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Could Changed Live/Work Rules Jump-Start the Downtown Condo Market?

By Eric Richardson
Published: Thursday, July 09, 2009, at 04:09PM
Rowan Auction Eric Richardson [Flickr]

A kitchen inside the Rowan Lofts, which developer Downtown Properties hopes will soon be eligible for FHA insured loans.

A small definition change could be big news for the Downtown condo market. The City Planning Commission today approved a revision to the city's definition of a live/work unit, tilting the ratio between the two heavily in favor of the live side.

Supporters say the change will bring the ordinance more in line with how the live/work units are actually being used, and will promote home ownership by allowing buyers to access highly-attractive federally insured loans.

"This is a very big deal for a very many people," Bill Stephenson of Downtown Properties said today. His firm has developed three Downtown live/work projects, the Douglas, Rowan and El Dorado.

Stephenson said that the Rowan has closed roughly 50 of its 206 units and that a large percentage of those units have been sold to first-time home buyers. "Right now at a bare minimum they're having to put down 10% and in most cases 20%," said Stephenson. "It's very difficult for a young person to come up with [that amount of cash]."

When the city passed the Adaptive Reuse Ordinance in 1999, it also created the live/work designation, which allows one space to be used as both residence and workplace. Property owners could create these units "by-right" in buildings built before 1974, dramatically streamlining the process of residential conversion.

The new rules were a big success, helping to create 14,000 new live/work units in converted commercial buildings around the city.

Recently, though, a technical definition used in 1999 has been causing big issues for would-be condo buyers. Following the formula used for Artist-in-Residence units, the live/work units were defined as being 67% commercial and 33% residential.

That ratio had the unintended side-effect of making the units ineligible for loans from the Federal Housing Administration (FHA), whose rules forbid loans for units with a primarily commercial use.

Initially, that was no problem. FHA's most attractive loan programs were limited to amounts that fell below the price of almost all Downtown condos, and private loans were easy to find. In early 2008, though, Congress drastically increased FHA loan limits, and the recent financial collapse dried up the private loan market.

Where condo buyers were previously expected to put only three or four percent down, private loans today typically require 10 - 20% down payments. "If you're buying a unit for $300,000, kind of our lowest-priced one bedroom unit, you've got to come up with $60,000 down, plus closing costs and everything else," Stephenson explained. "All of a sudden you need roughly $70,000, then you've got to move in, so you probably need roughly $80,000 in cash."

In contrast, FHA insured loans allow just a 3% down payment on loans up to $625,000. That means just $10,000 cash, a much more accessible sum.

To make that possible, the new rules change the live/work ordinance to define the units as 75 - 90% residential. Stephenson praised the work put in on the project by Alan Bell of the Planning Department, the Central City Association and Councilwoman Jan Perry's office.

The ordinance must now go to city council's Planning and Land Use Management committee, then on to Council itself.

Existing projects will have to submit new building plans to the city in order to benefit from the change. So will the Rowan be submitting those plans? "We will definitely reapply," said Stephenson.


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