Cashing In on Condominiums

ABOUT the first of every month, millions of apartment dwellers echo a familiar and bitter complaint: while homeowners get large tax breaks as well as investment equity in their houses, a renter's lifetime collection of monthly receipts adds up to just so much confetti in the wind. In search of a better deal, more and more erstwhile tenants are moving to condominiums, in which occupants hold legal title to their apartments instead of mere leases. This form of housing was devised in medieval Europe, has long been popular abroad, and lately has become the fastest-rising development in the U.S. shelter market.

Especially in the Eastern U.S., where population is denser and land costs higher than in the West, the demand for condominiums seems to be insatiable. Last year 16% of the nation's housing starts were condominiums; this year the figure will be 27%. Buyers are signing up for such varied accommodations as $10,000 row houses on the fringes of Florida's Everglades, and nine-room dockside extravaganzas in Greenwich, Conn., priced as high as $220,000 each. In almost every area and price range, condominiums are either challenging or surpassing leased apartments as the dominant multifamily housing form. Some examples:

MIAMI. Condominiums dominate the entire metropolitan housing spectrum. Working-class families as well as the city's large community of Cuban expatriate businessmen and tradesmen are eager buyers of condominiums, which five years ago appealed most strongly to middle-class retirees seeking Florida's sun. Even the palm-draped skyline of stately Key Biscayne, site of President Nixon's Florida White House, is being reshaped by high-rise condominiums. Most recent addition is a group of six twelve-story high-rises on the beach.

DETROIT. Condominiums have captured the entire middle-price range of apartments. One 400-unit project in the $26,000-to-$38,000 bracket sold out in 21 months.

CHICAGO. Priced between $21,000 and $75,000, condominiums are spreading all over the urban area. Downtown, a complex of buildings with a total of 4,000 condominiums will soon tower above Lake Michigan in the city's Illinois Center. In the suburbs, four-family condominiums priced at $ 18,000 for each unit are popping up near $75,000 private homes, and both types are selling well.

WASHINGTON. Construction of suburban condominiums is spurring the city's strongest building surge since 1954. Condominiums are bidding to pre-empt the market in the $25,000-to-$35,000 price range, and are appealing increasingly to would-be private-home buyers in the $50,000 range.

Condominium sales are now going through the roof in part because owners get tax breaks. When an owner moves and sells his apartment, the profit is taxed as a capital gain--usually one-half his normal tax rate. If he reinvests the entire proceeds in another house or condominium within a year, he can avoid income taxes completely. If he wants to rent out his newly vacated condominium instead of selling it, he gets tax deductions for upkeep and depreciation. Meanwhile, interest charges on his mortgage are taxdeductible.

These advantages also go to owners of cooperative apartments, which are cousins of the condominium. In a coop, residents get shares of stock in a corporation that owns their entire building, and all the apartments in it. The amount of stock a person receives is based on the size or value of his apartment. But in spite of the similar tax treatment, many buyers prefer condominiums. Reason: if one resident defaults on his payments and the building tumbles into debt, the other occupants do not have to ante up more mortgage money. The bank simply forecloses on the delinquent resident and sells his apartment to someone else.

Condominiums also appeal to builders and mortgage bankers. Builders benefit from state laws that permit condominiums to be "pre-sold." A builder advertises apartments that have not yet been erected; buyers sign purchase agreements and provide down payments. The money is then used as an earnest to attract loans that finance construction.

In the big-city areas, where land costs are out of the reach of many people, condominiums hold the first genuine hope of putting every American family in a home of its own. But overly eager buyers are encountering some woes. Owners of hastily constructed condominiums often grumble about shoddy workmanship, which usually appears only a year or more after a buyer has put down some money and committed himself to a 25-to 30-year mortgage. Says Max Puyanic, owner of a $26,000, three-year-old condominium on Key Biscayne: "We're having trouble with doors and windows that won't close because of the way the building is settling. If you're just renting your apartment, it doesn't mean that much to you when cracks start appearing in your walls. But when you own it, it's a whole different thing." On Florida's Marco Island, early buyers of "sea view" condominiums now complain that developers are erecting vast high-rise projects in front of them, cutting off their view of the sea and their access to the beach.

The dizzying growth rate of condominiums, especially in the second-house field, where 40% of all developments begun during this year will be condominiums, is attracting the skeptical interest of the Securities and Exchange Commission. SEC staffers are questioning whether ads for condominiums should be treated as offerings of investment securities. What arouses their concern are ads that tell would-be buyers in resort areas to rely on peak season rentals to defray monthly mortgage costs during the off season. In many offerings, developers and salesmen stress features such as "rental pools" in which a project manager acts as both renting agent and collection agent for absentee owners. An SEC committee appointed to study the matter will report in September. Real estate developers generally expect that the report will recommend that builders classify such offerings as investments. Builders will probably be required to register their projects by prospectus with the SEC in the same way that underwriters of new companies must do. Beyond that, the real estate brokers who sell condominiums may even have to go through lengthy qualifying procedures to be certified as securities dealers. The result could be that some condominium owners will be forced to retain a stockbroker to sell.

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