The Condominium Conspiracy

There's a former reporter, now unemployed, who left journalism and became a community organizer. Once upon a time, he worked for a newspaper and covered real-estate news. He found the subject of real estate to be complex and fascinating, a study in power, and he tried to write about it honestly. He did the hard digging, spent years learning how to trace assessments, property taxes, blind trusts, redlining, hidden ownership. He burrowed through tract books and special charts and city maps and tax logs, and he came up with interesting things to write about.

The trouble was that his articles kept getting spiked by his editors. Either they were not printed or they were rewritten extensively by other people. There seemed to be something too direct about the way this man wrote, and eventually he was fired from his job. So he decided to take more direct action. Sometimes he led demonstrations that protested housing policies, banking procedures, credit management. But the Sixties have come and gone, and there isn't much media coverage of those kinds of demonstrations anymore. They're considered ineffective and in poor taste, and they don't fit into the "happy talk" formula of most TV newscasts.

When you meet this man, he reminds you of someone who has just walked out from under an artillery barrage. He seems to have been to the other side of something, looked into a pit and come back to this world uncertain of what can be shared. Most of his time is spent wondering when and if he'll get another job. Community organizers are not exactly in constant demand these days.

The scene is a coffee shop underneath the Bryn Mawr el station in Chicago, a place to stop and talk after walking through the ex-newsman's neighborhood. It's mostly black and Latino, and you can't help but note the curious way old rental buildings have of getting torched. Rental-housing stock is declining in this country. Arson is only one of the reasons.

"I'll tell you what, Diogenes," the exnewsman says matter-of-factly, between sips of coffee. "If you're going to write about condominiums, I can guarantee you one thing: Everything you say will be contradicted by somebody. Everything. There's no safe ground unless you write a puff piece. If you write it like the industry wants it, then you'll be OK. But if you try to show the negative things, you're going to get creamed."

Diogenes? The name seems to fit. Diogenes walked around Athens with a lantern, looking for an honest man. He was a Cynic, and he slept in a tub in the open air, and when Alexander the Great came to talk to him one afternoon and stood over him in all his glory and asked Diogenes what he could do for him, Diogenes looked up at him and said, "Well, for one thing, you can get out of my sun." That took a lot of guts to say to Alexander. Some people at the time argued that it was a crazy thing for Diogenes to do, something that could only lead to trouble. And now a modern Diogenes is being warned against questioning the sanctity of condominiums.

Across the table, the ex-newsman laughs, but it isn't a happy laugh. "You say anything bad about condos," he repeats, shaking his head, "and you're going to get creamed."

•

It is springtime in Chicago. Out on the streets, the moving vans are loading the household effects of thousands of people as they start on what has become an annual American migration. Approximately 170,000 families are moving this season in Chicago. Some of them have been "condoed out," as the phrase goes. A new verb: to condo. A new question: To condo or not to condo? It is a paraphrase of Hamlet's dilemma, and that seems appropriate, too. Some people are buying condominiums because they sense they have no choice. Our options are shrinking. So what do you do if you don't want to move, or you want to live near your work and save on gas, or you just can't find another apartment to rent? You invest in property. You buy a condominium.

In 1970, there were only an estimated 85,000 condominium units in the entire United States. Since then, the growth of condos has been exponential. [See page 256.] Today there are apparently more than 85,000 condo units declared in and around Chicago alone. Those figures are open to question, of course; one of the reasons is that our own Government won't be keeping explicit tabs on condo conversions until 1980. The condominium movement has hit us so hard and so fast that the U. S. Census Bureau is not yet ready to chart it.

Let's put it this way: The Department of Housing and Urban Development predicts that within 20 years, 50 percent of our nation's population will be living in condominiums.

Condominium is a funny word. It's derived from the Latin con-, which means joint, and dominium, which means ownership. As we use it, the word condominium (condo, for short) refers to a form of property ownership.

In the big cities, residential high-rises and other apartment buildings are usually the types of structures that convert from rental housing to this new form of ownership. In the suburbs, you'll often find town-house complexes as condominiums. But the type of building really doesn't matter.

The point is that when you buy a condominium unit, you buy the space in that unit, obviously--but you are also a joint owner, by percentage, of other portions of the building and grounds, usually called the common elements. Those elements include things like the lobby, laundry room, boiler and air conditioner, the roof, the foundation, amenities such as pools and parking lots. You also own a percentage of the land. Your ownership percentage is proportionate to the area of the unit you buy. Whether your building is newly constructed or converted from rental housing, most of the arrangements just described are normal for condominium ownership.

Most condominiums are run by an association composed of elected unit owners. Sometimes the association hires a professional manager to oversee daily operations, but the larger questions of assessments, repairs, maintenance, insurance, improvements are voted on by the association.

One point to note immediately is that if you buy into a condominium, you'd better be prepared for a lot of democracy. It is not necessarily easy to decide what should be done in a large apartment complex, and if your side doesn't get the votes, you may find yourself being billed for special assessments you never wanted--and possibly cannot afford.

