The highest and best use of housing properties.

The concept of highest and best use of land is one of the first concepts we learn as real estate professionals. Highest and best use is defined as "that reasonable and probable use that supports the highest present value" of property according to the tenth edition of The Appraisal of Real Estate.

The principle of highest and best use applies itself even further among types of real estate, so that in the category of residential use single family home use and multi-family rental apartment use are separate and distinct categories. The conversion of substantial numbers of apartments to cooperative and condominium ownership has blurred the lines between these categories and it is often difficult in many cases to differentiate between when an apartment building is still multi-family use and when it has changed it's classification to single family home use as a result of such a conversion.

The ramifications of these classifications are vitally important as it can effect every facet of a building | s life from management to financing.

Traditionally, single family home use has been viewed as a "higher" use of land than multi-family use. The conversion of multi-family buildings to coop and condo ownership has been an unintentional attempt to "convert" these buildings to a "higher" use. In a free market though, market forces will always prevail and highest and best use is a major market force in our industry.

During the coop/condo conversion frenzy of the 1980s many buildings were drawn into the conversion process. Many of them did not belong there. They are today becoming again exactly what their highest and best use dictates; i.e. multi-family rental apartment buildings.

The coop/condo conversion wave in New York City was to some extent fueled by the growing number of families who chose an urban as opposed to a suburban lifestyle. They still required single family home ownership though, but in an urban rather than a suburban setting. Large "family size" units in good buildings in attractive locations became the obvious substitute for suburban single family homes. By purchasing these units, these families made the same commitment to long-term home ownership which families throughout the United States make when purchasing a home. Today, we find that our best coop and condo buildings, - those which are healthy both financially and socially, - are larger buildings with a healthy mix of unit types including many larger multi-bedroom units. These properties tend to have a higher percentage of owner occupied units, fewer sponsor units and fewer cooperator sublet units.

The trend though in smaller buildings with smaller units is quite different. While these buildings are often financially sound, they more often than not have a higher percentage of sponsor units and a much higher percentage of cooperator sublet units. One must ask the question Why? The answer, quite simply, is highest and best use. While home ownership is admirable for any segment of the population, it is unrealistic and often inconvenient for the many single people and childless couples who occupy the thousands of studio and one bedroom apartments, many in buildings composed entirely of studio and one bedroom apartments, that are generally unsalable and are being sublet today.

While it would be easier to blame the lack of sales of small units on the depressed state of the co-op/condo market, the national recession and the local real estate depression, it would be incorrect. Many owners of small and mid-size apartment buildings got caught up in the conversion frenzy, as did many renters in those buildings, all of whom expected to make a windfall from the re-sale of a co-op or condo purchased at a reduced price as an insider. Today's market glut of small units is more attributable to this factor than to fear of buying an apartment in today's era of economic woe.

As a case in point I would like to describe the situation at one East Side Manhattan mid-size co-op. This building, which contains 47 units, was constructed around 1960. The 47 units break down into 19 one bedroom apartments and 31 studios. Several of the alcove studios have been renovated into one bedroom apartments as well. The building was converted under an eviction plan in 1982. The sponsor owns only 8 units of which 6 are occupied by tenants in occupancy prior to conversion. This indicates that his units are stable; i.e. at their highest and best use. The cooperators own 83 percent of the building, a very high level of non-sponsor ownership. In the past two years the level of cooperator sublets has increased by over 100 percent. Currently 15 apartments are sublet and occupied by renters. This represents 38 percent of the converted units returning to rental use. When viewed on a building wide basis, 49 percent of the occupants of the building was at one time, 83 percent owner-occupied. Management expects this trend to continue as the shareholders marry or move to larger quarters inside or outside of New York City.

This is not to say that there is something wrong with this building. On the contrary, it is an attractive, well-kept building with no financial problems or major repair problems. The apartments are large, light, attractive and modern for their type. There is simply a very limited market for small unit ownership and that market is more active in the larger, more diversified buildings. Buildings such as this one will ultimately return to their highest and best use, multi-family rental housing.