating costs and lagging rents have shut down privately financed new construction of all but high-rent multi-family housing. In 1979, only 25 percent of the nation's apartment starts are expected to be privately financed. And the median monthly rent for new rental housing in 1978 was $250, a sum which is generally out of the reach of low-income families. The U.S. General Accounting Office study of the rental crisis suggests that market rents would have to increase about 25 percent above current levels in order to stimulate new investment in the private rental multi-family market. New construction is further limited by the scarcity of land available for development in desirable locations. Some communities do not even permit new multi-family construction. The scarcity of building sites for rental units was noted in a 1975 study by the U.S. Department of Housing and Urban Development (The HUD Condominum/Co-operative Study) as one sign of a market ripe for the conversion of apartment buildings to condominiums. In Chicago's case, the highly desirable and already heavily developed land along the lakefront has few building sites left. As a result, the lakefront is the vortex of condomania.

The debate

Chicago has a large supply of quality rental property in good condition that can easily be converted to condominiums. These apartment buildings double — at least — in value after conversion. Condominiums mean big profits for the housing industry; instead of writing one mortgage for a 20-unit apartment building, a savings and loan institution can write 20 condominium mortgages. Likewise, title insurance companies, insurance companies and the real estate profession can enlarge their profits greatly when the number of owners is multiplied by condominium conversion.

Condominiums encourage home-ownership which is believed to have a stabilizing and beneficial effect on a community. Again, multiple ownership of one building multiplies tax assessments, which generates additional revenue for local jurisdictions. In Cook County, however, this increase in tax income is, to some extent, counter-balanced by a homeownership tax assessment rate (16%) that is less than the rental tax assessment rate (33%).

For the consumer, buying a condo is much more complex than buying a house and there have been abuses. Thus the interest in requiring a recision clause in condominium sales contracts. Buyers who have second thoughts about their purchase could then cancel. According to Daniel Lauber, president of Planning Communications in Evanston and a national expert on condominiums, many buyers may not fully understand that for some, condo living may mean a loss of personal freedom and control of one's own environment. Decisions as to whether to permit pets or to replace the furnace are group decisions made by the condominium homeowners' association. And, says Lauber, a condominium may not be quite the inflation fighter it is heralded to be: the HUD study found that the monthly costs of owning a condominium were 30-35 percent above the rent for the same unit. Of course owners are usually willing to pay more for housing costs than tenants since they are building equity and appreciation. The cost question is dependent upon the monthly maintenance assessment. Unlike mortgage payments, the monthly assessment is not immune to inflation. The combination of mortgage payment and maintenance assessment can double or triple the monthly cost of a unit, and ultimately outstrip any tax advantages. This is particularly ominous for the owner on a fixed income or the marginal owner who has stretched all of his/her resources to get into the unit. There have been some cases in the Chicago metro area, says Lauber, where owners could not afford the monthly assessment and have not paid it. The owners' association has then been forced to go to court to have a lien placed on the property.

The assessment

The maintenance assessment is likely to rise not only because of inflation, but also because of the following factors:

1.   Developers frequently underestimate monthly costs, particularly utility costs.

2.   Assessments may go up as soon as the developer turns over control of the building to a condominium owners' association due to disagreement about

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levels of service. For example, the condominium association may decide to provide window-washing.

3.  The assessment amount is a group decision made by the condominium owners' association. Individual owners may find themselves paying for extras they do not want or need.

4.  Maintenance costs in converted buildings often skyrocket because (unknown to buyers) the building may have only received cosmetic treatment during conversion rather than thorough rehabilitation. Many converted buildings still contain antiquated plumbing, electrical and heat systems.

Condominiums appeal only to a specific segment of the housing market, and some housing experts suspect that the natural market in the Chicago area has already reached a saturation point. If they are right, resale values could be endangered. A true picture of demand for condominiums has been distorted by the investor/speculator and the reluctant buyer. It is estimated that as much as one-third of the condominium units in the Chicago area have been purchased by investor/speculators creating a false market demand and driving up prices. Investors may purchase a block of condominum units in a building, or a converter may retain control of several units and then rent them. The result is rental units in a building that was originally designed for owner-occupancy only. Conflicting interests are likely to occur among owner-occupants, absentee owners who have a voice in the homeowners' association, and tenants who have no voice nor any responsibility to abide by the

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association's regulations.

The actual market demand for condominiums may have been further distorted by those individuals who bought condos under pressure. The reluctant buyer is the condominium owner who did not actually wish to purchase a unit, but was cajoled or frightened into a purchase by the belief that equivalent rental housing would be impossible to find. A study (Condominium Conversion in Hyde Park, 1975-1979) by a University of Chicago graduate, Peter Adels, although based on a small sample, found that 70 percent of tenants who purchased condominium units in Hyde Park were reluctant buyers.

