“Condominium Deconversions” – KSN attorneys Kelly Elmore and Omar Malik discuss the condominium deconversion trend, challenges presented in these bulk sales, their experiences in handling these complex transactions, best practices, and more. (59 mins.)
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Episode Transcription
Nikki: You are listening to the KSN podcast and today we’re talking about condominium deconversions. Welcome to the KSN podcast where you’ll hear from KSN attorneys as they share their experience and insight on legal issues surrounding community associations, collections, property tax appeals, and landlord tenant law. I’m Nikki and today we’re joined by two KSN attorneys. Today we have Omar Malik and Kelly Elmore. Both Kelly and Omar practice condominium, townhome and homeowner association law, and both have backgrounds as a litigator, but most importantly, they make up our condominium deconversion team here at KSN. Hi Kelly and Omar. Welcome to the podcast. We are glad to have you here today.
Kelly: Thank you everyone for joining us this evening. My name is Kelly Elmore. I am a principal at KSN and with me, I have Omar Malik who is also a principal at KSN, and together we run the Association’s section 15 or deconversion department at KSN. Tonight, we’re going to be talking about section 15 sales or deconversion sales. Well, I will start off by just explaining what a section 15 or a deconversion sale is. So as many of you might know these types of sales, where a buyer makes an offer to owners to purchase all of the units in an association are governed by section 15 of the Illinois coning property act. That particular section of the act, given the gravity and the immense amount of work that goes into these types of transactions, it’s actually a relatively small portion of the act and it generally states that with few exceptions in the state of Illinois, if 75% or more of owners in an association decide to sell and vote to sell all of the units, then all owners in the association are required to execute their documents and proceed with a closing. For those of you who might be in or around the city of Chicago, you might have heard some of the press and publicity a couple of years ago when the city of Chicago actually via an ordinance increased the threshold for these types of sales to 85%.
So, if you are an association in the city of Chicago, the threshold is actually 85% and for most other associations in the state of Illinois the threshold is 75%. What is the history of deconversions and conversions and how did all of this begin? Well, some of you might remember back in the eighties, we saw primarily conversions from apartment buildings into condominium associations. Back then owners of apartment buildings found it more lucrative to sell individual apartment units set up in an association file and record a declaration with the secretary of state and actually create an ownership of unit owners and created condominium associations. Several years ago, really in about 2015, we started seeing a trend where buyers came in and started making offers to condominium associations to do exactly the opposite and to turn a condominium association back into apartment rentals. So, we’ll talk a little bit tonight about the reasons why we’re seeing these. I think when they started in 2015, a lot of people thought, we certainly did that, these were sort of one-off transactions, maybe just a fling for maybe six months or a year but here we are in August of 2021, 6 years later and there really doesn’t appear to be an end for this kind of market and this kind of sale insight.
Certainly, one of the reasons when we saw this kick up in 2015 is as many of you will remember with the 2007 market crash, the resulting wave of foreclosures and collections and bankruptcies that we saw in 2008, 2009 and 2010, that really significantly affected many associations, their budgets how they handled expenditures and things like that. And so, it unfortunately I think put a lot of people into a position between 2010 and 2015 in a situation where underwater mortgages were created. And so, as we understand from a number of buyers who do these types of sales the lending was excellent for them starting in 2015 and these deals just made sense to keep going and the trend has continued.
Malik: Okay. So generally speaking, when we see these section 15 sales kick off, it’s usually for one of two reasons. So the first reason is sometimes a buyer will come in and they’ll actually independently identify an association and they may reach out to the board member, a property manager, and oftentimes the registered agent, which frequently is KSN and this is more of an unsolicited offer where a buyer identifies the property, no communication with the association or any of the Association’s representatives and they will actually approach the board or approach an agent and say, we’re either interested in purchasing all association units, or they’ll actually send in an unsolicited letter of intent and I’ll talk about the letter of intent here momentarily. I’d say early on, so 2016, 2017, 2018, it was a lot more common for associations that we represent to receive these unsolicited letters of intent and they were oftentimes offering quite a premium over fair market value. We saw 40, 50, 60% plus above fair market value and oftentimes when associations saw those premiums, they were very interested and they presented those figures to the membership
The other manner in which these sales traditionally proceed is through a solicited offer where more and more commonly these days, associations that we work with will hire a broker and actually will go out and direct that broker to market the property and try to solicit offers for the sale of the building. Usually, we always tell our clients that this is a very low risk endeavor, just because when you hire a broker, you only have to pay that broker upon the sale. So, that broker is working for free unless and until a sale is achieved and actually closes. So that is a good way for a lot of the associations that we represent to determine truly what the fair market value of the property is. Now, obviously one of the key differences between these two is in one, you’re paying a broker’s commission and in one you’re not. So, if you receive an unsolicited offer and there’s no broker involved on the sell side, each individual seller would not have to pay a broker’s commission. Whereas if the association signs a listing agreement with a broker, each individual owner would be obligated to pay that broker’s commission at the time of closing. That would just come out of each individual owner’s proceeds. The pros and cons in terms of hiring a broker or not hiring a broker; oftentimes associations like to hire a broker for the simple reason and this is probably what a broker would tell you is to maximize value because they can expose the property to as many people as possible.