One of the difficulties in discussing the condominium movement today is that, until now, almost everyone has made money in it--including the people who have bought condos. The units have appreciated spectacularly in many cases, and on paper, people are looking good. The process by which conversions take place is inflationary, in and of itself, but there are a lot of people who will defend it: the ex-landlord, the developer, the banker, the lawyer, the insurance agent, the tax assessor, the condo management firm, the real-estate salesperson. All conventional wisdom indicates that condominiums are the way to reduce income taxes, build up equity, ride the inflationary tiger, secure a home base, meet the challenge of managing your own buildings and improve neighborhoods by driving out transitory renters and substituting stable apartment owners.

What won't be mentioned much in discussions about condominiums is the concept of risk, an important factor in any major financial decision. What are the risks involved in buying a condominium? They are many, and they are soon shifted to the people who buy. Once the building is converted, all those people who talked so positively about the joys of condo ownership seem to disappear: The risk is shifted. In olden, golden days, when people spoke directly and called things as they were, this shifting of risk was known by the phrase Take the money and run.

Consider that the risks you are absorbing when you buy into a large apartment building are much more difficult to calculate than when you buy a singlefamily dwelling. Consider that in a condominium, you cannot be the sole judge of when something needs to be repaired or changed, or when the bills will arrive. The risks are less defined and less under your control.

The condominium movement represents enormous change for us as citizens. But interestingly enough, one of the first arguments offered in favor of condominiums is that they aren't as new as we might think.

"They've been around for 4000 years," says a real-estate salesperson during a spin along Chicago's fashionable Lake Shore Drive. "There's a papyrus in the Brooklyn Museum that describes the sale of an apartment." She goes on to describe Rome before Caesar, Paris in the Middle Ages, Latin America and western Europe in the early 20th Century. Condos were there, too, it turns out. "How (continued on page 172)Condominium Conspiracy(continued from page 142) can people get excited about something that's so old and obvious?" she asks.

The thought is comforting, but the salesperson's passenger can faintly hear the words of one of the smartest businessmen he knows, who said, when asked about the condominium panic: "Major economic changes are seldom publicized. They happen before people recognize them. There's an information lag in real estate, and it's going to take time for the public to catch up with what's happening."

Major economic changes? In America, you used to be able to rent an apartment in a good location for a reasonable fee. You could budget about 25 percent of your income for housing, and you didn't have to mortgage yourself to the hilt unless you chose to do so. There were options. But these days, even the realestate people you talk to admit that the average family may soon have to commit close to 50 percent of its total budget in order to find shelter, and that rentalhousing stock is on the decline.

Isn't that a major change?

Another question: If half of our money has to go for housing, will the half we have left provide all the other basics--food, fuel and health costs?

Yet another: If we're all potential victims of condo displacement, and if we're borrowing more than we should because we feel that we don't have a choice, and if we're basing all our thinking on inflationary expectations, what will happen if the inflationary bubble bursts? The question gets back to risks: Will we be able to handle the risks we're assuming these days? Is it possible that there will be the birth of a new poverty class, and that it will be us?

•

"I see problems in terms of the economics of condominiums," says an official in the Federal Trade Commission. "The people who buy into them can have a cash-flow problem before they know it. In addition, the elderly are being displaced, and I think there's racial displacement here, too.

"But the biggest question in my mind involves the concept of supply and demand. Right now we have what they call 'the baby boom' entering the housing market. A lot of people need places to live. But there's a trough behind that boom. There's a drop in population. So I'm afraid that when the current condo owners look around a few years from now and try to sell their units, they might find much less demand. Their problem will be aggravated by regional shifts in population. The Northern tier of states will probably be losing population to the South and the West, and that could cause more changes than we know.

"There are investors chasing the condominium market from sea to shining sea, but I question how long it can look as good as it has these past years."

From a condo owner: "I bought in the building where I'd been renting. When the conversion from rental to condo was announced, I didn't even fight it. It seemed like a good idea at the time, because the building was selling out fast. There were people signing contracts in the elevator, in the lobby, and every day another unit was announced as sold. I didn't know it at the time, but the developer was sending his own employees in, having them sign up to make it look like the property was moving rapidly. It was a hustle, but I didn't catch on until it was too late. There was no bargaining on the price. As a matter of fact, the prices were hiked automatically every few weeks, so you had the feeling that if you didn't buy soon, you'd lose a lot by hesitating.

"We weren't allowed to do our own engineering study of the building. We had to take the developer's word for conditions. To get any kind of deal, the rule seemed to be 'Sign up or get out.' So I signed. I was rushed into buying by high-pressure tactics, and I probably paid more for my unit than I could afford. The assessments on my place went up between the time I signed for it and the time I moved from my old apartment to the new one.

