Chance for a good profit at Evandale
Experts say developer could clear $14 million if all 144 condos sell quickly
Experts say converting a run-down 64-unit apartment complex to 144 condominium units is a huge undertaking — and potentially very profitable, grossing $72 million if each unit sells for at least a half-million dollars, as expected.
The recently approved project at 291 Evandale Ave. off Whisman Boulevard would displace 250 mostly low-income tenants to make room for relatively pricy condos. According to one nonprofit housing developer, it would be reasonable to expect the property owners to clear $14 million if all the condos sold for at least $500,000 each.
On the other hand, the same source, who asked not to be identified, told the Voice the project might never get off the ground if the cost of construction materials continues to rise. In the year after Hurricane Katrina, construction material costs rose roughly 30 percent.
The Evandale project developer, Sal Teresi, could not be reached for comment, and architect Salvatore Caruso declined to comment for this story.
At a City Council hearing in December to re-zone the site, Caruso said the project's 1,100-square-foot units are expected to sell between $500,000 and $600,000, but that a final price has yet to be determined.
It is estimated that the total cost of all expenses in the project, including construction and in-lieu fees — paid to the city in return for not including below-market-rate units in the project — will be no more than $400,000 a unit. Part of that is the estimated cost of the land for the complex, which is $75,000 per unit, or $10.8 million.
But in the risky development business, profits are hard to estimate, said Mark Hirth, project manager for Toll Brothers, the developer working on Mountain View's massive Mayfield Mall project at Central Expressway and San Antonio Road.
"If a developer works real hard he will make money when times are good," Hirth said. "He might lose money when times are bad, though that's not always the case."
He added that the condo market is noticeably slower today than previously.
"I wouldn't describe it as hot. Everything has cooled down quite a bit over the last couple of years," he said. The market has its ups and downs, he said, and "every down cycle has developers losing money" because they "guessed wrong."
Hirth said that besides eventual profit, developers must consider a project's "rate of return," or how fast units will sell. In a "fast market" developers will not need as high of a profit margin, while in a slow market — which may be on the horizon — a developer will seek a higher profit.
According to the anonymousVoice source, most developers shoot for a 15 to 20 percent profit. The $14 million for Evandale equals a 20 percent profit if the units are sold for $500,000.
The estimates on construction and land costs are based on trends in the condo market. The source also noted the slowing condo market.
"The market is very weak," the source said. "The first thing that drops is condos. It would be interesting to see if they will actually be able to go forward. The cost of construction is going up dramatically because of world competition for materials."
Mayor Nick Galiotto has noted that the project is the largest example of low-income tenants being displaced in recent memory. In December, the council decided to look into using some of the $2.16 million in BMR housing fees generated by the project to help pay to relocate tenants in the existing 64-unit SummerHill complex. Developer Teresi is offering a $500 relocation allowance to tenants, along with free last month's rent, full deposit refund, subscription to a rental guide and bilingual advice on renting. Current rents there are in the $900- to $1,200-a-month range for two- and three-bedroom apartments.
Advocates of affordable housing say they would like to see the developer provide a better tenant-relocation package than is currently being offered. They also say using city BMR housing dollars for relocation is giving the developer a "free ride."
"Such a profit margin suggests that the developer could easily afford reasonable relocation expenses to displaced residents," said Roy Hayter, an affordable-housing advocate based in Mountain View. "If council were to require this appropriate and logical approach, they would give a clear demonstration of sympathy for the low-income residents of Evandale, while not giving a subsidy to this and potentially to other similar conversions of apartments into condos."
High density zoning for the project has been approved by council members, but another public hearing will be held this year, during which a more precise plan will come before the council.
E-mail Daniel DeBolt at firstname.lastname@example.org