They usually have a database of thousands and thousands of buyers and they’ll coordinate tours of the property, so on and so forth. So, that is one of the pros to using a broker. Obviously one of the cons is having to pay a commission, but I’d say you treat these on a case-by-case basis. There’s really no one size fits all solution for what’s best for you. If you’re a board member in your individual capacity representing your association, or if you’re a buyer out there, obviously this is a completely different analysis, but I would say treat this on a case by case basis and keep in mind that from our perspective, from a legal perspective, KSN, we are helping and our goal is to help our associations maximize value so that whatever offers received can be presented to the ownership where we’ve maximized the value and then we put that offer in the hands of the ownerships that the owners can collectively determine whether or not the sale proceeds. So, Kelly really touched on this on her previous slide when she was talking about the 75% or the 85% threshold. Ultimately, whether or not the sales proceed, it’s not a decision of the board, it’s a decision of the ownership. So, you could have a situation where all board members vote against the sale, but 75% or 85% of the ownership vote in favor of the sale and the sales still proceed. So, it’s really important to make sure to get this offer in the hands of the entire ownership so they can collectively as a group determine whether or not the sale proceeds.
So, I mentioned earlier I would circle back to the letter of intent. Letter of intent is a non-binding document. If you’ve ever seen one before, it’s usually a one- or two-page document that will contain basically a summary of the key contract terms. So maybe eight to 10 key contract terms, price, earnest money, deposit amounts, how long the buyer will need for due diligence, what taxes will be prorated at, how long to close the transaction leaseback rates for owners, if they’re allowed to stay in lease back their units and what happens to your tenant’s lease. Those are some of the key terms or the more traditional terms we see in a letter of intent but if you notice, if I’m highlighting, I think there I just counted seven terms. The ultimate contract that’s voted on and approved by the ownership consists of a lot more than just seven terms. So, what we recommend is when you receive a letter of intent, if you’re an association, to take the terms of that letter of intent and to actually put them in a formal contract and if you think about it just from a layman’s perspective, it makes sense. Why would you want to vote on eight to 10 terms when you can vote on a full contract document that may be 20 pages and cover from A to Z every single possible term?
If we’re talking about the sale of an individual’s home, we want them to vote and have the ability to review each and every term of that contract, because while many people may fixate on price, there may be some other key contract terms that really determine whether or not someone has a yes or a no vote and we’ll cover some of those contract terms tonight, but from a legal perspective, it makes the most sense if you have a decision of the ownership as section 15 is the owner should be presented with a full purchase and sale agreement to review and KSN can assist in drafting and negotiating that and it’s usually based on the terms that initial letter of intent that you receive. So, we don’t recommend signing the letter of intent, but rather taking the terms of that letter of intent and memorializing them and negotiating them into a full purchase and sale agreement.
Kelly: That’s a really good point that you make Omar about the letter of intent and also owners voting on an actual contract. We had a meeting with a large association and really the first time the association is starting to discuss a deconversion and the board explained after speaking with us a lot about this process and the owners said, well, why can’t we just vote right now? We already know what our answer is and the obvious question is, but you don’t know what the purchase price is, you don’t know what the leaseback terms are, you don’t know what other incentives a buyer might be willing to add and Omar and I can tell you from the hundreds of meetings that we have attended on this subject, what people think at the outset, at the initiation of this process is usually very, very different at the end. There have been sales that we’ve handled over the years where people are quoted in very public press articles saying I will never sell my unit, they will have to drag me out, I’m not selling and the buyer ends up changing a couple of the terms and those people are the first people to send back their vote. So that’s why, again, it’s so imperative that when it’s time to actually go to the ownership you provide the entire contract, and you don’t just simply try to vote on a letter of intent.
