How to Turn $450k into Eight Figures

The Washington Business Journal reported this week that 75% of the new Montrose condo (FKA the Hurt Home) has already been sold.This is remarkable for several reasons. First, the building is not even done yet. Second, the one and two bedroom units are priced between $1.65 to $2.39 million. Finally, it’s most remarkable when you remember that the developer bought the building from the city for only $450,000.

The story of the Hurt Home condoification is long (just read here) but here are the quick facts:

• DC announced its intention to surplus the former institutional building way back in July 2009.
• The only bid that came in was from the Argos Group, and they originally proposed to build 41 units.
• The neighbors lost it.
• Eventually Jack Evans stepped in and negotiated the number of units all the way down to 15.

Negotiating the number of units down also meant lowering the price that the developer would pay. Originally the price was somewhere around $1.5 million. Part of the rationale was that the cost to remedy decades of structural neglect of this historic building was a relatively fixed cost. The developer argued that the fewer units it could build, the less it could recoup the construction costs, and thus the less money it was willing to pay up front.

(You might ask, “Aren’t you just talking about how many slices a pizza has? If they had to build fewer units, wouldn’t they get that money back by selling larger units?” Yes and no. They originally planned a large wing off the back which would have returned a lot more money. So it was in fact a matter of a smaller pizza, not fewer slices, so to speak.)

GM has no idea what the construction costs were. This paper estimates that a building of the Hurt Home’s size could be renovated for condos at a cost of $144 per square feet (in Canadian dollars, which is $132 in American dollars). That would put the cost at just below $4 million. (Here’s another study that pegs the cost of adaptive reuse at a much less number, even for challenging projects like old mills.)

Even if GM is grossly underestimating the cost, the developer still made a killing.

But there is an added wrinkle to this. The city insisted that three of the fifteen units be set aside for affordable housing. The units were priced around $250,000 a unit. These units were probably not built to quite the same luxurious standards as the multi-million dollar units, but still, that’s a lot less than the developer would get if they sold them at market rate.

So the way some view situations like this is that the city “bought” the three units when they made them permanently affordable housing. The value of that could reasonably be priced as high at $1 million a unit. Looking at it this way, the city got more like $3.5 million for the property. That’s still well below the $9 million it was valuing it prior to sale, but it’s not as bad as it first seems.

And remember, this was a bidding process open to all. About a dozen organizations and developers looked at the property and passed. So if Argos is making a mint, it’s a mint that others decided not to pursue.

But the last question GM has is this: Argos promised all along that part of its deal with the city was that they would rehab the decrepit tennis courts in Montrose Park? Is that still going to happen?