"I learned recently that the developer still controls the building through the association--50 percent of the units are owned by his syndicate. Those units are either rented out or stand empty, and they're being held by speculators who want to ride with the market. But I've got a question about that: If a lot of speculators are holding condos off the market, what does that do to supply and demand?

"My own cash requirements are three times what they were when I was renting. The monthly operating statement that we receive from the developer who's managing the building is filled with extra charges that nobody seems to be able to explain. And last week I heard from someone in another building who has been asked to come up with an extra assessment for roof repairs and painting. That extra assessment comes to $4800. Considering all that's happened to me here, stories like that scare me. It may be a one-time thing, and it may add to the value of the building, but I'm in no position to come up with that kind of money. If that happened to me, I don't know what I'd do."

From a person who decided not to buy a condo: "I was paying $450 per month rental and had been living in the building for 12 years. When the notice came around that the building was being converted to condominium, I sat down and figured out what I'd have to pay in cash per month to live there. It came to about $1200, and that was before any hike in assessments. There were some tax savings at the end of the year, but that didn't help my cash-flow problem.

"The bank funding the developer was willing to give me a big loan, so for a time I was certain I would buy, no matter what. My family liked the neighborhood, we felt that we had roots there, the schools were good and moving itself was a hassle we didn't want to go through. Everything was pointing us toward buying a condo.

"I eventually decided that that particular developer was too fast and loose for me. I told the bank no, thanks. We moved to another rental in a transitional neighborhood.

"Now we've just found out that the building we've moved into has had a conversion declaration filed and will be going condo next year. I don't know what we're going to do, but I feel like my family is trapped in a game of realestate roulette."

From a person who refused to buy when his building converted to condominium--but who bought another condo instead:

"At first, my wife and I were impressed with the developer. The prospectus printed up for the sales pitch was very professional, glossy, filled with facts and pictures and plans, and almost immediately there was some landscaping being done, some window washing, and so on. The building started to look better than it ever had and we were seriously thinking of buying.

"Then we sat down with an adding machine and figured out what the developer was going to make--from us--for minimal services. The total public price for the more than 500 units offered for sale in the two buildings was about $58,000,000. The discounts to tenants who bought early didn't amount to much at all. There was a specific dollar commitment of $224,000 for repairs and improvements, with approximately another $1,000,000 scheduled to be added (continued on page 204)Condominium Conspiracy(continued from page 172) to that budget at the developer's discretion.

"There was a mortgage on the two buildings, securing the payment of a bank note in the principal amount of $43,000,000. I have to believe that's about what the buildings cost the developer, because the banks are funding those guys close to 100 percent.

"So my simple mind figured the building was being converted to condominium at a before-tax profit to the developer of between $10,000,000 and $14,000,000. 'For what?' I kept asking.

"The engineering report on the building was written on the basis of a oneday inspection. There was a disclaimer in the report to the effect that no regard had been given to determining the energy efficiency of the buildings (surely something that is going to be terribly important in the years to come) or their 'feasibility' as an investment. Furthermore, I read that if I bought there, I would be signing up for partial ownership of a building that had already had major repairs on potentially troublesome areas--such as boilers, heat exchangers, pumps, cooling towers, fans--and that we would be depending on some basic equipment that had been installed 25 years before.

"To me, the risk was too great and the numbers were too high. We decided not to buy there. But in my city, the condominium craze is so bad that if you want to live in a decent area near your work, you've got to buy a condo. You either own or you get out, because all good buildings have by now been converted. That's just the way it is. So I bought a condo about a block from where we'd been renting, and I hope the market keeps going up 30 percent a year, like it has the past few years. Because with the price I had to pay for the place we bought, I need inflation to make my purchase seem sensible."

•

In journalism, the best sources are often the ones who come to you. Good reporting is made not by the reporter himself but by other people--brave people, men and women of conscience, who know their own businesses inside and out and who choose to say to a reporter, "Look, there's something that's not right here and I have to tell you about it." There may not be a surplus of such souls in this culture, but there are more than might be imagined. They fall like angels onto a reporter's shoulders, and they deserve protection.

Comes a day like any other, and then the phone rings: A man wants to talk. He is a real-estate developer who has been in the business all his life and has made millions of dollars, some of them in condominiums. But he is not enamored of the condo process. Somewhere in the middle of small talk, he leans back and says casually, "Condominiums didn't come from God, you know. Condominiums--all housing--are man-made products of taxes and credit. Taxes first, then credit. You have to remember that. The decline in rental housing, along with the rise in condos, is due first and foremost to a deliberate tax structure. The current tax laws and tax decisions in this country created the condo developer. They made him happen."

The man takes a yellow legal pad and lists specific numbers from one of his latest deals. "You own a rental apartment building," he says, jotting down figures. "Inflation is hitting you like everybody else. Energy costs, replacement costs, repairs, maintenance, they're all driving you nuts as a landlord. Maybe your building is almost fully depreciated. You're tempted to get the building off your hands, and tax laws have structured your decision. You'll see in a minute that you're not free to do just anything you want with your building.

