Report — Department of Commerce, Review of Condominium Conversions in Washington (March 8, 2023)
Summary
This March 8, 2023 report to the Legislature from the Housing Division of the Department of Commerce reviews condominium conversions in Washington and their viability for affordable homeownership, per Chapter 165, Laws of 2022. The Affordable Housing Advisory Board was directed to study the feasibility of converting apartment buildings into condos. The report states that attached ownership units make up 5.3% of the statewide housing stock and that condos accounted for less than 1% of new unit construction over the last decade. It identifies barriers including Federal Housing Administration loan underwriting requirements, construction defect liability under the Washington Condo Act, and the expense of conversion.
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A review of condominium
conversions in Washington
Exploring viability for affordable homeownership opportunities per
Chapter 165, Laws of 2022
March 8, 2023
HOUSING DIVISION
Report to the Legislature
Interim Director Kendrick Stewart
V3.2
Acknowledgments
Washington State Department of Commerce
1011 Plum St. SE
P.O. Box 42525
Olympia, WA 98504-2525
www.commerce.wa.gov
For people with disabilities, this report is available on
request in other formats. To submit a request, please call
360-725-4000 (TTY 360-586-0772)
Study Project Committee
In addition to representatives from ECONorthwest, BDS
Planning, and the Washington State Department of
Commerce, the Affordable Housing Advisory Board
Condominium Conversion Study Project Committee
included:
Paul Trautman, Senior Housing Developer, Community
Frameworks Affordable Housing Advisory Board Chair
Ann Campbell, Managing Director Homeownership,
Washington State Department of Commerce
Jeanette McKague, Assistant Director of Housing and
Community Development, Washington Realtors
Michael Orbino, Managing Broker, Team Foster Building +
Developer Services at Compass
Steve Walker, Executive Director, Washington State
Housing Finance Director
Patrick Johansen, Chairman of Housing Justice
Committee, RiseUpWA
Raelene Schifano, Nonprofit Advocate, HOA Fightclub
Michael Brandt, Real Estate Lawyer, Brandt Law Group
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
Table of contents
Executive summary...................................................................................................................................... 4
Introduction ................................................................................................................................................. 7
Methodology ............................................................................................................................................... 9
Background ............................................................................................................................................... 10
Barriers to condo conversion ..................................................................................................................... 16
Case studies: Policy examples from other states........................................................................................ 39
Conclusion: Conversions a complicated approach ...................................................................................... 42
Appendix ................................................................................................................................................... 43
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Executive summary
As of 2019, Washington has underproduced more than 140,000 housing units and ranks as the fifth worst
state in the nation in terms of underproduction as a share of total housing stock. 1 From 2011 to 2021, only
0.92 units of housing were added for every household formed in Washington, contributing to a lack of housing
affordability across the state. One symptom of housing underproduction is that prices are increasing faster
than incomes — particularly for households who might struggle to save for a down payment, even if their
incomes can support a mortgage. The price of new detached, single-family housing across the state has more
than doubled in the past decade, with very limited production of housing units that are affordable to
households earning less than 100% of the Area Median Income (AMI). This limits the state's ability to attract
new businesses and residents, and it means that current residents and renters are unable to become
homeowners if they desire.
Recognizing the lack of affordable homeownership opportunities and the importance of homeownership as a
means to stability and wealth generation, the 2022 Washington State Legislature directed the Affordable
Housing Advisory Board (AHAB) to study the feasibility of converting apartment buildings into condos as an
option to increase affordable homeownership opportunities in Chapter 165, Laws of 2022 (Senate Bill 5758).
AHAB advises the Washington State Department of Commerce on housing and housing-related issues. The
following findings will help guide legislators as they continue their efforts to make homeownership more
accessible to a wider array of Washington residents, including first-time homebuyers.
Legislative mandate
This report was produced to satisfy the portion of requirements of Section 7(2) of Chapter 165, Laws of 2022
(SSB 5758):
The board must provide a report on its review to the appropriate standing committees of the legislature by December
1, 2022. In conducting its review, the board shall seek input from ESSB stakeholders with expertise in both the
condominium conversion process and in providing tenant relocation programs and assistance.
What are condo conversions?
A condo conversion is a process of converting leased rental apartments into owned condo units. The
conversion can create more entry-level housing, but it might displace rental tenants who cannot afford to
purchase their current units.
This process is more complex than changing the legal terms of a unit. Converting apartments to condos is
expensive and often requires lengthy construction and legal processes, as the requirements for apartments are
different than for home ownership. There are numerous financial barriers and considerations when converting
a rental apartment into a condo. The process often requires multidisciplinary teams, and the expenses burden
both the developer pursuing the conversion and the cost of ownership for the buyer purchasing the unit.
Most buildings are converted by developers because many apartment building owners do not have the
skillsets, risk profile, and access to capital required.
1 ECONorthwest, "Redefining Economic Success in Washington State: 3 Keys to Quality Growth," (2022), https://econw.com/projects-
collection/2022/3/8/redefining-economic-success-in-washington-state-3-keys-to-quality-growth
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Summary of findings
Conversion incentive programs face a policy tradeoff. Increasing wealth-building opportunities can come at
the expense of reducing naturally occurring affordable apartments and increasing displacement risk for
existing tenants.
The condo market is small. Although demand for homes of every type has been strong in Washington
for the last decade, there has not been a corresponding rise in new condo construction nor an increase in
the number of conversions of apartments to condos. According to data from the U.S. Census Bureau
ACS 2019 5-year, attached ownership units make up 5.3% of the stock of housing statewide. This is a
close proxy for condos but is likely an overestimate because it also includes attached units that are not
in legal condo structures (such as fee simple units). Additionally, condos accounted for less than 1% of
new unit construction over the last decade. The barriers facing developers and contractors affect their
financial returns and risk, such that they almost exclusively produce other types of housing
(predominantly multifamily apartments and single-family detached homes).
Federal Housing Administration (FHA) program requirements limit scaling affordability in condo
ownership. Condo buyers face an additional barrier because FHA loan underwriting requirements for
condo mortgages have greater risk mitigation standards than non-condo loan products. The heightened
underwriting standards include criteria related to the financial solvency of the condo owners' association,
more stringent financial qualifications for individual buyers, and limitations on the number of insured
mortgages in a single condo development. These requirements reduce the pool of potential condo
owners to cash buyers and those who can secure non-FHA-secured loans.
Legal barriers are a hurdle to conversions. Condo developers, realtors, and contractors cited the same
issue: risk, specifically construction defect liability. Primarily determined by RCW 64.34, the Washington
Condo Act (WCA), condo developers are subject to specific warranties not applicable to detached
housing or apartment buildings. These laws are also applicable to condo conversion and can add risk
and cost via inspection, insurance, loan and presale requirements. Chapter 238, Laws of 2019 (SB 5334)
constrained condo defect liability, but many developers are still hesitant to reenter the condo market.
Condo conversion is expensive, impacting affordability for renters and buyers. Providing an opportunity
for renters to purchase the apartments they live in could allow more households to build wealth, remain
in neighborhoods of choice and maintain cost stability. However, the costs associated with the
conversion process increase the income required to afford the same unit that was previously rented,
making conversion challenging for low- and moderate-income households. For example, a hypothetical
two-bedroom unit renting at 80% of Area Median Income (AMI) in King County is $2,145 per month and
would cost $334,620 to purchase in current market conditions, resulting in a $4,060 monthly payment
(assuming a 5% down payment), including monthly condo fees, mortgage principal and interest
payments, private mortgage insurance, property taxes, and insurance. That means the rental unit —
affordable at 80% AMI — is now a condo that would require an income of 140% of AMI to afford the
monthly payments.
Unregulated condo associations increase risks to homebuyers. Condos are attractive to many
homebuyers due to the limited maintenance and the lower purchase price compared to detached
housing. The mechanism for achieving shared caretaking responsibilities is condo associations (also
referred to as homeowner associations or HOAs), but these shared responsibilities often create an
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
5
imbalance of power due to fee structures that can be changed without the approval of a majority of the
homeowners. HOA boards also have the power to fee, fine and even place liens on one's property.
Displacement risk from condo conversion incentives. There are many factors that affect the
displacement risk for a tenant in a condo conversion project, including their desire to purchase the unit,
their access to capital for a down payment, and their ability to afford the monthly payment of the condo.
If a new condo conversion incentive was introduced but did not include adequate homeownership
assistance for existing residents, it could cause the displacement of existing tenants. Although some
cities do require relocation assistance in such situations, it is often insufficient to mitigate any increases
in rental or transportation costs associated with the constrained new housing options.
Economic conditions have changed rapidly since 2019, with a particular effect on real estate markets.
Market volatility regarding interest rates, the impact of inflation, and changing valuation metrics for
apartments (cap rates) make it challenging to forecast condo conversion feasibility in the near term. As
current market conditions/volatility change in the future, the affordability impact of conversion could
improve, at which point they can be explored as an option to provide affordable homeownership.
