Keeping the Lights On: With Buyers Scarce, Condos Turn to Rental

Condo and townhome developers have embraced tenants as the next best thing to buyers in a market long on supply and short on demand. Better to have a rent-generating unit than an empty, unsold one.

Two years ago, eight projects in Little Rock and North Little Rock were home to 434 residential units. The properties, backed by more than $140 million in bank loans, accounted for 120 units sold through September 2009, mostly in the 300 Third project, one of the first to open.

Since then, the developments have attracted 55 more sales and reduced the overall inventory to about 60 percent.

To improve the cash flow of projects, owners have turned to leasing unsold units and often offering residents a rent-to-own option. The purchase program at downtown Little Rock's River Market Tower, introduced less than two years ago, has attracted 40 residents who could turn into buyers.

Under this plan, 20 percent of their monthly rent will be transformed into a down payment on their condo if they exercise the purchase option at the end of the one- or two-year lease. If the purchase option isn't exercised, the owners keep the money.

Rett Tucker, partner in the 20-story project at 315 River Market Ave., said five of these deals were now under contract to become sales.

"It certainly isn't like it was before the bubble burst," Tucker said of the market. "But the lull from the dog days of summer is over, and activity is starting to pick up."

Entry-level condos on floors 6-11 at the River Market Tower, the largest condo project in town, start at $239,000 for one-bedroom units and $349,000 for two-bedroom units. These white-box units have plumbing, electric and heating/cooling in place along with all walls and doors but await flooring, painting and other finish-out details.

From these units, the prices ascend and top out at the 19th floor, where a 2,946-SF unit sold for $1 million.

Scott Howe, the new CEO of Acxiom Corp., looked at buying a condo in downtown Little Rock earlier this summer but experienced sticker shock. Howe couldn't make the big-city pricing jibe with the abundant supply of options.

A marketing effort at Riviera Condominiums also is designed to convert tenants into owners by turning part of the monthly rent check into home equity.

The deal is structured so that 1.5 to 2 percent of the would-be purchase price is held in escrow until the sale closes. This money is collected from a portion of the monthly rent, $1,000 for one-bedroom units and $1,500 for two-bedroom units.

If the resident completes the transaction, the funds are applied toward the acquisition. If not, Riviera keeps the funds as part of the rental agreement.

"We're not doing anything new marketingwise, but things seem to be picking up," said Tom Rystom, partner in the apartment-to-condo conversion project at 3700 Cantrell Road in Little Rock's Riverdale area.

"We have a couple [units] under contract. It's slow, but we're developing momentum. I feel pretty encouraged."

Prices for Riviera condos range from $185,000 for 695-SF units on floors 2-4 to $879,000 for 2,850-SF units on the 11th floor.

Alex Marks, senior vice president of Tower Investments, said an aggressive marketing push to attract residents to its Lafayette Square project was a success. Six units have sold and 24 are leased to push occupancy at the downtown Little Rock redevelopment at 523 Louisiana St. to 100 percent.

"We're pretty much leased up from a condo standpoint, Marks said. "We're doing well, but it can always be better."

The starting point for Lafayette Square condos: $119,900 for one-bedroom units and $169,900 for two-bedroom units.

Brad Canada, partner in The Residences at Building 5 at 400 W. Markham St., has refrained from entering the lease-to-own marketing wars.

He sees the flurry of activity generated by competing projects as a good thing for his downtown Little Rock development.

"We're seeing more people come downtown, whether they're renting or buying," Canada said. "That's a positive. It's certainly important to get the inventory number down."

Condo sales at Chenal Woods are approaching 20 units, with a sale scheduled to close Sept. 9 and five units on a lease-to-purchase plan.

Henry Jordan Jr., partner in the west Little Rock project near the northwest corner of Chenal Parkway and Rahling Road, said the lease-to-own program was started about three months ago in response to the push by downtown condo developers to fill unsold units.

"We're underwriting those people, so they can close if they want to," he said. "One hundred percent of the rent paid comes off the down payment or purchase price.

"I've turned down a lot more than I've accepted. We're not renting to any Tom, Dick or Harry who walks through the door."

The Chenal Woods investors will go so far as to help facilitate 100 percent financing for qualified buyers.

"We will even carry the second mortgage," Jordan said. "If the bank does 90 percent, we'll do 10 percent if they get approved by the bank."

Prices range from $364,000 for 1,418-SF two-room, white-box units to $589,000 for 1,791-SF three-bedroom, finished condos.

An ownership change at downtown Little Rock's Vertical Lofts in June brought new life to the dormant project.

Ball & Farrar Properties LLP of Houston completed finish-out work on the eight unsold townhomes and more at Victory and Second streets. The Texas attorneys bought the units for $1.35 million and land for an additional eight townhomes.

However, Ball & Farrar have decided not to expand the project as planned by the original owners/developers: Matt Bell and Gene Cauley.

Instead, the land will be developed into a pool and common grounds, which should be completed next year. One of the units is under contract, and there are no plans to shift from sales to lease.

"They're not in desperation mode," said Tiffany Lindsey, local marketing agent for Vertical Lofts.

Developers at the CityGrove townhome project in downtown North Little Rock are reworking plans for the next phase of construction. Configurations at the three-block development along Maple Street between Fourth and Seventh streets will be altered from three-stories topped by the master bedroom to two stories with the master bedroom on the ground floor.

Of the 14 three-story townhomes built, six have sold and seven are leased. Instead of another six adjoining townhomes planned under the original configuration, new construction will produce three to four detached, single-family homes of 2,000 to 2,200 SF.