Why are we seeing section 15 sales? So as Omar mentioned earlier, initially and still to this day, we are seeing purchase prices above fair market value on these sales and we’re always asked a lot of times at some of these early meetings, well, why would I sell my unit and if this is a terrible deal, we shouldn’t do this. Well, the simple fact is in order to get 75% or 85% in the city of Chicago on any deal, it’s going to obviously have to be an attractive deal for owners to vote in favor of it and for the deal to actually proceed. So, first and foremost, I would say the 99% majority of the deals that we’re seeing the purchase prices are over fair market value, some well over fair market value. In addition, some individuals, as we mentioned after the 2007 crisis where a lot of people who bought units in 2007, 2008, suddenly have now found themselves underwater in their mortgage just because they bought really high and values have gone down we’ve heard from a lot of owners over the past six years that they cannot sell their units, they’re underwater, they’re not able to refinance and these deconversion sales offer an opportunity to sell at a rate that they would never get if they went on the open market and sold as an individual owner. In addition, I think one of the additional factors that has certainly been discussed a lot in the last year or so, and especially after what we’ve seen earlier this year down in Surfside, Florida with that unfortunate situation with the association, many, many associations are facing major expenditures that have been deferred for a variety of reasons over the years.
We represent a number of associations especially on lakeshore drive where the makeup of the ownership, if you have an elderly population, they are on fixed incomes they do not have the ability to absorb a special assessment suddenly, but many, many boards are faced with buildings where at the life of the building, where they are right now, they have to move forward with certain capital expenditures. And we are seen on some of these transactions where buyers are coming in with above market prices, although many owners can’t exactly turn around and buy something at the price they’re being offered. The deal at least offers them an opportunity to be able to sell their unit, make some money while they’re walking out the door and also avoid what could be very, very costly special assessments and capital expenditure projects.
Malik: So, Kelly, speaking of the special assessments, if an association has a special assessment pending right now, is the purchaser required to pay that off as part of the closing. So, for example, fund the reserve more prior to the closing, or is it considered part of the purchase price? And I know we dealt with this up in crystal lake. Did you want to touch on this?
Kelly: Yeah, so that’s a very, very good question and the first answer is it’s whatever we negotiate in the contract. So generally speaking, unit owners are responsible for all assessments. So, whether it’s a regular assessment, a special assessment or any other type of loan or expenditure that’s owed by the association currently, that will need to be paid at the time of closing. When you think conceptually about assessments coming in, early on, we had a lot of questions at our meetings where owners said, well, I’ve been paying my assessments over the years and John Smith, my neighbor, I know hasn’t paid in a year or two. That’s not fair if we go and we sell all the units and he doesn’t have to pay. We do want to make it clear, when we close these associations and all units are closing at the same time, the association collects all funds at the time of closing and we’ll talk in a minute sort of about what can happen with the association funds, but everyone is required to pay in full. Same thing with a special assessment and I know in many associations the board will allow different installment payments or lump sum payments. Again, it’s only fair to collect the entirety of the special assessment.
Now, we have had situations– we had a large association that was closing back in 2018, where the board had adopted a special assessment several months before they really started going through the deconversion sale process and as they got closer and closer to the sale, what we advised was you need to continue to run the association as a condominium association. Meaning if you passed a special assessment for necessary expenditures, you need to continue to collect that until such time as we’re confident, this is absolutely going to close and you don’t need that money and what the board ultimately did was they waited until about 60 days before closing and they did vote to rescind the special assessment and all the funds did go back to the owners. So, there’s a number of options. Again, we do want to be careful as we advise associations don’t ever just, you know, if you start going down this process, hey, let’s not spend any money on the building if we’re going to sell. Still continue to reasonably make repairs. For you board members, you still have a fiduciary obligation to the ownership but you do want to make sure you continue to make repairs but there are definitely options as far as the special assessment collection and returning that to the owners.
Malik: Thanks, Kelly. And going back to the slide Kelly was talking about, another common reason that we see these sales proceed and Kelly and I are both dealing with an association that’s in this very scenario, is that there’s a vote meeting for an association we represent on August 30th and this is an association that was built pre 2000 and a lot of the owners– This was a starter home for them and they subsequently moved to the suburbs and they’ve now been renting that unit out and over time, this association essentially is now operating as a rental building where I think this particular association, I want to say it’s close to 65 or 70% rentals and for that reason, you have owners who at this point in time, it’s too late to pass any sort of leasing restriction amendment because you have too many owners who are using this income generating property. Similarly, it’s already operating almost like an apartment building, given that you have such a high percentage of rentals. Sometimes these are oftentimes these renters don’t care for, or treat the property as well as they should just because it’s not their permanent home, they’re not owners there and then one of the most important factors is once you reach that high percentage of rentals, it’s oftentimes very difficult to obtain if not impossible to obtain conventional financing. So, these owners are finding it very difficult to buy and sell these particular units. So, for that reason, several associations that we represent with a high rental percentage have found themselves on the receiving end of letters of intent or going out and hiring a broker soliciting offers to see if there’s any way that they can deconvert the property fully through section 15.