In the long term, conversion creates new homeownership opportunities but does not add to the overall
housing supply. Permanently removing rental apartments from local housing markets can exacerbate
shortages of rental housing and play a role in rising housing costs, especially when new housing construction
is slow or stagnant. Because condo conversions are more likely to occur in buildings that rent at more
affordable rates, conversion has a more acute impact on the supply of affordable rental housing,
disproportionately impacting low- and middle-income renters.
Frequently used terms
Area Median Income (AMI) is the primary measure of income used to determine housing affordability. It is
determined annually by HUD for individual counties and metro areas across the county. AMI represents the
median household income for a family of four and then is adjusted based on the number of people in the
household or the number of bedrooms in a housing unit to determine affordability. This is sometimes also
referred to as median family income or MFI.
Housing is considered affordable when a household spends 30% or less of its gross income on a mortgage,
rent, or combined housing cost. If a household is spending more than 30% of its gross income on housing, they
are considered cost burdened.
A first-time home buyer is an individual or their spouse or domestic partner who have not owned a home
during the three-year period prior to purchase of a home. The Washington Center for Real Estate Research,
which publishes quarterly housing market summaries with affordability indices, assumes a first-time
homebuyer household to have less income (85% of the AMI) than a "typical" homebuyer household to support
a mortgage payment or a 20% down payment on a home.
A low-income household is a single person, family or unrelated people living together whose adjusted income
is less than 80% of the median family income, adjusted for household size, for the county where the project is
located.
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Introduction
A recent study evaluating business competitiveness in Washington identified the lack of housing as the
leading barrier to equitable economic growth in the state.2 As of 2019, Washington has underproduced more
than 140,000 housing units and ranks as the fifth worst state in the nation in terms of underproduction as a
share of total housing stock. The state has had one of the strongest economies in recent decades, buoyed by
the growing tech industry, but has not produced sufficient housing to meet the growing demand. From 2011 to
2021, only 0.92 units of housing were added for every household formed in Washington, contributing to a lack
of housing affordability across the state.
As shown in the map below (Exhibit 1), the ratio of housing units to households from 2011-2021 is below 1.0 in
most Washington counties. It is not limited to rural or urban counties, although the most significant disparities
do exist in some of Washington's least populated counties.
Exhibit 1: Housing underproduction ratio by county in Washington, 2010 to 2021
Statewide
ratio: 0.92
Source: OFM, ECONorthwest Calculations
Findings in this report are informed by in-depth analysis, discussions with industry experts and key stakeholder
interviews, including project committee members. The scope of this study was broad and focused on the
intersection of topics such as condo financing, displacement protections, HOA board dynamics, and transit
2 Ibid.
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
7
corridors, among others. We recognize that the topics of affordable housing, homeownership, and tenants' and
homeowners' rights are complex and often include difficult tradeoffs.
This study includes:
An assessment of the current housing market and affordability of condo conversions, especially for first-
time homebuyers
Statutory, regulatory, financial or other barriers to condo conversions as a viable source of housing supply
for first-time home buyers
Impacts to tenants caused by the conversion of multifamily buildings to condo ownership, and the
adequacy of programs and resources for tenant rental relocation and other assistance
A review of programs in other states that use condo ownership as a first-time homeownership opportunity,
including those focused on employer-specific programs for certain public service occupations in high-cost
areas
Specific areas in counties subject to the buildable lands reviews and evaluation program where condo
conversion could provide first-time home buyer opportunities close to light rail, express bus service, or
other forms of mass transit
Condo association concerns, including board accountability, fee collection, effective communication,
representation regarding covenants, lien and foreclosure fairness, and insurance claim impartiality
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Methodology
This study included a series of meetings facilitated by BDS Planning and Urban Design with a Project
Committee consisting of Affordable Housing Advisory Board (AHAB) members, housing developers, experts in
condo law and homeowner associations, and tenant and homeowner advocates. 3 The Project Committee
provided feedback and guidance in the research process, assisted in stakeholder selection, and reviewed
findings. Additional targeted interviews were conducted with developers who had previous experience with
conversions, as well as experts on condo law and insurance requirements.
Overall, desired outcomes of the study include the following:
A county-level analysis of the condo homeownership market
A profile of first-time homebuyers that includes an evaluation of a homeownership-ready approach.
A financial analysis of the financial feasibility of condo conversion in locations around the state.
A review of statutory, regulatory, financial, or other barriers to condo conversions.
A review of impacts to tenants caused by the conversion of multifamily buildings to condo ownership.
A review of programs in other states using condo ownership as a first-time homeownership opportunity.
Specific areas in counties where condo conversion could provide first-time homebuyer opportunities in
proximity to transit.
Concerns regarding condo associations.
3 See Appendix, Study Project Committee for a list of Project Committee members.
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Background
Is more condo homeownership an option?
Because condos are generally less expensive than detached single-family homes, Washington has considered
incentivizing or reducing barriers to condo development to provide more homeownership opportunities,
particularly for first-time homebuyers or downsizing seniors. Homebuyers might use the equity on their condo
to purchase their first single-family home. Because condos are about half the size of single-family units, they
are generally priced about 30% less, offering one potential avenue for creating more affordable
homeownership opportunities.
Potential homeowners have limited financing options to purchase a condo compared to a detached home. The
condo mortgage market has declined in the last 15 years compared to the mortgage market in general. Condo
mortgages declined from 15% of residential lending in 2007 to 8% in 2019. 4
Rapidly changing market conditions
Economic conditions have changed rapidly since 2019, with a particular effect on real estate markets. Factors
like mortgage interest rates and capitalization rates influence the cost and affordability of converting
apartments into condos. At the time of this report, mortgage rates were hovering between 6.5% and 7%, the
highest rates in over 20 years, which negatively affects housing affordability.
Capitalization rates, or "cap rates," are the ratio of a building's operating revenue to its purchase price and the
market mechanism to value commercial real estate. Lower cap rates increase property values, thereby making
conversion more expensive. Cap rates have steadily decreased for the past two decades, which has resulted in
valuations of apartment buildings more than doubling in many parts of the state. The economic uncertainty
and risk of recession are increasing the likelihood that cap rates will reverse and begin to increase. Any
increase in cap rates will improve the affordability of conversion, as the acquisition price of the apartment
would decrease.
Homeownership is out of reach
Underproduction + Rising mortgage rates = Decreased affordability
Washington has underproduced needed housing relative to its strong economy and population growth in the
past several decades. As of 2021, Washington's housing stock provides 1.08 units of housing per household,
below the U.S. average of 1.11 units per household and ranking second to last among all states. 5 The U.S. ratio
of 1.11 units per household serves as a good target ratio, allowing for market vacancy, turnover as units are
demolished or become obsolete, the presence of second and vacation homes, and the formation of new
households.
4 Sumit Agarwal, et al., “The Hidden Peril: The Role of the Condo Loan Market in the Recent Financial Crisis,” Review of Finance 8, no. 1,
(2016): 467–500, https://academic.oup.com/rof/article/20/2/467/2461314;
Jacqueline Doty, “The State of Condominium Lending: U.S. Housing Finance Update 2019,” CoreLogic: The MarketPulse 8, no. 5, (2019):
6, 8, https://www.corelogic.com/wp-content/uploads/sites/4/downloadable-docs/marketpulse/the-marketpulse-vol-8-issue-5-may-
2019-screen-052219.pdf
5 2021 U.S. Census ACS, 1 year sample
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Without an appropriate structural vacancy factor, a natural consequence of the imbalance in housing demand
and supply is a rise in housing prices and rent. The Sightline Institute describes an undersupplied housing
market as a game of musical chairs, except rather than racing to a limited seat, the process of attaining
housing becomes a bidding war, with those least able to afford a unit being most impacted. 6
Mortgage interest rates and prices increased statewide from 2012 to 2021, resulting in a higher income
needed to purchase the median-priced home. Households must earn more than 100% of AMI to purchase the
median home virtually everywhere in Washington, and over 200% of AMI is required for new construction in
most parts of the state. 7 A decade ago, new construction was often affordable to households earning less
than 100% of AMI.
Exhibit 2: Median income buyer affordability index distribution in Washington cities,
2022
35 33
30
24
25
Number of Cities
20
15 13
10
7 7
5
2
1
0
<40 [40,50] [50,60] [60,70] [70,80] [80,90] [90,100]
Affordability Index Range (100+ indicates affordability}
Source: Washington Center for Real Estate Research
6 The Sightline Institute, "Infographic: The mean musical chairs of rising rent and home prices," (2018),
https://www.sightline.org/2018/03/14/infographic-the-mean-musical-chairs-of-rising-rent-and-home-prices/
7 New construction refers to the building of a structure where none previously existed or a significant addition to an existing structure.
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Rising housing costs in Washington
From 2012 to 2022, prices for condos and single detached units more than doubled, with the median cost of
condos rising by nearly $300,000 and the median cost of single detached units rising by over $400,000.
