Why I Converted Two Recent Multifamily Development Projects from Apartments to Condos

I’ve been working on and finishing up two multifamily development projects that I had decided to convert to condos from apartments about mid-way through construction. The two projects consist of a ground up development and one gut rehab, and I decided to convert each project for specific reasons. It was a difficult decision because I really like the location of each of these buildings, as they are located on great streets in very high growth neighborhoods around the Boston area. Ultimately, as much as I would have loved to sit on them long term, I decided it was best to sell; here are some of the things I was thinking of:

1.?????? Significant Trapped Equity: both projects will end up having quite a bit of trapped equity that we wouldn’t be able to access otherwise. With equity, I’m referring to the equity that we have built in the properties through the construction process along with the initial funds we raised for the project and the personal cash we have put in.

Let’s break down each one of these. For the initial LP capital we raised, if we decided to sit on the buildings, we would not have been able to refi and completely return all the initial capital (more on that in point #2). Since our business is growing and we are taking on more projects, it’s critical that we manage LP capital strategically and think about posting more “complete results” on the turnaround of capital. The same thought goes into the personal cash we invested ourselves; we want to be strategic with our capital and want to make sure we have plenty of liquidity to tackle some of the bigger projects we’re looking at.

Finally, in terms of the trapped equity that we created, you can likely guess that if we can’t fully return initial capital in a cash out event through a refinance, it would be tough for us to touch the equity we’ve created during the build process. Again, since I want to be strategic about growth and continue to tackle bigger and better projects, having a lot of equity trapped in these buildings would be an opportunity cost that could restrain growth.

2.?????? The Lending Environment is Still Tricky: Even if we wanted to put on new debt on the property, it would be a challenge in this environment. First, as most of us know, the rates that we could get on our debt would not be incredible (we were getting quoted in the high 6s/7% by local community banks) which would cause several issues.

First, with the higher debt the cash flows of course don’t look as attractive. After spending a long time developing these properties, it would be a shame to sit on brand new product and not generate significant yield. Second, and much more importantly, with the higher rates we would be limited on our LTV on any cash out attempts on a DSCR basis. Some local lenders have also upped their DSCR target metric, which just makes pulling cash out of the property that much tougher.

3.?????? The For Sale Market Has Picked Up Drastically: If I was asked to make this decision ~6-9 months ago, I would not have chosen to go down the condo route. The retail for-sale market last year was tough, particularly the city condo market (I saw this first hand on the brokerage side as well). Yet, somewhat as expected, as soon as the rates came down in late 23/early 24, the market quickly picked up activity and has now been kicking very aggressively. ????

Of course it’s a no-win game to try and predict what’s going to happen in the future and when, but since the recent jump and activity spike in the marketplace, I made the decision to try and capitalize on all this activity and push for top dollar sales of our product.

Now one note that you be thinking to yourself is did we incur any issues by converting the projects from for-rent to for-sale. I’ll be making a more detailed post about this in the future, but thankfully we made the decision early enough where we were able to spec out our design, build, and finishes all to condo standards and have a top of the notch product ready to go.