Tenants in a converted building who either cannot or do not wish to purchase a condominium must find other housing. For several reasons elderly tenants will probably not be interested in buying a condo. Often they don't need the tax breaks or equity buildup that ownership provides. Other tenants, such as students, rent in order to remain mobile or to avoid financial commitments. Unfortunately, condo conversions are frequently concentrated geographically, and an entire neighborhood can go "condo." This has happened along Chicago's lakefront. When "condomania" strikes, displaced tenants may have few rental options in the immediate area and little time to find a new home. They can be forced to move to a different neighborhood. An unwanted change of both apartment and neighborhood is especially upsetting, even traumatic to the elderly who are believed to be a significant group affected by conversion. They depend upon the security of familiar sights, sounds and people in their old neighborhoods.

Wholesale condominium conversion obviously weakens the rental market since conversion eliminates rental units. The low- and moderate-priced rental market suffers the most, and a tight rental market makes relocation difficult. A rental market vacancy rate of 5-8 percent is considered healthy. Yet at the height of Chicago's condominium activity in 1978, the city of Chicago possessed a vacancy rate of 1.6 percent, according to city staff. The Federal Home Loan Bank of Chicago estimated a .5 percent vacancy rate for Evanston and a .9 percent for Oak Park during that time period.

With new rental construction virtually at a standstill, the rents for remaining units go up and this affects a large number of people. Thirty-five percent of American families live in rental units and a majority of these families are at the lower end of the income stratum. Nationwide, there is a shortage of affordable housing for low-income groups, and condominium conversions may be making a bad situation worse for the poor.

The background

A 1979 American Planning Association report (Condominium Conversion Regulations: Protecting Tenants) on condominium conversions discuss the history of condominium legislation in the U.S. and notes that condominiums were first introduced in the U.S. in 1958 in Puerto Rico. By 1968 all states had adopted the first generation of condominium enabling legislation. Illinois passed its Condominium Property Act in 1963. During the 70's a second generation of condominium laws provided consumer protection and set procedures for the converion

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The condominium controversy is another chapter in the venerable conflict between individual property owners and the community-at-large

process. A third generation of laws dealing with displacement and the depletion of rental units are now under consideration by various levels of government throughout the U.S. (see box). On the federal level, legislation (U.S. House Bill 5175) sponsored by Rep. Benjamin Rosenthal (D., New York) would place a national three-year moratorium on conversions. Rosenthal is also asking for changes in the tax laws favoring conversions and a commission to study the subject.

Under home rule, several municipalities in Illinois have adopted or are considering legislation that limits the pace of conversions and/or provides stricter consumer protection measures than state statutes. Arlington Heights, Evanston, Skokie and Chicago have enacted temporary moratoriums on condominium conversions while examining possible regulation. Moratoriums have been upheld twice in court tests in Evanston, but the City of Chicago's 40-day moratorium was voided by the court on the grounds that it was vague, arbitrary and capricious. The court said the ordinance failed to clearly define when a building becomes a condominium during the conversion process.

At the state level a central issue is the desire of the real estate industry to obtain a uniform state condominium law that would preempt local ordinances. Such laws have been passed in Alabama and Pennsylvania. Municipalities such as Evanston, Arlington Heights, Skokie and Oak Park have been very active in regard to condominium regulation; it is unlikely that any state law would be as strict as the local ordinances of those jurisdictions. Dan Lauber opposes a uniform state law on the grounds that it would probably only address tenant protection issues and not deal with the larger housing policy questions of displacement and the depletion of the rental market. Lauber would like to see a law passed that defines a condominium conversion project as a subdivision. Conversion projects would undergo the same approval process by local plan commissions as subdivisions. California and Colorado currently have such a definition.

The condominium controversy is another chapter in the venerable conflict between individual property owners and the community-at-large. Reconciling the rights and interests of the two has never been easy. When the Illinois General Assembly considers proposed condominium legislation this year, the conflict will be sharpened, if not resolved. Some of the proposed legislation appears to be unduly restrictive from the real estate industry's point of view, especially as it effects Illinois communities that have experienced little condominium activity.

The phenomenon

Condominiums are a new and poorly understood phenomenon, and both consumers and the general public need better information on their merits and drawbacks. In the meantime, the state has a responsibility to carefully monitor and control the effect of condominiums on Illinois' housing market. Unfortunately for some neighborhoods, Chicago's lakefront, for example, any state legislation is probably too late. Condomania has already conquered there.

Beverly Ann Fleming holds a master's degree in urban planning from the University of Illinois at Urbana-Champaign. She is a research associate at the Center for Policy Studies and Program Evaluation, Sangamon State University.

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