"Now, let's say a developer comes along who wants you to sell your building to him. He specializes in taking rental property and converting it into condominiums. He offers you a chunk of money. Maybe you don't know the tax laws like you should and you ask him a question. Maybe you want to convert the building yourself, and you ask, 'Hey, Jack, why should I turn my building over to you? It's my private property. Why can't I convert it myself?' That guy's going to laugh in your face.

"'Just try converting your own building yourself,' he'll say. 'You'll be classified as a dealer by the IRS. You'll be taxed the ordinary-income rate on all your profits--up to 70 cents on the dollar. But if you sell your building to me, it'll be capital gains to you. A maximum of 28 cents on the dollar.'

"That's an enormous difference. Which do you think the rental landlord is going to take? Ordinary income or capital gains?"

The man stops writing. "See what I mean? The entire condominium-conversion process begins with a tax law. Once that kind of thing was in place, the result was inevitable."

What this man has just explained is how the Government, or the forces behind it, created a middleman--the condo developer. Uncle Sam helped legislate inflation. He concentrated power through taxes, limited competition and made sure the conversion process would be placed in the hands of a few people.

"Every step along the way as a building is converted is inflationary," says the developer. "More money has to be borrowed because the building has to change hands one more time. Good for the banks. Good for the Government. The original landlord has to sell to the developer, and that developer is a specialist at getting money out of property. The banks fund him. Then they do the end loans to the consumers.

"We've got this mania for centralization in this country. But I think in times of hyperinflation, we should encourage more competition. Let the rental landlord into the process on the same terms as the developers. Let's treat building owners the same, whether they're going to convert to condo or to co-op. Most owners do their own co-op conversion because their sales to a cooperative corporation will be treated as a capital gain. So why handle condos any differently? Let's take the action out of the hands of the few. Condo conversion is a sweetheart arrangement now between the banks and the big developers. I guess I resent that, even though I stand to profit from it."

He lights a cigar and there's a long silence. "I think the people who are buying into condominiums don't know what they're getting themselves into," he says. "On the credit side of the question, I really think the banks are extending end loans to people who are going to have trouble later on."

The interview winds down with bits and pieces of business news: stories of exorbitant interest rates on loans from banks to developers, of ways in which one major condo corporation is sending most of its profits offshore and avoiding U. S. taxes, of the intense pressure to push earnings in all companies and an increase in the number of condo investment ventures by insurance companies, service corporations, furniture companies, and so on.

Then, asked for suggestions on improving condominium conversion, he counts the points on his fingers: "One, let the rental landlord into the act and open up competition. Two, boost tax advantages for rental housing. Taxes are man-made. Don't let the tax structure dictate that only condos are decent investments as compared with rental housing. Three, somebody's got to show how the banks are behind this process, how they're underwriting it, pushing it, profiting from it. Four, apply some kind of windfall-profits tax on the developers who take a rental building, spruce it up and sell it out in a few months. They're (continued on page 252)Condominium Conspiracy(continued from page 204) making millions for not much service. Why should they make so much for doing so little, for running few risks? Five, don't let the developers buy a lot of units in their own projects. That perverts the supply-and-demand question. It gives the impression that the units are selling out faster than the public is actually demanding. It also lets the developer hold a large body of units for speculation, and can give him control of the condo association itself."

The developer concludes: "Selling condominiums is a slam dunk right now. It's easy. But it's the result of some deliberate, man-made decisions that created a middleman and hurt rental housing. Taxes and credit are man-made. Remember that. And now," he says, smiling, "after all I've told you, I guess you could make it hard for me to get my next loan."

•

Did you ever do everything right and still lose? Most of the people who lived in the lovely old apartment building on North Commonwealth Avenue in Chicago feel they did. They've moved out because their building is being converted from rental to condominium. It was sold last spring to a developer for a little over $2,000,000. It will be sold to the public, if things go according to plan, for a little over $4,000,000. That should make some nice profits for some of the professionals involved in condominium conversion. But it doesn't do much for the folks who were living there.

The funny thing is that when the people who were renting in the building got together in an attempt to buy it themselves, they did all the right things. They hired a good lawyer and kept communications open with the bank that was handling the sale and put down earnest money and made a very nice bid on the property. And when the bank, as representatives of the estate that owned the building, went ahead and sold to a professional developer anyway, the people tried to buy the building from him. No deal. So the people moved.

Sure, they could've stayed--if they had trusted the developer, and if they could've accepted the prices being asked when they compared those prices with their own appraisals. But the ex-residents of North Commonwealth had done their homework and they knew hyperinflation when they saw it. Now, after the fact, they're angry and discouraged, most of them, and they feel as if a system rolled over them without cause.

Robin Baugher watched her husband-to-be and his fellow tenants come together and grow as a community while they planned and worked carefully to buy the building. For a relatively young woman, Baugher has been around: graduate of Stanford, speechwriter in Nixon's White House, a former businesswoman; she's now a writer and publicist for Chicago's WTTW/Chicago Public Television station.