Exhibit 3: Median sale prices in Washington, January 2012-September 2022
$800,000
$700,000
$600,000
Median Sales Price
$500,000
$400,000
$300,000
$200,000
$100,000
$-
WA Condos WA SDUs
Source: Redfin Sales Data 2012-2022
Exhibit 4: Median price per square foot in Washington, January 2012-September 2022
$600
$500
Median Price Per Square Foot
$400
$300
$200
$100
$-
WA Condos WA SDUs
Source: Redfin Sales Data 2012-2022
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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While condos are generally more expensive on a per-square-foot basis, the average sale price is lower because
condos are, on average, half the size of detached units in Washington. However, homeowner association
(HOA) fees are not reflected in purchase prices and affect the overall affordability of condos over time. For
example, a $600/month HOA fee is equivalent to $100,000 of the purchase price when financed using a 30-
year mortgage at a 6% interest rate. The difference between the average detached home and a condo
statewide is about $216,200, which is equivalent to a $1,300/month HOA fee (which is higher than the median
HOA fee in any location in the state) if financed using a 30-year mortgage at a 6% interest rate.
Homeownership attainability decreased in the current market
While this report primarily focuses on homeownership opportunities, would-be homeowners are current
renters, and increasing rents limits their ability to save for a down payment and transition into homeowners.
The inability to save due to increased rents, combined with high-interest rates and home prices, make
homeownership unattainable for many. Exhibit 5 shows the share of renter households who have incomes
sufficient to purchase a home in various locations across Washington, broken out by an assumption of a 5% or
20% down payment.
There are two primary factors influencing the decrease in homeownership attainability: increasing prices and
increasing interest rates. At the time of publication in December 2022, the households level dataset (PUMS)
used for the analysis was only available through 2021. The exhibit below shows the share of renter households
with sufficient income to afford the median-priced home in different parts of the state, with both a 5% and 20%
down payment assumption. The share of renters who could afford the median-priced home is less than 4% in
each of the counties with a 5% down payment assumption. For example, in Pierce County, 3% of renter
households could afford the median home in 2021, compared to 19% in 2019.
Since then, mortgage interest rates have risen to their highest level in more than 20 years, further straining the
affordability of the housing stock. Prices have since stabilized and, in some areas of the state, have declined.
Given the magnitude of the mortgage interest increase during 2022, prices would need to decrease by roughly
25% to offset the increase in interest rates.
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Exhibit 5: Share of renters that can afford the median price home, 2019 vs. 2021
Source: Census PUMS 2021, Freddie Mac, UW Center for Real Estate Research
Homeownership inequities are persistent
Asian, Indigenous, Black, and Hispanic households have lower homeownership rates than non-Hispanic White
households across the state. In particular, Black households have a homeownership rate of less than half that
of white households. Alarmingly, for some of these groups, these rates are worsening: The Black-white
homeownership gap is worse today than it was in the 1960s when racial discrimination in housing was legal.
More than 143,000 BIPOC households would need to become homeowners for the BIPOC homeownership rate
to equal the non-Hispanic white homeownership rate. 8
8 Washington State Department of Commerce, "Improving Homeownership Rates for Black, Indigenous, and People of Color in
Washington," (2022), https://www.commerce.wa.gov/wp-content/uploads/2022/09/Homeownership-Disparities-Recommendations-
Report-FINAL-Sep2022.pdf
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Exhibit 6: Washington homeownership rate by race/ethnicity and income level in 2021
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
<80% AMI 80%-100% AMI 101%-150% AMI >150% AMI
Black, non-Hispanic Hispanic, any race Asian, non-Hispanic White, non-Hispanic
Source: US Census Bureau, ACS 2021 1-year
These disparities in homeownership rates are due to a confluence of current and historical factors, including
historically racist zoning practices, racially restrictive covenants, redlining, gentrification and displacement,
lack of access to generational wealth, and discriminatory lending practices. In 2022, the Washington State
Department of Commerce released the report "Improving Homeownership Rates for Black, Indigenous, and
People of Color in Washington," which examined the causes and consequences of disparities in
homeownership rates between non-Hispanic white households and Black, Indigenous, and People of Color
(BIPOC) households across the state. 9
9 Ibid.
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Barriers to condo conversion
The condo market is small and stagnant
Condos represent only 5.3% of the overall housing stock statewide. 10 As seen in Exhibit 8, the condo share of
housing stock in Washington is similar to the U.S. average. In addition to the small share of housing, the condo
market in Washington has not increased; condos have made up 1% or less of new construction since 2011.
Data availability and reliability are limited at the county level. The map below shows the share of attached
ownership units as a share of all housing units. This is a close proxy for condos but is an overestimate
because it also includes attached units that are not in a legal condo structure (such as fee simple attached
units). No county has more than 10% of its stock of housing as attached ownership units.
Exhibit 7: Condos as a percentage of housing stock by state
25%
20%
15%
10%
5%
0% WV
MS
AR
AL
OK
ID
LA
NM
WY
SD
KS
NE
TX
ND
IN
ME
MO
NC
TN
KY
SC
MT
OR
PA
IA
GA
DE
WI
AZ
OH
VT
MN
U.S.
WA
UT
NY
VA
NV
RI
MI
AK
MD
CO
NH
CA
NJ
CT
MA IL
FL
HI
Source: U.S. Census Bureau ACS 2019 5-year
10 Source: U.S. Census Bureau ACS 2019 5-Year
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Exhibit 1: Attached ownership units as a percentage of units in Washington, 2019
Source: U.S. Census Bureau ACS 2019 5-Year
Federal financing standards restrict condo ownership
Condo buyers face additional barriers to homeownership when seeking mortgages. The Federal Housing
Administration (FHA) expanded its requirements for condo loans to include criteria on the financial solvency of
the owners' association in addition to more stringent qualifications for individual buyers. These policy changes
reduced the pool of buyers in favor of those who could secure private loans not backed by the FHA or using
cash. 11
The most significant policy change affecting access to condo homeownership is the cap on the number of
insured mortgages allowed in a single condo development:
In buildings with 10 or fewer units, only two units are eligible
In buildings with more than 10 units, only 10% of units are eligible
This policy alone makes condo conversions for affordable housing challenging, as 90% of buyers must qualify
for a conventional loan or must have another source of subsidy or down payment assistance that is backed by
a federally insured product. Other FHA policies make condo developments ineligible if too many units are
11 U.S. Department of Housing and Urban Development, “Project Approval for Single-Family Condominiums,” Federal Register 84 FR
41846, (2019), https://www.federalregister.gov/documents/2019/08/15/2019-17213/project-approval-for-single-family-condominiums
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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owned by one entity or if the owners' association is party to an active lawsuit (such as construction defect
liability claims).
During the collapse of the housing market that began in 2006, condos had a higher foreclosure rate compared
to single detached homes, likely driven by the larger role of investors/owners in the condo market at the time. 12
In 2019, the FHA updated its lending and Private Mortgage Insurance (PMI) rules for condos with the intention
of broadening access to the market for condo mortgages. At the time, only 6.5% of 150,000 condo
developments were eligible for FHA-insured loans. 13 These regulatory changes focused on policies related to
non-residential space in mixed-use developments, owner-occupancy rates, and whole-building certification for
FHA loans. 14
In February 2022, Fannie Mae and Freddie Mac released additional qualifications related to structural integrity,
deferred maintenance, and operating reserves after the collapse of the Champlain Towers South condo in
Florida. Compliance with the new disclosure requirements among owners' associations has been uneven,
which has complicated or stalled some condo sales. 15 These lending requirements related to deferred
maintenance may present less of a barrier for condo conversions because the conversion process would
include engineering reviews, necessary renovations for safety and habitability, and the identification of needed
reserves for future capital improvements. The costs of these necessary steps contribute to the overall cost of
conversion to condo ownership and increase the per-unit sale price.
Litigation risk constrains condo development
Building or renovating condos introduces more requirements applicable to the developer than building
detached housing or apartments under RCW 64.34 (the 1989 Washington Condo Act, or WCA). These legal
requirements impact condo construction by increasing costs (higher insurance premiums, markups from
general contractors, architects, and engineers) as well as the uncertainty that it adds to development timelines
and potential litigation years after completion.
State regulations can introduce litigation risk
Primarily determined by the WCA, condos are subject to specific development liabilities intended to "provide
protection to condo purchasers in part through the creation of implied warranties of quality construction." 16
This results in a higher construction warranty standard for condos than detached housing or apartment
buildings.
