Condo conversions making a comeback in valley

The Spanish Palms condominium community on South Rainbow Boulevard is a blast from the city's 1990s past.

And that other past — the 2006 boom era in which sanity abandoned the local housing market.

Aaaand that other one, too — when recession reigned and the party stopped.

Spanish Palms began life as an apartment complex, converted to a for-sale community in the housing bubble and reverted back to rentals in the crash.

Now, units inside Spanish Palms — stop us if you've heard this before — are for sale again. The reception has been strong: The community sold nearly 70 units in the last four months, or nearly 40 percent of its relaunched inventory.

That sales tally is thanks partly to the city's housing recovery, but also to hard work on financing and upgrading on the part of its new owner, DK Las Vegas.

Still, even if Spanish Palms' renewal is a story unto itself, it traces the general saga of Southern Nevada's condo conversion craze and crash. Conversions once made up a fifth of the market's new-home sales. Today, they account for practically none.

The jury is out on whether Spanish Palms marks a revival for the entire segment, although some market indicators signal that condo conversions could be set for at least a small comeback.

'It was a craze'

Spanish Palms opened in 1997 amid a wave of construction in a city surging toward the 1 million resident mark.

As the population expanded, the median local single-family home price soared to $315,000 in 2006, according to the Greater Las Vegas Association of Realtors. Developers enlisted apartments to meet growing demand for affordable alternatives. They converted rentals to for-sale units, marketing apartments of as little as 700 square feet for prices that typically started in the low $100,000s.

"It was a craze. At the time, everything was set up right as far as the market's situation," said Dennis Smith, president of local analysis firm Home Builders Research. "Single-family prices were way up, and financing on conversions was relatively easy. You could get people qualified. Salespeople were telling buyers they could flip them in a year."

Developers bought up 18,500 local apartment units — about 10 percent of the city's rental supply — for conversions from 2004 to 2007, said Spence Ballif, a senior vice president specializing in multifamily investment properties for commercial brokerage CBRE Las Vegas. They focused on communities in master-planned areas with strong demographics, most notably in the southwest, northwest and Henderson, he said.

At their height in 2005, condo conversions made up 20 percent of new-home sales, or 7,951 out of 38,957 closings, Smith said. The Review-Journal reported in July 2005 that four of the city's 10 best-selling new-home communities were condo conversions, selling for average prices of $125,000 to $166,000.

The Reserve Development LLC bought Spanish Palms for $52 million in July 2005, near the market's height. The company was selling units in earnest by April 2006.

At that point, conversions were still 15.2 percent of the new-home market, with 5,475 out of 36,156 closings.

Before long, though, home values would begin plummeting, and the conversion math would stop making sense.

Banking crisis unfolds

The median single-family resale price dropped to $246,500 by February 2008, down 21.7 percent from its June 2006 record, and another 39.6 percent to $149,000 by April 2009.

What's more, the banking crisis that began in fall 2008 made it "impossible" to for homebuyers to borrow, Smith said.

And although executives with current owner DK Las Vegas say construction-defect litigation wasn't an issue at Spanish Palms, the lawsuits did broadly affect condo communities, including conversions. Nevada law changed in 1996 to guarantee plaintiffs and their attorneys not just actual damages, but also attorneys' fees, the cost of expert witnesses and interest on those expenses. That made defect lawsuits lucrative, and filings soared 355 percent from 2006 to 2012, according to a 2013 study by UNLV's Center for Business and Economic Research.

Condos were especially vulnerable to defect claims, because common areas and shared walls meant a flaw in one unit could be extrapolated to most or all units.

Before nosediving prices, frozen credit markets and lawsuits destroyed the city's condo conversion market, developers had moved about half of their 18,500 units, Ballif estimated.

That was the case at Spanish Palms, which sold 184 of its 372 units by 2007, after which it sold no more. The remaining units stayed as rentals.

ST Residential, a division of Starwood Hotel Group, bought Spanish Palms for $5.5 million in a foreclosure auction in April 2011, and it became part of a portfolio of five local condo properties that included downtown's Ogden and Juhl towers, and the south valley's Loft 5.