"We did everything right," she says. "Caveat emptor? We were wary. We checked everything out. Our attorney explained each step to us along the way, and he made it clear that he was in constant touch with the bank. But I don't think the bank ever took us seriously. We were all just crushed at the end. It was a blow to all of us--and to the myth that in America you can supposedly accomplish things through the system by hard work and cooperative planning. We got together; we were careful; we didn't want something for nothing; we were willing to bid more than anyone else for the property; but we lost."

Camille Weiss was one of the first people in the building to start organizing the tenants. She's still participating in the battle, along with Stan Hallett and others, from her new quarters in the same area. "We offered a bid with a floor of $2,025,000 and a ceiling of $2,325,000," she says. "We were ready and willing to top any bid up to the ceiling we placed. In addition, 30 out of the 42 apartments were presold--that is, that many tenants were willing to buy there and stay. And we had a list of more than 30 other people who were interested in buying the 12 units left. We gave the bank a certified check for $25,000 as earnest money, and the bank assured us all the way along that our bid was in an acceptable form--until we were told that we would not be awarded the contract and that our bid was not in proper form. It seemed odd to us that a developer got the building for about $2,210,000 when we were willing to bid higher. OK," says Weiss, "we felt we'd been treated unfairly, but we went ahead and offered to buy the developer out immediately, giving him a $200,000 to $300,000 profit. But we were turned down by him, too. It's been a calamitous event for every one of us involved."

Calamitous seems to be the right word to describe what the ex-Commonwealth tenants endured. One lady checked into a hospital the day after she moved--exhausted from the entire procedure. The wife of a couple who had lived in the building for 30 years said on her moving day, "It's like being evicted." The list goes on and on: survivors of a small war, each feeling the effects in a personal way.

Mary Ann English moved after living in the building on Commonwealth for 28 years. At the age of 82, she's bouncy and strong, a lady who jogs and swims and speaks Italian and does volunteer work. She knew that her cash demands would more than double if she had to buy a condominium, and she knew the odds on an older person's trying to negotiate a 30-year mortgage. So she sold a lot of her valuable furniture--antique wigstands, a Duncan Phyfe table, old English china, pressed glass--and she left the building.

But not before a relative of the developer offered to take her antiques off her hands for bargain-basement prices: five dollars for some Japanese hanging screens worth at least $500, $50 for the Duncan Phyfe table. Mary Ann English declined to sell her life's collection that way. "I think they were just insensitive," she says. "But I do remember that every time I saw one of those real-estate people, they would smile and say, 'Don't forget to sell us your things.' "

•

In his book The Builders, Martin Mayer quotes Samuel LeFrak: " 'On Wall Street, they have bulls and bears. In real estate, we have pigs.' "

Mayer's point has to do with profits: "There has been," he states, "entirely too much money to be made in real estate in America." In 1977, Mayer says, an estimated 150 billion dollars' worth of residential real estate changed hands. There were some 3,000,000 salespeople who made five billion dollars or so in residential sales commissions.

One year later, industry spokesmen report that the amount of residential property changing hands doubled, to 306 billion dollars. And that figure does not include sales of condominiums!

Where is all that money coming from? And what's going to happen to us if it continues that way?

Gradually, a pattern emerges. Some of the developers admit certain facts: Yes, the banks and savings-and-loan service corporations lend most of the money; yes, sometimes they offer developers between 90 and 100 percent financing; yes, there are points on top of points and fees on top of fees; yes, "gap," or "bridge," loans--loans to tide a person over for a short time on a project--come with extremely high interest rates; yes, the end loans to consumers to help them buy their units are often highly leveraged at 80-90 percent of the purchase price; yes, those consumers are frequently steered to the particular bank that has helped finance the developer; finally, as everyone knows, yes, the interest rates to the public are high and people are locking themselves into expensive money for a lot of years.

"But if you attack bank underwriting," a highly placed real-estate executive advises, "you might be made to look foolish. It's hard to get adequate information. The banks won't disclose a thing. And if you try to suggest that their interest rates are too high on some loans, all they'll have to do is claim that the rates go according to the risk. Don't forget, in many states, there are no usury-law limits in loans to corporations."

"Who's talking about attacking bank underwriting?" you ask. "Consumers sometimes don't seem to understand how much it costs to get the condo conversion financed. But the consumer ends up paying those costs. They are passed on to him. How about simply describing what's happening?"

The real-estate executive smiles. "In that case," he says, "shut the door."

With the world safely closed out, the man begins to tell how the condo-conversion process really works.

"The banks," he says, "are the culprits in this condominium thing. Culprits is a strong word, but I've got to use it. I've been in this business for 30 years and I've never seen anything like this. The banks and savings and loans are giving 100 percent financing to their favorite developers. The moneylenders are making 18 to 20 percent on interim financing. Sometimes more. But what's their exposure? What's their risk? It bothers me that in a panic situation, when the risk is low, the banks still charge such high interest rates on their interim loans. They're essentially charging what the market will bear. And they're making end loans to consumers who're having a hell of a time keeping up with inflation. I really question whether people will be able to meet their payments as the cost of living keeps climbing."