12 Agarwal, et al.
13 U.S. Department of Housing and Urban Development, “FHA Issues New Condominium Approval Rule,” (April 14, 2019),
https://archives.hud.gov/news/2019/pr19-121.cfm
14 U.S. Department of Housing and Urban Development, “Project Approval for Single-Family Condominiums,” Federal Register 84 FR
41846, (2019), https://www.cnn.com/2022/04/02/homes/us-new-condo-rules-freddie-and-fannie/index.html
15 Anna Bahney, “Why this recent change just made it harder to buy or sell an apartment,” CNN Business, (April 2, 2022),
https://www.cnn.com/2022/04/02/homes/us-new-condo-rules-freddie-and-fannie/index.html
16 Leon, David, "Washington Center for Real Estate Research, Incentivizing Condominium Development in Washington State: A Market
and Legal Analysis," (July 28, 2016), https://re.be.uw.edu/wp-content/uploads/sites/9/2016/07/CondoReport_v7_FINAL.pdf
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
18
Under RCW 64.34.455 and RCW 64.90.670, condos are subject to the following warranties:
There will be no adverse change to the physical condition of the unit, beyond reasonable
wear and tear, between the date of sale agreement and the date of conveyance
The unit and common elements are suitable for the ordinary use of real estate of its type
Any improvements must be:
• Free from material defects and constructed in accordance with sound engineering
and construction standards
• Constructed in a workmanlike manner
• Constructed in compliance with all laws then applicable to such improvements
The continuation of a residential use of a unit does not violate applicable law
Plaintiffs must show that the alleged breach has or will impair the performance of the
construction, materially impairs the operation of a major building system, or unreasonably
endangers health or life. Generally, warranties extend for a period of four years after the first
sale.
Under 2004 updates to RCA 64.35, condo developers can obtain defect liability insurance for the unit owners
and owners' association by providing a "qualified warranty." To be a qualified warranty, the insurance policy
must provide coverage for the following:
Two-year materials and labor warranty for noncompliance with building code.
Five-year building envelope warranty provides coverage for defects in the building envelope.
Ten-year structural defects warranty provides coverage for defects that cause structural damage that
renders the condo unlivable.
“Warranties run four years from the date of the first unit sale and the plaintiff attorneys show up three
and a half years later. Their success rate is nearly 100%”
— Seattle Area Real Estate Attorney
However, insurance providers have been unwilling to provide such insurance, and this provision has largely
gone unused.
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19
The WCA statute language has been interpreted
broadly by attorneys and courts, often leaving WCA condo defect warranties
developers vulnerable to litigation. Rather than
imposing specific construction standards, Vague statute language
implied warranties impose product liability
standards that require expert testimony. Plaintiff
attorneys and HOAs have a limited time period Higher likelihood of litigation
to bring litigation and protect against personal
liability, resulting in a higher rate of litigation High risks for condo developers
than other types of housing products. While a
2019 update to the warranty legislation removed
shielded individual HOA board members and officers from personal liability, HOA members could still
potentially face high repair or maintenance costs in the case of unresolved defects. Prompted by plaintiffs'
attorneys (who will typically work on contingency), many HOAs will err on the side of bringing any potentially
viable defect lawsuit rather than risk missing any defects during the warranty period.
Given these considerations, the overall risk, costs, and differing standards of condo and non-condo
construction for defect litigation reduce the rate of return for condo development statewide compared to
apartments and other types of housing.
1989 Washington Condo Act (64.34 RCW) legislative history
Legislative changes to the WCA have both supported and hindered condo development in Washington, with the
most recent update in 2019. A timeline of these legislative changes is shown in Exhibit 9.
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
20
Exhibit 9: Washington Condo Act timeline, 1989-2019
Following several public
Chapter 64.55 defect lawsuits and safety
passed to provide concerns, the WCA was
protections to amended to increase
homeowners, tenant protections during Condo
extending the condo conversions, production and
statute of including tenant relocation conversion
limitations for assistance, extending the slows. Since
RCW 64.34, potential defect tenant notification period 2011, 1% or less
Washington lawsuits and to 120 days, and of new
Condominium imposing higher prohibiting construction construction
Act (WCA) development until tenants vacated the have been
passed. standards. property. condos.
2003–2005 2007 2009 2019
1989 2005 2008 2011
WCA amended to
provide protections Condo WCA amended to SB 5334 passed
for builders, development provide to constrain
supporting a boom peaks in protections to condo defect
in condo Washington, with homeowners, liability and
development. 1,590 units added incentivizing increase condo
Legislation allowed to the market. HOAs to bring development.
builders to cure litigation to
defects, provided a protect officers
higher standard of and board
proof for defect members from
claims, and a future liability.
statutory insurance Condo-related
program. lawsuits swell.
Source: ECONorthwest
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21
2019 WCA updates to constrain defect liability and increase development
Following discussions with developers and other stakeholders, the Washington Legislature passed Chapter
238, Laws of 2019, which was intended to increase protections for condo developers, decrease the number of
defect liability lawsuits, and increase condo development overall. 17 Major changes included:
Updated the implied warranties for condo construction: Condos must be "constructed in accordance
with applicable building codes, generally accepted in the State of Washington at the time of
construction." 18 Previously, the language more broadly stated that condos must follow "all laws then
applicable to such improvements." 19 By changing the language from "all laws" to "generally accepted,"
the Legislature hoped to give developers additional cover from frivolous defect allegations.
Modified the burden of proof for claims of "breach of warranties of habitability:" The Legislature
increased the burden of proof required to show a breach of warranty. Purchasers are now required to
establish that the breach is more than technical, is significant to a reasonable person, has caused or will
cause physical damage to the unit or common elements, or presents a safety risk to occupants. 20 By
doing so, the Legislature again hoped to give developers additional cover from frivolous defect
allegations.
Helped shield condo association board members from personal liability: To limit condo lawsuits, HOA
officers and board members are now entitled to certain immunities from liabilities. Previously, these
members were at risk of personal fiscal liability if a defect was not cured or financed via litigation,
incentivizing HOAs to bring lawsuits over all potential issues. By providing protection to HOA members,
the Legislature hoped to disincentivize litigation.
While stakeholders interviewed for this report generally supported these changes, many agreed it was too early
to tell if these changes would affect condo development and litigation. Other states, including Colorado, have
updated their condo defect legislation in the past five to 10 years; however, their respective condo markets
have yet to reflect any potential impacts. Some Washington developers have cautiously begun to build or
consider condos, but many still consider the condo market too risky of an investment
Consequences of litigation risk
Stakeholders identified the threat of litigation as one of the biggest barriers to condo development in
Washington. Developers and other industry stakeholders interviewed for this report stated that they were not
interested in condo development due to increased costs, risks, or previous experience with litigation.
Consequences for this increased risk are pervasive throughout the development process. In response,
developers often take on additional financial and procedural burdens, such as expensive assessments and
inspections, higher insurance and loan rates, and presale requirements that impose further risk. In total,
17 Washington State Legislature, "Chapter 238, Laws of 2021 (SB 5334),"
https://apps.leg.wa.gov/billsummary?BillNumber=5334&Initiative=false&Year=2019
18 Ibid.
19 Preg O'Donnell & Gillett, "Small Steps Toward Promising Change – Breaking down the 2019 amendments to Washington’s Common
Interest Ownership Act," (Sept. 27, 2019), https://www.pregodonnell.com/2019/09/small-steps-toward-%E2%80%A8promising-change-
breaking-down-the-2019-amendments-to-washingtons-common-interest-ownership-act/
20 Washington State Legislature, "Chapter 238, Laws of 2021 (SB 5334),"
https://apps.leg.wa.gov/billsummary?BillNumber=5334&Initiative=false&Year=2019
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22
stakeholders emphasized there are currently very few incentives to build condos in Washington, particularly in
comparison to other types of housing such as single detached or multifamily apartments,
Inspections: Prior to converting, developers must get a property
assessment report that documents the condition of the building (this
CAUSE: Threat of litigation report can cost $10,000-$50,000). Findings in this report can affect
insurance rates and are provided to potential buyers, so there is a strong
incentive for developers to fix any discovered issues. In addition,
developers often hire third-party consultants to conduct independent
inspections after project completion as protection against defect
Property assessment report
litigation.
& inspections
Insurance: In response to litigation risks, insurers charge higher liability
insurance premiums for condo developers and other involved parties.
Because contractors and subcontractors are also subject to liability risk,
Increased insurance costs developers must obtain wrap insurance policies that provide
comprehensive coverage to all parties involved in condo development
projects. However, these policies can be extremely expensive, with
stakeholders reporting costs of up to $1 million. Because of the
increased cost and complexity not present in liability insurance for other
forms of housing (which also have high demand), many developers are
Higher cost loans deterred from participating in condo development.
Loans: Condo conversions often require conversion-specific loans,
which can have shorter timeframes for project completion and be more
expensive than traditional loans. Because liability risk extends to
Lost revenues from lenders and investors, these loans can also be difficult to secure.
presales
Presales: For new condo developments and conversions, lenders often
structure development loans so that funds will not be released until the
project pre-sells a certain number of units, delaying construction. For
OUTCOME: Higher costs developers, this often means pricing and selling condos that do not yet
for condo developments exist, running the risk of losing months or even years of real estate
and conversions compared appreciation before selling the final unit and turning over the building. In
to other forms of housing fast-growing markets, where home prices continue to surge, the
difference in just a matter of months could be significant.
