Big deal: Deconversions still happening in Chicago

Condo deconversions should be dead in Chicago. The voting threshold was raised last year from 75 to 85 percent; rock bottom interest rates promote homeownership; the pandemic has caused many investors to pull back on their reins. And yet, the trend persists.

That was the message from the panelists during the 3rd Annual Deconstructing Deconversion Virtual Summit. However, the landscape has changed and there are a lot of blind corners that brokers, investors and associations should be aware of.

The first panel was moderated by Kathryn Kovitz Arnold, practice group chair and partner at Taft Stettinius & Hollister LLP. Speakers included Mojca Anaya, Illinois state escrow lead at First American TitleKovitz Shifrin Nesbit and Andy Friedman, multifamily broker with Kiser Group.

The jump from 75 to 85 percent, as Elmore pointed out, isn’t as dramatic as it at first appeared. Prior to the new legislation, both sides stopped tallying votes and attempting to win owners over once they hit that 75 percent threshold. In the end, most deals had a much higher number of yes votes and would have passed under the current ordinance.

The fact remains that condo owners in buildings that have deferred maintenance or that are facing special assessments are still in a position to exit via deconversion. That doesn’t mean, however, that brokers should rush in without understanding the scope of the endeavor.

“Deconversions are still happening, but it’s not one size fits all,” said Friedman. “They are easier with smaller associations where you know where everyone stands.”

Larger associations, he said, tend to require more work, especially if there are a high number of owner-occupied units. The COVID-19 situation has led to more rental incentives being offered by existing multifamily properties, but Friedman said that has not had much impact on pricing. Some buyers are proving to be more cautious during these circumstances, but so much depends on their horizon; if they plan to hold the property for a long time, then current events hold less sway over their decision to buy.

One impact that the pandemic has had, according to Anaya, is a rise in remote notarization. While sellers like this approach, buyers are more hesitant as they worry that there could be some sort of issue down the road for them. Anaya pointed out that Illinois doesn’t have online notarization legislation so she and her team have been collaborating with notaries in Michigan, Texas, and other states that do allow for the practice. These notaries also assist with out-of-state and out-of-country sellers.

Elmore detailed a recent piece of litigation brought forward by a collective of condo owners who wanted to stop the sale of their building. They were seeking to have their association acquire a two-thirds yes vote prior to even negotiating a sale with a broker. The court ruled that the plaintiff’s case had no merit and granted the defendant’s motion to dismiss, which was upheld on appeal.

“Our opinion is there is no requirement under the condo act that the board needs a vote to negotiate a sale,” Elmore said. “Logically, it makes sense that they can negotiate a letter of intent as they negotiate any other contracts and then present it to owners. If you withhold the ability of the board to even explore offers, you’d never hear them.”

Scott Weinstein, attorney with Field & Goldberg LLC moderated the second panel. Joining him were David Bloomberg, principal at Chuhak & Tecson, P.C.33 RealtyEssex Realty Group and Gail Lissner, CRE, SRA, managing director at Integra Realty Resources.

Connelly stressed the importance of communicating early and often with owners, as ultimately the decision to sell or not rests with them, not the association. He said there can be a “hostile takeover” mentality when the subject of a deconversion is first broached and he tried to get out ahead of that by answering all of their questions.

There can be a vast discrepancy when it comes to valuation. As Lissner pointed out, associations consider valuation in terms of what the condo building is worth, considering its individual units. Buyers are looking at it as a future multifamily rental building, which carries a different valuation.

She also walked through the process when there is a dispute over an appraisal. A panel of three independent appraisers—one each selected by the owners’ and the buyer’s appraiser, and a third that they agree on—reassess the property. The panel will look at the property jointly and when two or more arrive at a similar opinion, that sets the value.

“We think that is the best way to get the deal done in the most efficient manner,” said Lissner.

One sticking point for individual owners is allocating funds from the sale of the building. The standard way to allocate the money is to break it down by percentage of ownership; if one owner has a larger unit, they get a larger allocation. Owners who have made upgrades expect to be compensated but as Bloomberg pointed out, market conditions have changed and owners need to realize they might not get what they expect.

Though it can be costlier and take more time, Bloomberg advises a full appraisal of all units and reapportion based on that. Another way is to insert value targets for various upgrades. If an owner has installed new appliances or hardwood flooring, for example, those upgrades carry a flat bonus, pro-rated based on how long ago the upgrade was made.

Though much has changed with Chicago’s deconversion landscape—and the world in general—over the past 12 months, Karmowski points out that lack of supply is still the case here, so deconversions should still continue for the foreseeable future.

“We are fairly optimistic going into the fourth quarter and into next year,” Karmowski said, “not just for deconversions, but multifamily overall.”

Since 1990, Essex Realty Group, Inc. has served Chicago’s investment real estate market as a top multifamily brokerage firm. Contact us today to learn more about our recent multifamily and mixed-use property sales.