He goes on to explain that when a rental building is being converted to condominium, the banks figure they'll get a minimum of 40 percent of the tenants in the building to buy. Those are forced sales, in a sense, because there's not much of a choice in high-occupancy areas. The tenants are somewhat captive. The bank gets 40 percent of the tenants and it can figure 20 percent on top of that sold to speculators. With 60 percent sold, the bank is going to get its money. But still they're charging very high rates on their loans.

"Listen, the profits in this conversion business are enormous," he says. "I could show you buildings we've done: millions of dollars in a few months. In and out. But what about the consumer who buys? Does he know what he's doing? I'm not sure. Consumers hear so much about the tax savings on condos that they forget to calculate the costs on a strict dollar basis, a cash-flow basis. What happens if energy and maintenance costs go way up, as they seem sure to? Will those people who buy into old buildings, or poorly constructed new buildings, be able to afford the monthly cash demands?

"There should be," says the real-estate executive, "a limit to the number of speculators who can invest in a building: You know, some groups of investors buy 50, 60, 70 units at a time. Then they hold them--sometimes unoccupied--for price appreciation. That's got to go. It throws supply and demand out of kilter.

"I think there should be a law requiring 35 percent tenant approval before a building can go condo. And I think there should be a rule that nonresidents can't sit on a building's association. Sometimes these developers control a building by controlling the association. They have proxies, or they own units on spec. It can make life tough when you're living in a building and the association is controlled by the developer.

"One thing's for sure," he says. "The public needs to be educated. They need help. It's like anything else--there's good news and bad news. Until now, people have been hearing only the good news. Or no news at all."

Later that day, a haunted, furtive man, a real-estate developer who has done substantial dealing with the big banks, describes the dynamics of one particularly memorable gap loan, a six-way real-estate deal that required $1,000,000 for two days. For various reasons, the money could be borrowed only at a certain bank. That bank charged ten percent interest--per day. That's $200,000 interest for the use of $1,000,000 for two days. Calculate that on an annual basis and it comes to 3650 percent interest.

Could that be true? Those are Mafia juice rates. Bankers don't charge rates like that, do they? Banking is stolid and conservative, isn't it?

The question is put to someone in the very bank under discussion, a high-grade, high-legal-lending-limit officer. "Are those kinds of lending rates possible?" he is asked.

"Yes, they're possible," the man says. "There are no usury laws in business loans to corporations in this state. Those figures don't surprise me.

"We're a very aggressive bank when it comes to real estate. The man in charge of real-estate lending here has a legal limit of $100,000,000--per loan application. Now, that $100,000,000 legal limit applies to all the grade-nine officers in our bank. They're the highest.

"You have to understand that we are a very big bank. To give you some idea of our size, we purchase about three billion dollars in funds every day. That's a lot. And we're very positive on real-estate loans. We don't turn many down."

"Sounds like a case of a bank in step with the times: disco banking, go-go financing, doesn't it?" you say.

The man laughs. "It depends," he says, "on who you talk to."

One person well worth talking with is Julien Studley, experienced hand in real estate and president of his own realty company in New York City. Studley has some interesting remarks to make about banks and condominiums.

After first pointing out how the tax laws force the rental landlord to sell to a developer, Studley compares the condominium market to other examples of rampant speculation--tulips in 17th Century Holland, for example. Then he launches into straight talk about banks.

"Most banks are unsophisticated real-estate lenders," he says. "Just look how poorly real-estate investment trusts managed by banks have done compared with those managed by insurance companies. Banks usually put their foot in it on real-estate loans. A bank gets into a relationship with a developer, and if the guy doesn't default on his first loan, there's a geometrical increase in the loans the bank will give him. They push more and more dollars at him. In terms of sheer size and activity, it becomes uncontrollable. Banks can't stay on top of expanding real-estate companies. And those real-estate companies quickly grow too large to be managed efficiently.

"Let me ask you: How do you as an individual businessman make smart, detailed decisions on 300 projects? You can't. Things expand too rapidly and you lose control.

"Condominiums in New York haven't really taken hold yet. We've got more protection against that kind of speculation here. We've got a 35 percent tenant-approval rule, and rent control, and two-year leases. And a lot of co-ops, which are more solid financially.

"You see, progressive government in the cities can make a difference. I'm one of those people who argue that controls work in favor of the honest developer as well as the consumer. You have a more orderly market. There's planning, not panic, and you protect the rights of the community. In the long run, the little guy is going to get hurt in a highly speculative market. Condos are here to stay, but I would hope there could be some controls over them for the sake of the consumer."