Converting condos is expensive
When developing a rental property, the upfront costs are recouped over decades. With a fee simple condo sale,
those costs are expected to be recouped as quickly as possible. The following section details how the
conversion of an apartment to a condo can increase the monthly cost of ownership by almost double
compared to monthly rent.
Development costs are complex
Getting to the core of the research question in this study, there are numerous financial barriers and
considerations when converting a rental apartment into a condo. The process is lengthy and complex,
requiring multidisciplinary teams to execute. There are two processes at play impacting affordability; the
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
23
acquisition cost for the developer pursuing the conversion and the cost of ownership for the homebuyer
purchasing the unit.
Developer process to convert apartment to a condo
Acquire a building. First, the developer must locate a suitable building
for conversion and determine the acquisition cost. This presents an
initial major hurdle because the existing property is generating
revenue for the current owner. Buying a performing asset (even if it is
underperforming) to convert is more expensive than buying vacant
land for new construction.
The acquisition cost of an apartment is determined by the property's
net operating income (NOI) 21 and the current market capitalization
rate, or cap rate. For the remainder of this section, a hypothetical
building located in King County that is currently renting two-bedroom
units at 80% of AMI will be used as an example to demonstrate the
cost of conversion. In the case of a condo conversion, a developer
must secure financing for the cost of acquisition as well as any
rehabilitation or repositioning of the property.
21 NOI equals the building’s revenues less expenses and vacancies.
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24
What does it cost to acquire an apartment
while renting at 80% of AMI? What are capitalization rates?
Building owners have varying levels of interest in selling Capitalization rates (cap rates) are the ratio of a
existing apartments. The owner determines the conditions building’s operating revenue to its purchase
under which they are willing to sell: Do they need the influx price. Cap rates fluctuate with the market and
of cash a sale provides? Do they need to sell the property are influenced by the sales of similar buildings in
and the willingness of investors to finance a real
to balance a portfolio in a Real Estate Investment Trust
estate development. Rates of return are
(REIT)? Is there sentimental value to holding the building?
compared against other market-based
investments, such as stocks and bonds.
When a building owner is interested in selling, the offer
price needs to be worth as much or more than the value of Lower cap rates increase property values. Cap
the building as a rental property. 22 The industry standard rates are currently at an historic low, which
is to value a building using its net operating income increases the value and purchase price
(revenue after expenses and vacancies) and market cap necessary to acquire a building. Cap rates have
been driven by the relative performance of real
rates. Currently, the housing market supply is low, and
estate assets compared to other investment
demand is high, which drives rental and sale prices even
types. In recent decades, investors have flocked
higher. If a prospective buyer, the developer, is able to to real estate asset ownership. This increased
offer a price that is equal to or greater than the value of interest in real estate has increased the
the building as a rental property, then the seller is likely to competition among investors to own properties,
accept the offer. thereby driving up purchase prices.
Exhibit 10: Example conversion scenario
Scenario 80% of AMI building
Location King County
Bedroom type Two Bedroom
Rent $2,145 (80% of AMI)
Vacancy 5% of gross income (-$107)
Operating expense 30% of gross income (-$644)
Monthly NOI $1,394
Annual NOI $16,728 ($1,394 * 12)
Cap rate 5%
The developer's purchase price of this property would be $334,620 per unit.
Source: ECONorthwest Calculations
22 Selling a building is not required for a condo conversion. A building owner could do it themselves, but it is not likely to occur as the
skillsets, risk profile, and access to capital is a limiting factor to conversion. For this reason, we have assumed the most likely scenario
for a conversion is for a developer to purchase an existing apartment, then begin the conversion process to a condo.
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
25
Cost of converting an apartment to a condo
Rehab or reposition of the property
Developers must understand the costs required to rehabilitate the property and improve it to a standard at
which they can sell it as a condo. This requires an inspection to understand the current conditions (presence of
mold, water intrusion, etc.) and the capital needs of the building (costs to repair building systems, envelopes,
roofs, etc.). Developers also need to understand the construction cost to improve the units sufficient to
interest potential buyers compared to similarly priced units in the area. Because of the extended warranties on
the building systems, envelopes and structures, developers face legal risks due to potential construction
defects on these building components. In order to mitigate these risks, developers will purchase costly wrap
insurance policies.
Transaction costs
In addition to the costs of construction and improvement, other costs associated with the conversion include
selling costs, closing costs, and Real Estate Excise Taxes (REET). Delays in permitting, construction or
materials acquisition add to the timeline and cost the developer money via carrying costs (the interest
payments accruing on the debt financing construction). Developers are also required to produce a reserve
study, then fund it, typically with at least two months of HOA payments for all units. In addition to finding a unit
and understanding the costs of conversion, the developer needs to understand the legal rights of the existing
tenants, including possible notification requirements and relocation assistance. For example, the City of
Seattle's SMC 22.903 requires developers to pay low- and middle-income tenants up to three months of rent as
relocation assistance.
Expected return
The inherent risk of development, along with staffing and carrying costs, all contribute to the developer's
selected rate of return. The rate of return in our model is 15%, which is determined as a premium added to the
cost of acquisition and all subsequent costs and fees related to the conversion. This rate of return has been
confirmed through local developer and real estate brokerage interviews.
Exhibit 11: Example conversion scenario, rate of return calculations
Conversion costs
Physical improvements $25,000 per unit
Legal requirements $25,000 per unit
Rate of return 22%
Sales transaction cost 7%
Net rate of return 15%
Developer purchase price per unit $334,620
Required sales price for a 15% rate of return after accounting for 7% in transaction costs $468,000 per unit (+40%)
Source: ECONorthwest Calculations
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Exhibit 12: Monthly housing affordability cost comparison, King County 80% AMI,
two-bedroom unit - apartment converted to condo
$4,500
$4,061 (+60%)
$4,000
$600
$3,344 (+36%)
$3,500
$136
$296
$3,000 $600
$363
$136
$2,500 $363
$2,145
$2,000
$1,500
$2,665
$2,245
$1,000
$500
$- $-
Apartment Rent 20% Down Ownership 5% Down Ownership
Rent Mortgage Property Taxes PMI Insurance HOA
Source: ECONorthwest Calculations
Factors influencing homeownership affordability
The second aspect of financial considerations comes from the potential homeowner. Homebuying involves
numerous costs, including the down payment, mortgage principal and interest, insurance, taxes, and fees (such
as closing costs). It also involves numerous processes, from the offer to the inspection, escrow and closing.
Most home buyers use a 20% down payment, but depending on the loan, the borrower's income and the
purchase price, this can be too expensive for some potential buyers.
A two-bedroom unit currently renting at 80% of the AMI in King County is $2,145 per month and would cost
$334,620 to purchase in current market conditions. This same unit would require $4,060 monthly payments
after converting to a condo (assuming a 5% down payment), including monthly condo fees, mortgage principal
and interest payments, private mortgage insurance, property taxes, and insurance. This increase would
convert this rental unit — affordable at 80% AMI — into a condo that would require an income of 140% of AMI
to afford the monthly payments. If the tenant had savings to support a 20% down payment, the tenant's
income would need to be 116% of AMI (equivalent to a 36% increase in AMI) to afford the condo payments.
These estimates assume a down payment of 5% on a standard 30-year amortizing loan and $600 per month in
HOA fees. A 5% down payment requires less upfront wealth and equity than a 20% down payment but results in
a larger principal loan balance and, therefore, higher monthly payments, which is particularly impactful as
mortgage interest rates rise and increase the cost of borrowing money. A 5% down payment also requires
private mortgage insurance (0.8% of the total mortgage), an additional expense avoided with a 20% down
payment.
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Exhibit 13: Example King County conversion scenario, monthly payment calculations
Scenario 80% AMI 2-bedroom
Purchase cost per unit $468,000 (5% down)
Mortgage 30-year amortization
Mortgage rate 6%
Down payment 5%
Monthly mortgage payment $2,665
Private mortgage insurance $296
Homeowners' association fees $600
Property taxes $363
Insurance $136
Previous monthly rent $2,145
Total monthly payment $4,060
Source: ECONorthwest Calculations
What influences the affordability of a condo conversion?
The assumptions and factors that influence the affordability of the conversion process vary by individual
circumstances, market conditions, state and local policy, building condition, and developer goals, among
others. There is no silver bullet to convert an apartment into an ownership option that is affordable to an
equivalent AMI level. The variables described below are the key factors identified that influence the cost of
condo conversions. The chart below demonstrates the impact of various key factors on the overall
affordability of the example converted unit, presented as a nominal change to the AMI needed to afford the
unit. For example, beginning with the increase in required income is equivalent to 60% of AMI, which means a
household able to afford a unit at 80% of AMI, would need to earn 140% of AMI (80% + 60%).