Spanish Palms carried on as a rental community. In early 2014, ST Residential sold its local portfolio to DK Las Vegas, a partnership between Dune Real Estate Partners of New York and California-based KRE Capital. The sale price on Spanish Palms was $19 million, according to Clark County assessor's office.

It took more than a year of planning, plus more than $1.5 million in upgrades, but by May, converted condos at Spanish Palms were back on the market.

Making Spanish Palms competitive

Those condos — and the community — look different today.

DK Las Vegas improved units with new flooring and appliances. Walls that chopped up space were removed, for more open floor plans.

There were also additions to common areas, including an expanded fitness center and a new business center and conference room inside the clubhouse. But the heart of the community, KRE Capital partner Uri Vaknin said, is its "central park," a 16,000-square-foot park designed by local landscape architect Jack Zunino, who created the master plan for the Las Vegas Springs Preserve. There's a dog park with an agility course, as well as new grills and dining pavilions near the pool.

The idea, Vaknin said, was to expand on Spanish Palms' existing lures, which included attached garages and a guard-gated entrance — both of which are difficult to find in the local condo market, and at the community's price points, which begin today in the $120,000s.

"The key thing was to add value," Vaknin said.

The idea was to make Spanish Palms competitive on price, location and product, he said.

But one more essential element was missing.

The mortgage market for condominiums is, in most cases, as bad as ever. Federal agencies that back home loans no longer lend on attached homes unless condo communities can certify that they have low numbers of investors and dues delinquencies.

DK Las Vegas has been working hard to restore that lending. The community's buyers are now eligible for low-down-payment programs through the U.S. Veterans Affairs Department, and because it's selling mostly to owner-occupiers rather than investors, it has conditional approval to begin offering Federal Housing Authority-backed loans in coming weeks.

And that's perhaps the most important ingredient for success, Smith said.

"The only places that will work will be places where you can buy with a mortgage," he said.

At Spanish Palms, it's already working, according to numbers from DK Las Vegas.

More than a third of its 188 leftover units have sold at an average price of $145 to $165 per square foot, compared with a marketwide average that real estate sales website Trulia pegs at $115. One Spanish Palms unit — a three-bedroom place on the first floor by the pool — went for $180 per square foot, or about $200,000.

"People like to be near the pool," Vaknin said of the unit's high sale price.

DK Las Vegas may have found a formula to turn around Spanish Palms. The question is whether the rest of the dormant conversion market can follow.

Financing a question mark

So far, there's no evidence of a broader local return of the condo conversion.

The Realtors' association's Multiple Listing Service reported only 132 condo conversions, out of a total attached inventory of around 3,500 units, for sale as of Aug. 21 at prices ranging from $34,500 to $240,000, said Tim Kelly Kiernan, broker-owner of KRG Group at Re/Max Benchmark.

"That segment is quiet. With HOA litigation and difficulty getting financing, agents are not paying much attention to them unless they have investors or cash buyers," Kiernan said.

Still, few builders are selling new homes for an affordable $200,000 or less, Ballif noted. That could make conversions competitive on pricing.

Home Builders Research reported a new-home median of nearly $306,000 in July. And the median price of a single-family resale has crept back up to $218,000, from its 2012 low of $118,000, according to the Realtors' association.

Also important: Reforms earlier this year in the state's construction defect laws repealed guarantees of attorneys' fees and required a more clear definition of defects.

"The pendulum has swung back, and that will absolutely help," Smith said.

But the ability for owner-occupiers to borrow remains the most essential factor, he said.

"Unless the financing is there, we don't see big changes in the market anytime soon," he said. "I think some market share will be there, but it will stay in the low single digits."

For developers willing to put in the work of bringing back federally guaranteed mortgages to their properties, though, the market could pay dividends.

That's why executives of DK Las Vegas, which deployed a similar financing strategy at the Ogden to close on 14 units worth a total of $4 million from June to July, are more bullish about the future of suburban, two-story condo conversions.

"If you'd asked me four months ago if we plan to convert more, I'd have said, 'We're great with Spanish Palms,' " Vaknin said. "But now, with the success we're enjoying, we may take a look at it. I don't think anyone was aware of the pent-up demand for this type of product. It's blown us away."

Contact Jennifer Robison at jrobison@reviewjournal.com. Find @_JRobison on Twitter.