•

But after digging like a miner, after reading and researching and talking with literally hundreds of people, you finally begin to understand that the system is not set up for the sake of the consumer. There's too much money at stake.

A conversation from the first days of research keeps coming to mind, a conversation that took place during that ride with the real-estate saleslady along Chicago's condominium-studded Lake Shore Drive. She was asked to stop the car in front of one particular construction project. "I hear the developer has a profit margin of $100,000 per unit in this one," her passenger muses.

"That's what I heard, too," she says, nodding. "But I have to add that the average developer doesn't make that much per unit. We figure maybe 12 to 14 percent profit per unit on most of our conversions."

"That's big buildings and lots of units?"

"Yes," she says.

"And the big boys? There are five or six developers who get a great amount of the business. What are their profits?"

"I can't tell you." she says. Then, after a pause, she continues. "Let's put it this way: The big condo developer makes more than the highest-paid corporation president in the country."

It takes a moment for that last statement to sink in--time for the mind to thumb through memories of corporate compensation as listed in the business magazines. "Doesn't the highest-paid corporate president get something like $2,000,000 a year?"

"Right," the lady says.

"And you're saying that each of the big Chicago condo developers makes more than that?"

"Yes. We're talking about the big boys now--the ones who do the major buildings in the best neighborhoods. It's the same in the other cities where condos are really big. There's a lot of money in this business."

A lot of money. Enough so that underneath, the forces at work in condominium conversions seem more--well, more violent than they appear on the surface.

The concept of violence first comes to mind during a luncheon with a developer. The conversation at lunch isn't violent--that's not the point. The luncheon is almost comic in its politeness and understatement. The developer is relatively young--in his 30s--and carries hints of Old World elegance as he talks. He is well dressed and logical and totally self-satisfied. He smokes cigarettes with only slightly affected gestures as he tells about success stories in condominiums, about how much the consumers who bought at the right time have made on their investments--a building that went from $45 a square foot to $165 a square foot in five years; another building bought for $20,000,000 in 1974 that has appreciated to $40,000,000 today.

At first, the talk is all about the profits of the individual condo-unit owners. No mention is made that those are mostly profits on paper or that equivalent property was going up at the same rate. Little is said of profits to the developers. And, as always, nothing is said of the risk that has been shifted to the public.

The developer is an apologist, pure and simple, and it is amusing to listen to his rationale. This developer, for example, was a recent participant in a large condo-conversion project, a deal that involved the building's changing hands three times in one day, going from an initial selling price of $39,000,000 in the morning, through another offer of $41,000,000 midday, to a final sale of $42,500,000 that evening. Monopoly for real. Pass Go and pass it fast. Trade buildings like kids trade marbles.

This developer has also paid some mighty high interest rates on loans from one special bank to his corporation. He understands the condominium market--and is preparing to get out of it now that public awareness is increasing.

The beat goes on as the man makes excuses for manipulative developers. He scoffs at the financial ignorance of the public. If they are gullible, that's their problem. Everything is softly said, but there is a violence behind the words that cannot be totally hidden.

"People only have one right--to survive," the man says. "That's it. Everything else has to be worked out. For example, there's too much talk about the displacement of the elderly in this condominium question."

"What about the lady who's lived in a rental building for 30 years and then gets condoed out?" he is asked.

"She should've thought about saving her money so she could buy a unit," the developer answers. "People have to learn how to handle their money." Other thoughts follow. Their bottom line is that no culture, community or people deserves much protection. "You know," the man says, "the Depression was good for people. It cleaned the system out. People started doing an honest day's work again."

The young man goes on pontificating. For a moment, his suit seems to change colors and a cap appears on his head and strange insignias like lightning bolts adorn his lapels. But, no, that's just the wine at lunch, isn't it?

This young man, a millionaire, darling of the banks, product of the tax system that created him and protects him from too much competition, a developer and converter and financial analyst, born to privilege and high circumstance--this man has one simple message: Base your economic system on human greed and let the chips fall where they may. Don't regulate or interfere or modify. Don't stifle your civilization with safeguards for the incompetent or the untutored. Let money be made.

•

Well, the condominium movement is about as pure an example of what that developer wants as you can find. There may be a few cities where condominiums have been regulated--San Francisco and New York, for example--but, in general, condos have hit fast and hard at the basic living arrangements of many metropolitan centers. The change has been rapid and thorough in certain neighborhoods. And no matter how you justify it, such change is violent to the people affected, to the ones who have to move out, to the ones forced to buy in order to live where they have been renting.

Viewed cynically, and perhaps also realistically, the advent of condominiums and the conversion of rental housing is one of the bigger scams of the century. Rental buildings that have run out of usefulness in terms of tax depreciation and that will be costing more and more to maintain and heat and cool are being sold by privileged middlemen to the public. These middlemen exist because tax laws make ownership of rental property (and renting itself) less advantageous, discourage competition and inhibit rental landlords from converting to condos themselves. The middlemen turn the buildings over to the public at enormous profits, leaving the consumers with all the risks. A lot of money is borrowed, a lot of property changes hands, and all the responsibility is shifted to an unwary public that may very well be unable to afford such risks. To make matters worse, the public is being financed with the same tactics that brought us the stock-market crash of 1929--high margins and small down payments.

