Fifteen to 20 years ago, the Chicago-area real estate was buzzing with conversions. Apartment buildings, often the vintage variety, were rapidly bought and converted into condominiums to appease the appetites of buyers looking to purchase a small piece of the real estate pie.
Fast forward to 2020, and like many trends, what goes around comes around. Chicago and its neighboring suburbs are seeing a reversal of the trend. With condos no longer rapidly appreciating assets, a number of condominium buildings are being deconverted, a process in which all of the units in a building are sold to a single entity with plans to revert the units to apartments.
For buildings of four or more units, Section 15 of the Illinois Condominium Property Act currently allows 75 percent of owners of a condominium association to approve a binding sale of the building. The city of Chicago recently increased the required owner approval to 85 percent.
While the percentage for other municipalities is holding at 75 percent, in February state Sen. Sara Feigenholtz (D-6th) introduced Senate Bill 3731, which would revise the act to require 85 percent of unit owner approval for all properties with seven or more units throughout the state.
In Oak Park, two condominium buildings recently were purchased as part of a deconversion process, and Chicago-based Kiser Group brokered the sales.
The first building was Regency Terrace Condominiums at 922 North Blvd., a 52-unit building purchased for $8.8 million. The second was the vintage Clarence Court building at 628 Harrison St., whose 26 units were purchased for $3.6 million.
Kiser’s Andy Friedman says that the two buildings illustrate the two main reasons condominium buildings are deconverted. The first reason is because of deferred maintenance, or a building t in physical distress.
“They might be chronically behind on maintenance, or there’s some new issue that’s going to be horribly expensive to fix,” Friedman said. “Maybe there’s a new special assessment, and residents want out.”
He says that 922 North Blvd. fell into that category. In May 2018, unit owners were notified by the village that they needed to correct violations regarding the balconies on the units.
Friedman says that the estimate to bring the balconies up to code was extremely high and would have represented a large special assessment. With that special assessment looming, it was hard to sell units, because new owners wouldn’t want the burden of an upcoming special assessment.
Friedman said the building had other issues as well, including water infiltration in the garage and elevator controls that appeared to be original to the 1970s-era construction. “The amount of money needed to fix the issues would have been staggering,” Friedman said. “A very large number of people couldn’t afford it.”
As a result, he believes many owners would have put their units up for sale, but the maintenance issues would have created sales prices that were significantly depressed.
He notes that in this case, it made more sense to sell the building as a whole, with full disclosure about the maintenance issues.
“Because apartments are in high demand, and because that building is in a great location, there was a high demand for a deconversion,” Friedman said.
Demand was so high, they had 53 tours of the building before it sold to Goldman Investments, and Friedman says unit owners were given a lifeline.
The second kind of condo building ripe for deconversion, according to Friedman, is often a vintage building that was originally an apartment building that was converted to condos in the last 15 to 30 years.
Friedman says that when the value of the condominiums is stagnant, it can mean the building is candidate for deconversion. He notes that the wave of conversions of vintage apartments was not paying off for many original owners, who couldn’t sell their units but did not want to stay.
“Almost 50 percent of the units in these buildings are already being rented,” Friedman said. “There were a ton of conversions in the early 2000s. With the recession, maybe someone bought a starter condo in 2006, but couldn’t sell it in 2010 when they had to move. They become an accidental landlord. Most of these owners didn’t want to be landlords.”
Friedman says that 628 Harrison St., which sold to Redpoint Capital Management, fell into this second category, remarking that the building was in good shape.
“It was an apartment building until 2000,” he said. “It was converted in 2003 to condos. At the time of sale, only nine of the 26 units were owner-occupied. The others were vacant or rented out.”
Still, there are challenges for real estate brokers to overcome. According to Friedman, there is much more to the negotiation than getting a price that condominium owners will agree to.
Once that agreement has been reached, brokers should work to benefit the owners or current renters, allowing them to stay in the building at below market rent for a set amount of time.
Friedman says that over-conversion years ago most likely led to the deconversion movement gaining strength in the area.
“There were a gazillion conversions in the mid-2000s,” he said. “So much of it was done in vintage buildings. These are great buildings, but you have to keep up with them. A professional landlord knows what these buildings need, but for a condo board, it can be easy to fall behind. It’s very scary for a condo board to ask for a raise in assessments.”
Illinois and Florida are the states that Friedman says are hotbeds of the deconversion movement, and he says Illinois’ issues are easy to spot.
“Chicago, Oak Park, the state of Illinois, in case you haven’t heard, there are major fiscal issues,” he said. “The target is landowners because it’s not easy to move. Property taxes in Oak Park definitely play a role because condos are no longer an asset that’s going to appreciate.”
David Pope of Oak Park’s Residence Corporation considers the tax implications for condo owners in Oak Park a contributing factor to the deconversion movement and says that small condo associations often struggled to collect assessment and weren’t able to develop strong financial bases.
“This is, in part, a market correction,” Pope said. “We’re seeing properties being affected by the changes in the tax laws. Was it necessarily an ill-advised decision 20 years ago to go condo? Maybe not, but 20 years ago is not today.”
Friedman says it’s possible the cycle will keep on turning.
“In 10 to 20 years we might see conversions again,” Friedman said. “It just cycles.”