Cities find the glut of condo rentals better than foreclosures

  • Article by: MARY JANE SMETANKA , Star Tribune
  • Updated: March 10, 2012 - 12:08 AM

Rentals are viewed as better than foreclosure, but not as good as owners who have vested interest.

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FILE--Former Spring Park Mayor Jerry Rockvam.

Photo: Jennifer Simonson, Star Tribune file

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For the tiny city of Spring Park, the $68 million condominium project was going to be the perfect development, replacing old businesses and blighted properties with luxury housing near Lake Minnetonka that would build the city's tax base.

But "The Mist" ran smack into the collapse of the housing market. People who put deposits down on some of its 116 units walked away, and most units are now rented. When the owners of the Mist won an appeal in tax court, Spring Park, which has an annual city budget of about $1 million, had to pay back $200,000 in property taxes.

"They were intended as ownership units and they were very, very expensive. The timing could not have been worse," said Mayor Sarah Reinhardt.

Four years after the collapse of the housing market, more than half the condos in Spring Park, Hopkins, Mound, Orono, Osseo and Rogers are non-homesteaded, meaning they are vacant, rented or used as second homes. Countywide, the proportion of non-homesteaded condos jumped from 26 percent to 32 percent since 2008.

"People lived there awhile, circumstances changed and they haven't been able to sell them, so they're renting and hoping values recover sometime in the future," said Herb Tousley, director of the University of St. Thomas' real estate program.

While cities like Hopkins embrace rental housing, others are keeping tabs on the trend, fearing too many renters will keep property values low, only prolonging the decline in home prices. Renters don't have a stake in a property, so might not invest the same time or energy into the well being of the building or community.

In St. Louis Park, the number of non-homesteaded condos and townhouses increased 128 percent over three years. While many of those units appear to be owned by snowbirds who return in summer, Mayor Jeff Jacobs said the city is monitoring the numbers.

"I am a little bit concerned," he said. "It is something you want to watch."

In St. Bonifacius, all 18 of the city's condo units are rented. The former apartment building was slated to be upgraded to condos, but work stalled and a mold problem developed.

The city "struggled with whether we should step in, but it would have crippled us," said Mayor Rick Weible. A private investor repaired the building and turned it into affordable apartments.

"That worked for me," Weible said. "Not everything needs to be homesteaded."

Joe Grunnet, a Minneapolis real estate agent and condo specialist, said having renters in owner-occupied buildings is a natural response to a tight rental market.

"It isn't all bad," he said. "I would rather have renters in a building than foreclosures.... Foreclosures lower everyone's values."

But if condo buildings want to promote ownership, it's unwise to allow more than 49 percent of the units to be rented, Grunnet said, because most lenders won't give mortgages in buildings where renters outnumber owners.

"You'd be buying into an apartment building," he said.

Bad time for the Mist

The Mist was a huge deal for Spring Park, population 1,700. Initially, some of the units were priced at more than $1 million.

"It was the wrong price at the wrong time," Reinhardt said. When the recession hit, she said, values plummeted and some buyers walked.

After the real estate arm of Prudential Insurance Co. bought the building, it filed tax petitions for three years. From a 2007 market value of $59.3 million, the assessed value was $27.1 million in 2009-10 and since "has gone down even further," said county assessor Jim Atchison.

The lower assessments meant Spring Park had to pay back about $200,000 in property taxes. Reinhardt said the city tightened its belt, but did not have to cut services.

Fifteen of the Mist's 116 units are owned, with about half of the owners living on site, according to John Chartier, communications manager for Prudential Financial. Chartier said in an e-mail that the firm is "comfortable holding the asset until market conditions improve."

Reinhardt and Jerry Rockvam, who was mayor until 2009, agree that even as rental, the Mist is a city asset.

"It's better to have people in the building than not," Reinhardt said. "We're just glad that they're full."

Rockvam said he hopes that eventually the building is mostly owner-occupied. But Lisa Piazza, a real estate agent who rents at the Mist, said that while she loves living there, she probably would not buy there.

"It's a bit riskier because there are so many renters in the property," she said.

StoneBay waits

Nearby, the bank that owns StoneBay Condominiums of Orono has been patiently marketing the development. Citizens Independent Bank of St. Louis Park finished the project when the developer went bankrupt.

Eight of 57 units have sold for $149,000 and up. Renting is prohibited except to relatives, said Marion Brummer, bank executive vice president and CFO.

"The return on a rental is not nearly as good as selling the units," she said. "And the people that live there, they don't want rentals."

Interest has picked up, Brummer said, adding that she is "very confident" the building will fill with owners within three to four years.

Timothy and Lisa Myers of Lake City bought a StoneBay unit after discovering that they could buy the condo for less than they could rent. Timothy Myers said that, as a resident, the vacant units aren't an issue.

"It's not like you're in a ghost town or anything," Myers said. "I'm really surprised these are not selling quicker."

Danelle Wolf and her husband, Mark, also live at StoneBay. When they sold their house, they lived for a while in a condo building filled with renters. There were a few noise problems, and people smoked in the non-smoking building.

"We saw the effects," Danelle Wolf said. "In an owner-occupied building, there is pride of ownership....We refer to this as our own private chateau."

Mary Jane Smetanka • 612-673-7380 Twitter: @smetan

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