Condo Deconversion Frequently Asked Questions

Q. Why are condo associations choosing to deconvert back to apartments?

A. This is a simple supply and demand issue. Multifamily is a hot sector of Chicago commercial real estate. Due to a number of factors a large portion of the population are remaining renters for longer. Rents are at an all-time high, vacancies are low, and interest rates remain at historically low levels. Building owners are aware and refinance/hold their properties or are demanding premiums. This combination is fueling investors/lenders to actively pursue alternatives to the traditional purchase of apartment buildings. Further proof is the glut of city-wide new construction apartment projects. Yet, not all investors are developers (and want to avoid this risk), this is how the idea of bulk condo acquisitions came about.

Investors do not look at a bulk condo acquisition the same way a residential buyer would look at a condo purchase. For the investor, the analysis is based on a cash flow model, not on a comparative analysis on the individual condos. They look at the potential cash flow of the property and apply their expenses to determine value. The value of the property as a whole often outweighs the value of the individual condos therefore demanding premiums above residential pricing.

Q.How much more money would we make by deconverting versus selling as an individual condo?

A. This will vary by location, size of unit, condition of unit, and amenities. In general, we’ve seen sellers make 15-40% more money by way of condo deconversion.

Q. Do we all have to move?

A. No. This can vary, but in general, buyers are willing to lease back the units for short term or longer term leases to the owners. Each owner would have the option to lease back or move out at closing.

Q. What if we currently lease our unit?

A. That is not a problem and your current tenant would not be affected. Any lease in place would be honored and transferred to the buyer.

Q. What fees should we expect to pay?

A. Attorney fees, broker commissions, and closing costs are much cheaper than when you individually sell a condo. On average, these fees are 20-40% cheaper on a bulk sale.

Q. How many votes are required from the owners to force a sale?

A. The percentage of votes needed vary by association. Please review your condo declarations & bylaws for the exact vote needed. Typically, 75% is needed, however we have seen some as low as 66.67% and as high as 100%.

There is pending legislation to increase the minimum percentage threshold of unit owners to force a sale of the entire condominium property to a single entity from 75% to 85% for condominiums of 7 units or more (unless less than 25% of the units are owner occupied, in which case the 75% threshold would still apply). This legislation is pending and has not been adopted and therefore is not currently law.

Q. What happens to our reserves?

A. Reserves transfer to the new buyer. That said, we have almost always negotiated with buyers to allow the condo owners to keep the reserves. Those reserves are typically used to help offset closing costs, attorney fees, or realtor commissions.

 

Contact Sean Connelly  at sean@33realty.com or 773.245.0587  or Mark Kurgan  at mark.kurgan@33realty.com or 847.651.5868 for more information.

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