Reality Check: Converting Legacy Rentals in Overlay Districts

Many moons ago, when overlay districts were established, with existing rentals grandfathered in, the hope by many was, over time, rentals would be converted to single family homes, with the intent of solving multiple problems, including what then was perceived as a lack of desirable housing in East Lansing for families with school aged children and the nuisance behavior/neglect/eyesore problem associated with some rentals, but often applied across the board.

During the recent strong objections raised by the community against new rentals in overlay districts, an important point was lost: preventing single family homes from being converted to rentals is totally different financially from converting rentals to single family homes. An existing single family home can be sold as a single family home with only the level of home improvement an owner is willing to put into it, which factors into the price, perhaps in the current market to the detriment of the seller. Some existing rentals in overlay districts, mostly ones now occupied by single families or maybe two unrelated (and uncoupled) adults, that were single family homes and have more or less stayed that way, can be converted back to single family homes for about the same cost as for home improvement of any older home. However, for most rental houses or duplexes in overlay districts (apartment complexes are an even bigger problem) to be converted to single family homes, they would need extensive renovation or would need to be torn down and something new built in their stead. Also, many former single family homes that have become rentals and could be converted back are worth more as rentals, so if someone were to buy one and undertake the same level of home improvement as buying an analogous existing family home, it would be much more costly, in other words a detriment and deterrent to the buyer.

This has meant the hoped for devolution to single family homes has simply not happened, and it is not going to happen any time soon. There may be some who want to force landlords out of business so their properties can be bought for a song and accelerate the conversion, but in the real world, the interim deterioration and blight would be far worse for neighbors than existing issues with rentals, especially if the city adopted simple measures to force bad landlords to behave like good landlords, instead of basking in ineffective, high-profile, feel-good programs.

Since natural conversion has not taken place, the city has resorted to active intervention, at great cost. Avondale Square is, of course, the best known debacle, with taxpayer subsidies estimated at $200,000 per home, more than current median value of the few already built. Part of the cost of Avondale Square was the new infrastructure to turn it into a subdivision, but part was the cost of buying existing rentals, instead of starting with vacant lots.

Another debacle was the brownfield for Campus Village II in exchange for conversion of rentals in Chesterfield Hills, which I have discussed previously. However, I want briefly is review the cost of conversion of one of the houses, the one that the developer was allowed to let sit and rot and attract vagrants for three years, before finally converting it, per the agreement, after we raised repeated stinks (one of the prime reasons why I and my immediate neighbors were early "fire Staton" adopters.)

This house had long been a rental on Michigan near the QD, and the last students who lived there included one of the pioneers of MSU Recycling and a couple of State News people, who were troublemakers to the extent they placed anti-Iraq-war placards in the median and did composting (and had to be reminded to return my shovel after planting flowers).

Campus Home Conversions (associated with Campus Village) bought the house in September 2007 for $185,000. I would estimate, conversion renovations, which in this case did not need to be extensive, once finally begun, were at least $30,000. It was sold in August 2010 for $64,000 (to a student who is living in it while at MSU). Taxes in 2006 were about $3,450, in 2012 about $2000.

Admittedly, this conversion took place at a terrible time in relation to the bubble and its bursting. But we are looking at a loss to the developer of about $150,000 (a pittance compared to the brownfield tax break) and $1,450 in annual taxes for a property that if left a rental would be worth something like $120,000 instead of $67,000 (assessed market value).

I expect some conversions would work out better and others worse, but I think this example shows why the ideal of converting legacy rental houses in overlay districts to single family homes is, like so much else in East Lansing, financial wishful thinking.

I really see no other responsible choice but to allow landlords to make reasonable improvements to their existing rentals in overlay districts to keep them in marketable condition, and let's deal with irresponsible landlords and hooligan behavior directly, instead of thinking we can solve those problems by converting legacy rentals to single family homes with yet more snake oil.

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