Conversion

When Rental Apartments Become Condominiums

A condominium always provides greater control over your living environment than a rental apartment. In a condominium, you are the master of your own house – along with your neighbors. In a condominium association, you do not own the apartment itself, but rather the right to live in a specific unit.

Forum Property Economics has developed expertise in handling each step of the process when converting a rental property into condominiums. We master the entire process from initial idea to an established condominium association with a functioning board and adapted association bylaws. And above all – with a property to manage.

When a rental building is converted into condominiums, the process is gradual and concludes with the new condominium association's meeting, where a two-thirds majority decides to purchase the property.

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The Idea is Born

The initiative for the conversion usually comes from the property owner, who contacts the tenants and offers them the opportunity to acquire the property. It is also common for tenants to band together and form a condominium association, submitting an expression of interest to the Land Survey Authority to potentially receive a so-called right of first refusal in the future. In cases where the property owner intends to sell the property on the open market, tenants have the right of first refusal if two-thirds of the tenants support the offer. Regardless of what leads to the idea of converting rental apartments into condominiums, the first step is to establish a condominium association.

Forming the Association

It is sufficient to have three members to form the association. The board of the association must be elected from among the members and should have at least three members. The association must also be named and its bylaws adopted. Finally, the condominium association must be registered with the Companies Registration Office (Bolagsverket). Once the formalities are completed, there are conditions in place to negotiate with the property owner.

Acquisition Review

Before the property changes ownership, a thorough assessment of the property's technical status and installations is required. The association appoints an inspector to review the property's maintenance needs for the next eleven years. For example, the inspection should reveal the remaining technical lifespan of elevators, substation, roof, and facade, as well as whether the water and sewage pipes frequently leak, indicating a need for a demanding pipe replacement. Any defects and shortcomings identified during the inspection should be recorded in a maintenance plan for the property. The maintenance plan, alongside capital costs, will influence the association's future finances.

Acquisition and Price

The inspection report, combined with the property's market position, forms the basis for price negotiation. What is the market value of the property? Forum's market analysis system (FMI) allows us to accurately determine the "right price." As usual, it then comes down to negotiation, where the buyer and seller must agree to complete the transaction.

Financing - Bank

When it's time to finance the property purchase, Forum Property Economics gathers offers from various banks. Expertise in property economics is crucial for both creating the request for quotes and evaluating the offers, as well as for establishing a secure "portfolio" with different loan terms.

If this expertise is not available within the board, it is both advantageous and necessary to have Forum Property Economics negotiate on behalf of the association to find the best loan terms and financing model.

The bank that Forum Property Economics recommends to the board should also be able to offer favorable mortgage terms to the future condominium owners.

Financial Management and Property Maintenance

Financial management, including sending out fee invoices, monitoring unpaid invoices, financial reporting, and compiling the association’s annual accounts, is a service that the board must decide on directly. Order and accuracy in financial reporting are crucial. Even if the board outsources the service, it remains the board's responsibility to ensure everything is correct. The board can choose to outsource property maintenance or employ a property manager directly. Both options have their advantages and disadvantages. By outsourcing the service, the association avoids employer responsibilities.

Information Meeting and Housing Cost Calculation

In the conversions that Forum Property Economics is involved in, one or more information meetings are held with the residents at this stage. During these meetings, the financial calculation of what it will cost to live in the condominium association is presented, including the annual fee and the contribution each apartment will need to pay in the newly formed association.

Each individual tenant is given the opportunity to perform their own calculations and decide whether it is of interest to purchase their apartment as a condominium or to continue living as a tenant in the newly formed association. At the meeting, tenants can provide non-binding responses to the following questions:

Do you want to buy your apartment as a condominium?
Do you not want to buy your apartment but wish to remain as a tenant in the association?

Financial Plan

Forum Property Economics prepares a financial plan that outlines income and expenses for the next eleven years. The plan includes expected maintenance needs and, together with capital costs, forms the basis for determining both the annual fee and the contribution required to purchase a condominium in the association. The financial plan must be reviewed and approved by two individuals certified by the Swedish National Board of Housing, Building, and Planning (Boverket). The criteria for the review are that the financial plan must be credible and the underlying calculations realistic, ensuring that the plan is based on reliable grounds.

The Moment of Truth - The Meeting Decides on Purchasing the Property

The next step is to convene a purchase meeting to make the crucial decision on whether the association should acquire the property. For the association to proceed with the purchase, two-thirds of the tenants must vote in favor at the meeting.

To have voting rights at the purchase meeting, one must be a member of the association and registered at the address. A member who votes in favor of the purchase does not, however, have to buy their apartment. It is possible to vote in favor of the acquisition and then continue as a tenant within the association.

The Association Becomes the New Owner

When the association pays the purchase price, it also takes ownership of the property. At the same time as taking ownership, tenants who wish to purchase their apartment as a condominium must pay their contribution. Those who choose to remain as tenants continue to pay their rent as usual, under the same conditions as with the previous owner.

Typically, the association borrows 30–50 percent of the purchase price, with the remainder coming from the members' contributions.

The Association's Daily Operations - Management

Typically, a conversion takes between three months to a year. Once everything is complete, it is the board, along with the financial and technical management, that is responsible for ensuring daily operations run smoothly. This includes tasks such as cleaning the stairwells, sending out rent and fee invoices, and ensuring they are paid on time. The board allocates financial resources for planned maintenance. The key difference from a typical business is that a condominium association operates without a profit motive, following the cost principle. The association sets aside money in an external maintenance fund to create financial space for planned maintenance and property improvements.

Download Our Conversion Brochure

Forum's extensive experience in conversions contributes to security for all parties involved in the conversion process.

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