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Exhibit 2: Impact of cost factors on monthly housing costs
$4,060
$2,145 + 60% of AMI monthly
monthly rent at ownership
80% AMI costs
3% mortgage rate -27% of AMI 6% mortgage rate
20% down payment -24% of AMI 5% down payment
6% cap rate -17% of AMI 5% cap rate
7% rate of return -15% of AMI 22% rate of return
$50,000 cost
$25,000 cost -8% of AMI
(legal or capital)
Source: ECONorthwest Calculations
Mortgage rates
Mortgage rates are often the largest contributing factor to the costs of homeownership, particularly for first-
time homebuyers who don't have large down payments (equity). Mortgage rates on a 30-year fixed-rate loan
were as low as 2.625% in December 2021 and have more than doubled since to near 7% in November 2022;
they might be even higher depending on credit scores. Reducing mortgage rates by three percentage points
(for example, from 6% to 3%) would lower the cost of conversion affordability by the equivalent of 27% of AMI,
which is almost half of the cost increase from a rental unit.
Down payment size
One of the factors that most affect a conversion's affordability is the size of the down payment. We assume a
5% down payment in our analysis because it requires the least amount of individual upfront savings to enter
into ownership. Smaller down payments increase the remaining mortgage balance, require private mortgage
insurance and result in larger subsequent monthly payments. Increasing the down payment from 5% to 20%
lowers the cost of conversion affordability by the equivalent of 24% of AMI. In addition, avoiding private
mortgage insurance payments means the totality of the owner's monthly mortgage payments goes towards
home equity rather than insuring the lender's risk.
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29
Cap rate
Capitalization rates, or "cap rates," are the ratio of a building's operating revenue to its purchase price and the
market mechanism to value commercial real estate. Lower cap rates increase property values, thereby making
conversion more expensive. Cap rates have declined for two decades and are at near historic lows, which
drives up the value and purchase price necessary to acquire a building. An increase in the cap rate from 5% to
6% would lower the cost of conversion affordability by the equivalent of 17% of AMI.
Rates of return
Typical rates of return for condo conversion are near 22%, which accounts for time, staffing, risk and profit
margins. The rate of return a developer targets is used to secure project financing, and these costs are added
to the ultimate sale price. Assuming a 7% rate of return as the lowest achievable rate, it would reduce the sale
price after conversion. Reducing the rate of return from 22% to 7% would lower the cost of conversion
affordability by the equivalent of 15% of AMI.
Legal and capital costs
Legal and capital costs are incurred by the developer during the conversion process. As described earlier in the
section on litigation risks, the risk of lawsuits and building warranties is seemingly inevitable and must be
budgeted as a cost to conversion. The capital costs for building improvements vary based on building age and
condition, building code, and target homebuyers. For example, decreasing these costs from $50,000 to
$25,000 per unit could lower the cost of conversion affordability by the equivalent of 8% of AMI.
In order to maintain affordability for buyers earning 80% of AMI, it would require up to a
$175,000 price reduction per unit. This is more than the difference in the developer
acquisition price of $334,620 and the resulting renter purchase price of $468,000, largely due
to monthly HOA fees, and current mortgage interest rates.
Affordability for first-time homebuyers
Definitions of "first-time homebuyer" vary by agency, jurisdiction, and purpose. Most federal, state and local
programs that provide homeownership counseling, down payment assistance, loans, or tax credits define first-
time homebuyers as those who have not had a mortgage for the preceding three years.
The U.S. Department of Housing and Urban Development defines first-time homebuyers as individuals who
meet any of the following criteria:
Individuals who have not had ownership in a principal residence during the three-year period ending on the
date of purchase of the property. This may also include a spouse, so if either meets the above test, they are
considered first-time homebuyers.
Single parents who have only owned a property with a former spouse while married.
Individuals who are displaced homemakers and have only owned with a spouse.
Individuals who have only owned a principal residence not permanently affixed to a permanent foundation
in accordance with applicable regulations.
Individuals who have only owned property that was not in compliance with state, local or model building
codes and which cannot be brought into compliance for less than the cost of constructing a permanent
structure.
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The Washington State Department of Commerce defines a first-time home buyer in accordance with RCW
43.185A.010:
First-time home buyer" is an individual or their spouse or domestic partner who have not owned a home during the
three-year period prior to purchase of a home.
Additionally, the definition of a low-income household is as follows:
Low-income household" is a single person, family or unrelated people living together whose adjusted income is less
than 80% of the median family income, adjusted for household size, for the county where the project is located.
These definitions are often combined to characterize a low-income first-time homebuyer.
Researchers trying to understand long-term housing market trends prefer to define first-time homebuyers as
borrowers who have never had a mortgage, but there is no single or complete source of data on this
population.23
Condo associations add risk to homeowners
Washington state law requires condo developments to be governed by a condo or HOA, to which all owners
belong and are governed by a board of owners. The structure, powers, and responsibilities of HOAs are also
defined by state law. The responsibility and legal expectations of HOAs provide them with powers to oversee
the management of the facility, which can conflict with an individual's desired independence, and results in no
ability to control the monthly costs associated with fees and special assessments. They are also granted
powers to fine and (if it comes to it) foreclose upon a homeowner who owes fees that are greater than the
equivalent of three months of HOA dues.
As it relates to condo conversion, the financial risk is likely to be higher as a developer doesn't have a
requirement (or strong incentive) to adequately fund the HOA reserve.
HOA fees can be unpredictable and costly
In addition to the mortgage, a condo owner must pay HOA fees. The funding is to be used for costs covering
required maintenance, repair and replacement reserves, and an emergency fund. Special assessments could
be added when high-cost, building-wide, or common area items must be repaired or replaced.
As Exhibit 15 shows, monthly condo fees have steadily increased in the City of Seattle based on the year of
construction, with an average fee of more than $1,000 per month for units built in 2020 and later.
23 Arthur Acolin, Paul Calem, Julapa Jagtiani, and Susan Wachter, “First-Time Homebuyers: Toward a New Measure,” Cityscape 20, no.
1, (2018): 193–204, https://www.huduser.gov/portal/periodicals/cityscpe/vol20num1/article9.html
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31
Exhibit 15: Monthly condo fees by year of construction, City of Seattle, 1950-2022
$2,500
$2,000
Monthly Condo Fees
$1,500
$1,000
$500
$-
1950 1960 1970 1980 1990 2000 2010 2020 2030
Year of Construction
Source: Redfin Sales Data 2021-2022
Washington has recently updated laws pertaining to HOAs
Becoming a homeowner in a common interest property entails different contractual responsibilities and
options for resolving disputes than between tenants and landlords or between property owners and local
government. In 2018, the Washington Uniform Common Interest Ownership Act (WUCIOA) offered consistent
regulations for all types of common interest communities (condo, cooperative, subdivisions, etc.) created after
July 1, 2018, and updated key provisions for pre-existing HOAs governed by older laws. Conversions of rental
apartments to condos are also now subject to the terms of WUCIOA.
In addition to local, state, and federal law, HOA members are subject to the covenants, conditions, and
restrictions (CC&Rs), rules, and bylaws of the HOA. HOA documents are generally long and complex,
sometimes hundreds of pages. They are provided to owners before the purchase of a condo and detail owner
and board responsibilities and processes.
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32
WUCIOA provisions aim to improve the transparency of many HOA functions and require notice and member
communication for amending rules, record keeping, budgets and financial audits, borrowing, and open
meetings. There are also standardized rules for the quorum and approval threshold for changes to HOA
documents. Aspects of WUCIOA also allow common interest communities more paths for pursuing alternative
dispute resolution before seeking remedy through the court system, which can be expensive for homeowners
and HOAs.
Conflict between HOAs and homeowners
WUCIOA has elements that seek to protect
homeowners and HOAs but does not resolve all
the interests between individual owners and the
HOA as a corporation. Some of the most
divisive issues arise over fines and
foreclosures:
Fines: HOAs have the power to levy fines
against individual owners for violations of
the rules defined in HOA documents.
Fines often range from $50-$200 but can
be applied repeatedly until a violation is
remedied or while an owner disputes the
fine. If fines accumulate without
repayment or resolution, the HOA may be
able to initiate foreclosure against
homeowners.
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Foreclosures: HOAs have the power to foreclose on homeowners for unpaid assessments, separate
from a lender foreclosure for an unpaid mortgage. WUCIOA reformed the HOA foreclosure process in
three key ways:
• Foreclosures can only be filed for delinquent payments equal to three months of common expense
assessments
• HOA boards must vote to approve foreclosure filings
• Nonjudicial foreclosures are allowed
WUCIOA provisions provide greater security and time for homeowners to address past-due payments and
prevent foreclosures for minor unpaid fines. Allowing HOAs to pursue nonjudicial foreclosure offers a faster
and less costly process than going to court but requires that homeowners file a lawsuit to dispute foreclosure
action.
