The condominium “deconversion” vultures circling Chicago may have to adjust their sites under a new ordinance passed last week by the Chicago City Council.
Under the new law, 85% of the owners in a condominium property now must agree to the sale and deconversion of the building to rental apartments. Previously, under state law a building could be deconverted to rental if only 75% of the owners approved.
The ordinance also gives owners who do not vote in favor of a sale, and file written objection to the deal with the condo manager or board of managers within 20 days after the sale was approved, additional rights.
Owners who do not approve of the sale now are entitled to receive from the proceeds of the sale an amount equivalent to the greater of:
• The value of his or her equity, as determined by a fair appraisal, less the amount of any unpaid assessments or charges owed by the owner.
• Or, the outstanding balance of any bona-fide debt secured by the objecting unit owner’s interest which was incurred by the owner in connection with the acquisition or refinance of the condo, less the amount of any unpaid assessments or charges due.
• The objecting owner also is entitled to receive reasonable relocation costs from the proceeds of the sale.
Costs of moving would be computed by the federal Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970.
If there is a disagreement on the value of the interest of a unit owner who did not vote for the sale, the owner has the right to hire an expert appraiser to appraise the condo. The prospective purchaser of the unit also has the right to hire an appraiser. Then, both appraisers can mutually designate a third appraiser and determine the final value by vote.
Experts say the deconversion trend started nearly a decade ago after the Great Recession created the condo bust. Developers snatched up unsold condos in failed projects in bulk transactions and rented them out.
Over the past few years the trend has accelerated. The new wrinkle is investors hunting for troubled older condo buildings and attempting to buy out individual owners in such hot neighborhoods as the Gold Coast, Lincoln Park, Old Town, Lakeview, Wrigleyville, Logan Square and the South Loop. Now, the deconversion movement is spreading to Albany Park, Avondale, Lincoln Square, Uptown, Wrigleyville and South Shore.
A survey by The Home Front column in July of 2019 revealed that more than 2,500 condo units in more than 20 existing condo buildings have been “deconverted” and rehabbed into rental apartments over the past three years.
Buyers include major landlords, out-of-state investors, and 1031 tax-deferred purchasers who are looking to acquire real estate to defer capital gains on recent property sales.
The big players in the deconversion game include New Jersey-based Strategic Properties of North America, New York-based ESG Kullen, and Marc Realty Capital, a Chicago investment firm. Essex Realty Group is a major player in marketing the smaller walk-up buildings that generally are priced from $3-million to about $7-million for 18 to 41 units.
In 2016, Strategic Properties paid $35 million for the 133-unit Clark Place high-rise at 2625 N. Clark St. in Lincoln Park, and $51.5 million for Bel Harbor, a 207-unit tower at 420 W. Belmont Ave. in the Belmont Harbor section of Lakeview.
In 2018, Strategic Properties targeted the 268-unit Kennelly Square, a 22-story tower at 1749 N. Wells St. in Old Town, for deconversion. The company offered as much as $78 million to buy the property, and 75.8% of the condo owners in the building voted to approve the sale.
Another recent major deconversion was at River City, a 448-unit South Loop condo complex designed by famed architect Bertrand Goldberg. In late 2017, owners voted to sell the complex to Marc Realty Capital. The deal closed in early 2019.
Dozens of condo boards have received offers from developers who want to “deconvert” their buildings by purchasing all of the individual units, upgrade them with new granite kitchens, fancy baths and wood floors, and turn them back into rental apartments.
Ironically, many of the high-rises now in demand for deconversion were originally built as rental properties, then converted to condominium ownership during the conversion boom of the 1970s.
Why would condo owners vote to dissolve their association? It is simple economics, experts say. Here are the facts:
• Condo resale values plummeted during the Great Recession, and prices have not fully recovered in most buildings. For example, a typical one-bedroom unit that originally sold for $294,000 in 2005, resold for only $170,000—a 42% resale price decline—a decade later, according to Cook County property records.
• Many of the lakefront buildings were built in the 1960s and converted to condos during the boom of the 1970s and 1980s. These aging properties are showing infrastructure wear and tear, and need new roofs, elevators, windows and mechanical systems. As a result, owners currently are being hit with hefty special assessments for repairs ranging from $25,000 to $75,000-plus per unit.
• Buildings with low owner-occupancy rates signify trouble as traditionally financed sales and refinancing grind to a halt.
“Deconversion of a financially troubled condominium building is one way for owners to recoup some cash and escape from condo jail,” noted Chicago Realtor Sara E. Benson, co-author of Escaping Condo Jail. “It is a national trend. Tens of thousands of condominium units have been deconverted to rentals.”
As apartment rents continue to rise, the market value of rental buildings is soaring. So, investors are willing to pay top dollar for a building they can quickly deconvert, renovate, and start the flow of cash.
For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.