"New areas seen 'Ripe' for Condos," reads a headline in the Chicago Sun-Times on June first of this year. The article quotes Richard Impson, resident vice-president of Chicago Title Insurance Company. He predicts that the condo-conversion glacier is going to spread to most mid-sized Midwestern cities, the sun belt and the mid-Atlantic states. "The developer who has mastered conversion techniques in one city," says Impson, "should find that they work equally well in other areas of the country." He suggests that money is there for the developer, with financing up to 110 percent of his purchase price of the building.

Impson's prediction seems to wrap up the question of whether or not condos are here to stay and whether or not they are going to touch our lives. It seems clear that the moneylenders will be financing certain developers to the hilt and that the condominium movement could sweep like a fever from city to city, region to region.

A conversation comes to mind--the conversation with the ex-newsman who mentioned the name of Diogenes. Now, after all the research, it makes perfect sense. There are a few honest people, to be sure--the very fact that this article was able to be written attests to that.

But after looking into the condo business, this Diogenes feels a great deal of cynicism. America does not seem unique or unspoiled or simple now. Whatever experiment was being conducted by Thomas Jefferson and company some 200 years ago seems to have been sullied by bigness, complexity, bureaucracy.

Despite our 20th Century surfaces, we are much like 16th Century Italy with its city-states, street violence, bright music and art, Machiavellian leaders and, most appropriately of all, brilliant financial advisors who seem to have had only their own limited interests at heart.

From Power & Imagination, by Lauro Martines:

The fiscal institutions of the Itallian city-states were bewilderingly complex. They reflected the genius of urban politics, with its attendant stresses and deceptions, and they expressed the intricacies and expedients of the urban mind. Commune and city-state were a moneylender's paradise; this affected the institutions of public finance in their essence. Merchants and their many converts among noblemen wanted returns even on their tax disbursements. Whenever possible, therefore, taxes due were turned in large part into loans. By the middle of the 13th Century, credit and its mechanisms governed the fiscal proceedings of the larger communes; auditing and tax collection were centralized in the course of the 14th and 15th centuries; and the public finance of the modern state was born.

What this paragraph just said, of course, is that the vehicles of taxes and credit that confuse so many of us, and that have brought us condominiums whether we like them or not, have been around in sophisticated forms for several hundred years. We are up against a bewildering array of subtle and clever systems that have been used for centuries to control economies and help a few people make a lot of money. There's nothing new in that.

What is new for us as Americans, and what we have such trouble dealing with, is that our modern-day Medici princes defend what they do in the name of "free enterprise." They claim to be protecting a system of private property. Yet, as we have seen with the condominium question, in a certain sense there is no more private property. Tax laws invade our privacy and legislate what we may or may not do with our resources. Competition is limited by rules. Creditors take advantage of these limitations (and may, indeed, have something to do with structuring them--but that's another story). The institutions that control us are shrewd enough to operate under the flag of freedom while they limit our options, hand us illusions and leave us with debts. And if we oppose the controls that are slamming down like guillotine blades all around us, we are then asked, How is it possible for us to challenge "freedom," and do we want to hand our lives over to a controlled economy? The argument is maddening.

If things are allowed to proceed as they have been, and if we are gullible enough to accept the definitions handed us, then maybe one day we will have to buy a table to eat at in a restaurantinium and a shelf to own in a groceryinium and a bed to die in at a hospitalinium; we will have the illusion of ownership and we will talk a lot about how much we are worth on paper; we will spend some of our private time, if there is any, wondering why a special class of middlemen has come and gone, leaving us to run things, and why the bankers seem interested only in prompt payment, and why the tax laws are so complicated and arbitrary; we will comfort ourselves with the belief that we are a people of property, but we will be calling the IRS every other day to find out what we can do with that property (the IRS, by the way, will not have to be responsible for the answers it gives us at the time or for the statements printed in its publications); we will be caught in the middle of markets that ride up and down like a roller coaster, but only the most expert among us will be able to predict the next rise or fall with any accuracy; and through it all, we will be told to just relax and enjoy the freedom that is our birthright.

Thomas Pynchon wrote about economic systems in Gravity's Rainbow: "A market need no longer be run by the Invisible Hand, but could now create itself--its own logic, momentum, style, from inside. Putting the control inside was ratifying what de facto had happened--that you had dispensed with God. But you had taken on a greater, and more harmful, illusion. The illusion of control."

That's not a bad description of the condominium market today.

"Is it possible that there will be the birth of a new poverty class, and that it will be us?"

"'Condo conversion is a sweetheart arrangement now between the banks and the big developers.'"

"'The banks are behind this process; they're under-writing it, pushing it, profiting from it.'"