Balancing the rights and responsibilities of condo owners and volunteer HOA board members can be a
challenge. WUCIOA attempts to establish a baseline of accountability for HOA governing boards while
protecting board members from individual liability that would discourage board service. These laws also define
rules for decision-making that encourage participation from members without paralyzing governance in
communities where owner participation is low. Yet advocates for condo owners have concerns about the
accountability of HOA board members under existing laws and the ability of low- and moderate-income condo
owners to dispute incorrect, unreasonable, or potentially discriminatory HOA actions without litigation. One
approach to these issues taken in other states is the creation of a common interest community ombudsperson
office within the regulatory or consumer affairs department. At minimum, these offices offer clarification about
state laws related to HOAs. In some states, including Florida, Delaware and Nevada, the ombudsperson also
has the authority to mediate disputes between associations and members and/or recommend state
enforcement of HOA governance laws. 24
Permanent displacement could result from conversions
Converting occupied rental apartments into ownership units may support wealth generation efforts, but it
comes with risk. This shift will cause both short- and long-term impacts on tenants, altering housing supply
and affordability.
Permanent displacement and its impacts
An increase in the number of conversions of occupied apartments to condominiums could result in physical
displacement due to economic circumstances. When housing markets are tight, as they have been in
Washington in recent years, developers of new (or newly converted) units can take on larger renovation
projects. Despite being older properties, as the potential income return exceeds the perception of risk by
investors, structures become likely candidates for redevelopment.25 Seen in various regions throughout the
country, gentrification and displacement are more common in areas that have seen ongoing depreciation and
24 Florida Department of Business & Professional Regulation, Condominium Ombudsman,
http://www.myfloridalicense.com/DBPR/condominiums-and-cooperatives/condominium-ombudsman/;
Delaware Department of Justice, Office of the Ombudsperson for the Common Interest Community,
https://attorneygeneral.delaware.gov/fraud/cpu/ombudsperson/;
State of Nevada Department of Business & Industry, Homeowners Association Complaints,
https://business.nv.gov/Homeowner/Homeowners_Association_Complaints/
25 Smith, Neil. “Gentrification and the Rent Gap,” Annals of the Association of American Geographers 77, no. 3, (September 1987): 462–
65, https://doi.org/10.1111/j.1467-8306.1987.tb00171.x
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
34
physical deterioration of older built structures. 26 These structures are often occupied by lower-income renters.
Given longstanding racial wealth disparities in the state, displacement pressures will likely disproportionately
affect Black, Hispanic and Indigenous renters at a higher rate than white residents. 27
Exhibit 16: Share of Seattle renters who are cost-burdened by race
Pacific Islander
Asian
White
Hispanic or Latino, any race
American Indian or Alaska Native
Black or African-American
0% 10% 20% 30% 40% 50% 60%
Source: Race and Social Justice Initiative (RSJI), Housing Affordability, City of Seattle, 2017
Despite additional policies and programs that support existing tenants to purchase converted units in their
building, conversion projects are likely to displace all or most current residents. Some cities have passed laws
that encourage buildings to be sold to current tenants for ownership opportunities. Washington, D.C.'s Tenant
Opportunity to Purchase Act (TOPA) passed in 1980 and is the best known of these policies. TOPA specifies
the process for notifying current tenants of sale and gives tenants the right of first offer and the right to match
third-party offers. Tenant purchase conversions have been most successful when tenants have access to legal
assistance and low-cost financing to navigate the conversion and ownership process.
If a developer planning a condo conversion offers converted units to current residents, not all renters will
become owners. They might not be interested, or they might be unable to afford the costs and risks of home
ownership. Lower-income tenants will likely be displaced by the conversion process and will have to seek
new housing in what could be a highly competitive rental market.
Washington state law authorizes most cities to create policies to compensate tenants displaced by building
sales and condo conversions. Of the cities that have such policies, assistance amounts are relatively small —
26 National Community Reinvestment Coalition, "Shifting Neighborhoods: Gentrification and cultural
displacement in American cities," https://ncrc.org/wp-content/uploads/2019/03/NCRC-Research-Gentrification-FINAL.pdf
27 2021: ACS 1-Year Estimates
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
35
for example, $2,000 in Tacoma 28 to about $5,000 in Seattle. 29 Most importantly, tenants are often unable to
find adequate or affordable housing in their existing neighborhoods. Interviews with city staff who administer
tenant relocation assistance in Seattle suggest that current displacement patterns have residents of south and
west Seattle neighborhoods relocating primarily to the Burien, Renton and Federal Way suburbs.
In the long term, conversion creates new homeownership opportunities but does not add to the overall
housing supply. Permanently removing rental apartments from local housing markets can exacerbate
shortages of rental housing and play a role in rising housing costs, especially when new housing construction
is slow or stagnant. Because condo conversions are more likely to occur in buildings that rent at more
affordable rates, conversion has a more acute impact on the supply of affordable rental housing,
disproportionately impacting low- and middle-income renters.
Feasibility of converting housing stock inside transit corridors
The legislation authorizing this study requested an investigation of the affordability of the rental housing stock
within transit corridors located inside Growth Management Act counties. Access to jobs and transportation are
important considerations when selecting housing and impact its affordability. As it relates to condo
conversion, we focus on transit corridors with rents that would allow for the lowest acquisition cost and,
thereby, the best opportunity to provide units that are affordable after conversion.
In order to understand the scale of opportunity of units suitable for conversion, we looked at the affordability of
apartment rents near frequent-service mass transit lines in the following Washington counties: Clark, King,
Kitsap, Pierce, Snohomish, Thurston and Whatcom. 30 We obtained parcel-level apartment rent estimates from
CoStar and transit line locations from the Washington State Department of Transportation (WSDOT).
Beyond the data, our results were driven by three assumptions. First, our analysis defined "frequent" transit
lines as those with average headways (the time between transit vehicles) of 15 minutes or less during
weekday mornings. Second, we defined nearby units as apartments within a half-mile of a transit line. Finally,
based on the analysis in this report identifying the incremental cost of conversion in the range of an additional
35% to 60% of AMI, targeting naturally occurring apartment units in the 60% to 80% of AMI make the best
candidates if the goal is to deliver converted condos that are affordable.
28 Tacoma Municipal Code 1.95,
https://www.cityoftacoma.org/government/city_departments/equity_and_human_rights/rental_housing_code/relocation#:~:text=Unde
r%20Tacoma%20Municipal%20Code%201.95,use%20of%20their%20rented%20residence
29 Seattle Municipal Code 22.903, https://www.seattle.gov/sdci/codes/codes-we-enforce-(a-z)/condominium-conversions
30 These are the seven counties subject to the buildable lands review from RCW 36.70A.215.
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
36
Exhibit 17: Affordability of housing units with proximity to transit
100,000
75,000
Housing units
50,000
25,000 25%
23,426 Units 28%
19,873 Units
29%
9,658 Units
32%
0 3,029 Units
Studio One Bed Two Bed Three+ Bed
0%-60% 60%-80% 80%-100% 100%-120% >120%
Source: CoStar, HUD, ECONorthwest Calculations
Of the 227,500 apartment units inside the transit corridors, 25% of them (56,000) are affordable to households
earning between 60% and 80% of AMI. These units presented limited options for family-sized units, with 59% of
the stock of suitable conversion units having fewer than two bedrooms. The exhibit below shows the number
of affordable housing units (HUs) in Western Washington counties (left) and the Seattle-Tacoma metro area
(right).
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
37
Exhibit 18: (Left) Total apartment units within transit corridors in 2022, (right) number
of naturally occurring apartments affordable between 60% and 80% of AMI in 2022
HU = Housing Units
Source: CoStar, HUD, ECONorthwest Calculations
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
38
Case studies: Policy examples from other states
We explored policies in other states that affected condo conversions and development, including Colorado,
New York and Florida.
Case study: Colorado
In 2017, Colorado legislators passed HB 1279 to update the Colorado Construction Defect Action Reform Act
(CDARA) to spur condo development in the state. At the time of the legislation, condos made up only 3% of
new development in Colorado. To reduce condo defect liability litigation, HB 1279 implemented a requirement
that a majority of condo owners must approve builder defect lawsuits, not just a majority of the homeowners'
association board. The developer will also have the opportunity to remedy the defect prior to the HOA vote.
Also, in 2017, the Colorado Supreme Court ruled that condo developers could require arbitration in the case of
construction defect disputes rather than going directly to litigation as another protection for condo developers
and builders.
There is high demand for condos after years of stagnant development, with recent condo developments in
Denver selling out quickly. However, condo development — and condo conversion — has not gained traction
due to lingering uncertainty and the risk of lawsuits. For conversions, deed restrictions and the cost to convert
units remain substantial barriers. Many developers remain cautious and are waiting to see the impact of the
legislation before entering the condo market.
Exhibit 19: Units completed annually in Denver, 2007-2019
4,500
3857
4,000
3,500 3158
2942 From 2014 to
3,000 2019, Denver
2600
Number of Units
added about
2,500
33,000 new
1896
2,000 apartments and
1620
765 condo
1,500
1122
units, a growth
of under 2%.
