Until recently, the word “conversion” was generally thought to mean the process through which an apartment building was converted into a condominium association. However, in the wake of the 2007 market crash and real estate downturn, few condominium conversions have been occurring in the Chicagoland area. In the past year, as the demand for rental units has skyrocketed, a new phenomenon has emerged- the sale of all of the units in a condominium building to a third party who then “de-converts” the condominiums to apartments. Almost overnight, developers looking to convert condominium associations into rental properties have descended upon the condominium association market, flooding many Chicago condo associations with offers to purchase all of the units from the owners and launching a new housing trend of Chicago condo deconversions.
The condo deconversion process is initiated when a buyer makes an offer to the owners to purchase all of the units in the association, is governed by Section 15 of the Illinois Condominium Property Act and with few exceptions, requires the approval of not less than 75% of the ownership of the common elements. In addition, there is generally a provision in the association’s individual Declaration that addresses this type of sale, providing some additional requirements.
Why the sudden shift? As some developers have commented, the transformation of condominium associations into apartment buildings that can be rented at current market rental rates is an incredibly profitable venture. It is no secret that rental prices in the Chicagoland area have steadily increased and may continue to rise in the near future. Given this sudden surge in the rates that landlords may charge for monthly rentals, developers and investors are jumping on opportunities to pick up small, medium and large-sized residential properties to convert them into profit-generating rental properties.
Our attorneys have handled condo deconversion projects for buildings as small as 6 units, up to a building as large as 449 units- the largest deconversion project attempted to date in downtown Chicago.
The following comments are intended to outline the general process and may not be applicable in each and every Section 15 sale transaction.
How does the process work? There are typically two ways that a Section 15 sale transaction may arise: either an unsolicited offer made by a developer/purchaser; or the Association voluntarily seeks out an offer of purchase for all of the units. In situations where the association receives an unsolicited offer, this offer is typically contained in a letter of intent. The letter of intent will normally contain general terms of a possible purchase, which are essentially a promise to enter into a future contract at a future date. Note that unless it specifically states otherwise, the letter of intent, itself, is not a contract or a binding offer. It is simply a proposal in the early stages. Accordingly, I advise clients not to vote on a letter of intent, which is not a “contract”, but to conduct a vote on an actual purchase agreement.
Can owners object to the sale, or opt out of a Section 15 sale? The Illinois Condominium Property Act (or “the Act”) is clear that where at least 75% of the ownership has approved the sale of the units, such action is binding upon all unit owners. The Act mandates that once the sale has been approved at a meeting of the owners, it becomes “the duty of every unit owner to execute and deliver such instruments and to perform all acts as in manner and form may be necessary to effect such sale.” In other words, all owners are required to execute and sign the sales documents, or face being in violation of the Act.
However, Section 15(a) of the Act states that if an owner who does not vote in favor of the sale of the building files a written objection with the Board within 20 days after the date of the meeting at which the sale was approved, then that owner shall be entitled to receive from the proceeds of the sale “an amount equivalent to the value of his interest (determined by a fair appraisal), less any unpaid assessments or charges owed by the owner.” Section 15(b) of the Act further sets forth a process in the event of a disagreement as to the value of the interest of an owner who did not vote in favor of the sale, which involves the appointment of a panel of appraisers to make the determination.
When does the vote occur? Associations vary in how they approach these transactions. Generally we advise the Board to schedule informational meetings with the owners as soon as possible to discuss the process of a possible sale. Because the letter of intent or initial offer generally creates a number of questions among the owners, the Board may wish to refrain from circulating documentation which would confuse or create alarm amongst the owners. The Board may wish to schedule additional informational meetings with the owners during the process to obtain feedback from the owners for the contract negotiation. Once an association receives a purchase contract for the sale of the units, the contract should be distributed to the unit owners for a vote on the purchase contract.
During the entire process, the Board should ensure that it consults with legal counsel to ensure that the provisions of the Act and provisions of the declaration are closely followed. Due to the nature of the way in which the purchase contract is prepared, there may be a number of provisions that require close attention by counsel familiar with not only the Act, but also, the Association’s particular condominium declaration.
Please contact Kovitz Shifrin Nesbit today to discuss your Illinois condo Association’s legal needs at 855-537-0500 or visit www.ksnlaw.com.