1,000 769
636 622 652
520 462
500 344
85 88 102 98 138 113 74
0 0 0 50 0
0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Apartments Condos
Source: Rodriquez, James, "GOING VERTICAL: Is Denver-area condo development primed for a rebound? It's complicated." Denver Business Journal,
(2020), https://www.bizjournals.com/denver/news/2020/02/06/denver-condo-development-rebound.html
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
39
Case study: New York
In 2019, New York City passed the Housing Stability and Tenant Protection Act to strengthen tenant
protections, requiring that 51% of existing tenants agree to buy their apartments before a building can be
converted. Previously, only 15% of existing tenants were required, and the percentage could also include non-
tenants who were purchasing the apartment to use as their primary residence. The new 51% requirement
includes current tenants only. 31
According to a report written by the Steven L. Newman Real Estate Institute at Baruch College, this legislation
played a major role in slowing condo and co-op conversions in New York City. In the year following this
legislation, just five condo conversion plans were submitted, down 75% from the previous year and an all-time
low. 32 The total units associated with these projects are shown in the following exhibit. In 2013, the total
property value of converted projects was $3.7 billion; in 2019, this value was only $6 million. 33
The same report also found that in neighborhoods with condo conversion projects, homeownership rates
increased by 1.3 percentage points. 34
Exhibit 20: Total apartment units converted in New York City, 2015-2020
2,500
2324
1960
2,000
1655
Number of Units
1,500
1083
1,000 889
500
103
0
2015 2016 2017 2018 2019 2020
Source: Steven L. Newman Real Estate Institute at Baruch College, "NYC Condominium and Cooperative Conversion: Historical Trends and Impacts of
the Law Changes," https://zicklin.baruch.cuny.edu/wp-content/uploads/sites/10/2021/05/5.5.2021_NYC-Condo-Conversion_Impact-of-the-Recent-Law-
Change_May-5th-2021.pdf
31 Gadow, Sandy, "What happens when your rental is being converted into a condo?" The Washington Post, (Sept. 29, 2015),
https://www.washingtonpost.com/realestate/what-happens-when-your-rental-is-being-converted-into-a-condo/2015/09/28/e5e528fa-
5336-11e5-9812-92d5948a40f8_story.html
32 Hudson, Erin, "Rental-to-condo conversions drop 80% after 2019 rent law: report," The Real Deal, (May 13, 2021),
https://therealdeal.com/2021/05/13/rental-to-condo-conversions-drop-80-after-2019-rent-law-report/
33 Steven L. Newman Real Estate Institute Baruch College, the City University of New York, "NYC Condominium and Cooperative
Conversion: Historical Trends and Impacts of the Law Changes," https://zicklin.baruch.cuny.edu/wp-
content/uploads/sites/10/2021/05/5.5.2021_NYC-Condo-Conversion_Impact-of-the-Recent-Law-Change_May-5th-2021.pdf
34 Ibid.
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Case study: Florida
Following the deadly collapse of the Champlain Towers South in
Surfside, Florida, state lawmakers passed the Building Safety Act to Example: After updates to
reform condo regulations. 35 As part of this legislation, condo Florida Legislation, unit
associations in Florida have until 2025 to complete inspections to owners of the Florida condo
determine the scope and cost of any repairs. Condo associations tower Murano at Portofino
must hold reserves for major repairs, likely costing unit owners high are facing an assessment of
assessment fees. Recertification will be required after 30 years and $30 million — or $160,000
every 10 years following. Due to the uncertainty of potential costs and per unit. The building is not
risks associated with previously deferred repairs, it is likely that the offering financing, leaving
Florida condo market will slow in the coming years. unit owners to come up with
costs individually. Many
In Florida, the Roth Act governs condo conversions. It requires a involved in the Florida condo
condo conversion report to be prepared by an engineer or architect, market are expecting a wave
with each unit owner and the HOA as third-party beneficiaries of the of similar fees or HOA due
report. In addition, developers are required to provide one of three increases for condo owners
types of post-purchase protections to condo buyers: 36 across the state.
Establish converter reserve accounts for capital expenditures and deferred maintenance. These funds are
used for any required maintenance or repairs, and the amount is based on the age of the building.
Grant the purchaser of each unit an implied warranty of fitness and merchantability for the purposes or
uses intended. The developer agrees to cover the cost of any repairs or replacements for up to a three-year
period. However, if a developer chooses to grant these warranties, the time limit on those warranties likely
begins when the notice of intent to convert is filed, not when the unit is sold.
Post a surety bond equal to the total amount of all reserve accounts, which would otherwise be required.
This bond will cover the cost of any repairs or replacements of the features it covers.
While the Roth Act was not specifically updated in the Building Safety Act, condos formed via conversions will
be subject to the same assessment and inspection requirements as existing condos.
35 Echikson, Julia, "Colliers Launches Advisory to Help Florida Condos Manage New Assessment Laws," Commercial Observer, (Sept.
20, 2022), https://commercialobserver.com/2022/09/champlain-towers-south-colliers/
36 Sweeney Law, "Transforming Apartment Buildings Into Condominiums In Florida," (Nov. 25, 2019),
https://www.sweeneylawpa.com/transforming-apartment-buildings-into-condominiums-in-florida/
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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Conclusion: Conversions a complicated approach
The prospect of homeownership is getting further out of reach for many people in Washington. This study
examined the potential of converting apartment buildings into condos and (if currently occupied) transitioning
existing tenants into owners of their units. We identified a series of financial and legal barriers that limit the
market from pursuing conversion at scale. The limited amount of conversions is due to a myriad of factors for
which there is no clear fix. Two of the main issues are:
1. The construction defect liability of any work undertaken within conversions can lead to protracted and
costly lawsuits that drive up the cost, time, and complexity of conversion projects, making it difficult to
secure in-demand labor or financing.
2. In recent years, the return on investment for multifamily rental buildings has been strong, mitigating the
desire to develop condos. The risk associated with developing or converting a condo is not financially
attractive compared to other market options, particularly detached housing or apartments.
On top of the initial costs to convert (financial and material), condo fees and private mortgage insurance will
typically push the monthly costs higher than what many middle- or lower-income individuals can afford. The
risk of entering the contractual obligations of a homeowners association and its ability to fee, fine and place
liens also adds risk.
The goal of expanding homeownership and the ability to build wealth while creating housing stability is
challenging for low-income households and first-time homebuyers, as the cost of converting an apartment can
almost double the monthly costs of ownership compared to an apartment renting at 80% of AMI. Converting
apartments that are renting for less than 80% of AMI could offer some additional affordability for
homeownership but increases displacement risk for existing tenants of naturally occurring affordable housing
(affordable at between 60% and 80% of AMI) and would likely require additional improvement costs to conform
with code requirements and a standard of finish that would be attractive to potential buyers.
Currently, the cost of condo conversion makes affordability for households earning less than 80% of AMI
challenging without policy interventions or subsidies. Market volatility regarding interest rates, the impact of
inflation, and changing valuation metrics for apartments (cap rates) make it challenging to forecast condo
conversion feasibility in the near term. As current market conditions/volatility change in the future, the
affordability impact of conversion could improve, at which point they can be explored as an option to provide
affordable homeownership.
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
42
Appendix
Study Project Committee
In addition to representatives from ECONorthwest, BDS Planning, and the Washington State Department of
Commerce, the Affordable Housing Advisory Board Condo Conversion Study Project Committee included:
Paul Trautman, Senior Housing Developer, Community Frameworks, Affordable Housing Advisory Board
Chair
Ann Campbell, Homeownership Unit Managing Director, Washington State Department of Commerce
Jeanette McKague, Assistant Director of Housing and Community Development, Washington Realtors
Michael Orbino, Managing Broker, Team Foster Building + Developer Services at Compass
Steve Walker, Executive Director, Washington State Housing Finance Commission
Patrick Johansen, Chairman of Housing Justice Committee, RiseUpWA
Raelene Schifano, non-profit advocate, HOA Fightclub
Michael Brandt, real estate lawyer, Principal, Brandt Law Group
Study engagement
Study Project Committee meetings
Three study project committee meetings were held to cover the following topics:
1. Project goals and preliminary findings
2. Project updates and additional results
3. Committee feedback and guidance
Condominium Conversions Study meeting materials are available online:
https://www.commerce.wa.gov/about-us/boards-and-commissions/affordable-housing-advisory-
board/condominium-conversions-study/
Informational interviews with Committee members and stakeholders
In addition to project committee meetings, ECONorthwest conducted individual informational interviews with
project committee members. ECONorthwest also held additional key informant interviews with relevant
stakeholders, including:
Real estate lawyers
Insurance lawyers
Tenants' rights advocates
City staff focused on homeownership and anti-displacement
Nonprofit housing development organizations
A REVIEW OF CONDOMINIUM CONVERSIONS IN WASTHINGTON STATE
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