So going back to the slide here. So, when Kelly and I talk to boards, two of the most common words I talk about are the key to sales are education and transparency. Those two key phrases. So, I guess we should have started with this. From a KSN perspective, we represent condominium associations and homeowners’ associations. We don’t represent buyers. So, we are here to help the association, guide them through the sales process and provide them legal advice to assist them and to serve as a resource for both the board and the owners and answer any questions that they may have. Our role is not to swing people to vote one way or another. It is to negotiate the best possible contract, get that contract in the hands of the ownership, and then answer any questions that the board and owners have so they can make an informed voting decision and vote one way or another. So, in terms of the process itself, once you have a formal contract, we send that out to the entire ownership. Management will send that out to the ownership with what we call a voting packet where you have a copy of the contract, a cover letter describing some of the key contract terms, a notice of a meeting and a proxy.
So, if you are on the receiving end of this document, and let’s say, this is the only piece of real estate you’ve ever bought and sold, or you’re not familiar with, you’re one of the few who are not on this seminar tonight, this may be a very, very new process and unfamiliar process for you. So, for those board members on the call tonight you probably seen where it’s very difficult to get ownerships to turn out for your traditional board meeting. Some associations we work with– I was working with an association earlier today where they haven’t even been able to get a quorum for their annual meeting. So sometimes you’re just in this situation where owners do not feel the need to participate or attend board meetings. This particular topic, when you’re talking about the sale of an individual’s unit usually has tremendous turnout because you’re talking about an individual’s investment with significant financial implications here. So, we do our best to reach out to all of those owners and have as many people attend as possible and rather than just give them the lengthy document to process and read on their own, we recommend that our associations host town hall meetings. Prior to COVID, we used to have these meetings in person where maybe we go to a conference room in the association or some sort of amenities space, or maybe rent out a room in the nearby library or something like that, where we can physically come out to the property, meet with owners in person and answer questions that they have.
They could be very, very specific questions or very general. It could just be asking generally about timing. Maybe they’re asking Kelly or I about our experience in section 15 sales, or it could be a very specific question where they ask about paragraph 3.3 of the agreement. But the bottom line is after these town hall meetings, we want owners to feel as though they have all of the information that they need so that they can make an informed voting decision to get all of their questions answered. So, they now feel comfortable with the document that’s been presented to them, and that they can vote on that document. Since COVID, we’ve been doing these meetings via zoom, it’s been very effective that way because we can have owners who can participate. If they want to dial in, if they want to turn on video, they can do so. They can unmute themselves to ask questions. They can ask questions via the chat function. The bottom line is we want to make sure these owners have the ability to ask questions and we found it very effective to do this via zoom.
In fact, it may even encourage more participation because owners don’t physically have to go in person to the meetings, but those are a key component because if you’re a property manager on the call, you’ve probably seen it’s extremely difficult to get 75% of your ownership to do anything, let alone to vote on the sale of your unit and for the property managers or board members on the seminar tonight just think of any sort of amendment you’ve tried to pass in the past where it may take months, and it may take going door to door, asking people to vote, to pass a relatively simple amendment that certainly doesn’t involve the sale of an individual’s unit and it may be what many consider to be a more of a no brainer. It’s just that reaching all of those people is very, very difficult. So, the sale of an individual’s unit is tenfold more important if not more and it is imperative to reach all of these people, to give everyone an opportunity to vote, not just those who attend the board meetings on a monthly basis, not just those who you see in the hallways every day, we want to reach everyone. So going back to slide one, when Kelly’s talking about 75 of the percentage of ownership needing to approve a sale, it’s not 75% of those who respond, it’s 75% of the entire association. So, that goes back to what I was saying at the outset of this slide, education and transparency and we found that these town hall meetings are absolutely essential to the educational component of these sales.
Again, if you haven’t been involved in section 15 sale before, which is very, very likely. Now, we’re sometimes seeing people who have been involved in a transaction here or there. We’ll see a familiar owner name, but generally speaking, this is a very, very new and unique concept for most of the people we’re dealing with and it absolutely differs from a one-off sale of your residential unit if you were to go out and sell it on the open market tomorrow. So again, I can’t emphasize enough, how important it is to have these town hall meetings. I think I touched on the voting process itself where owners can submit a proxy in advance to vote on the sale and that proxy is tabulated again in accordance with percentage of ownership and physically, when owners attend the vote meeting itself, they can complete a ballot in person, but most of the voting on these sales is completed by submitting a proxy in advance and we recommend that those proxies be tabulated by an independent auditor who is licensed and this is what they do for a living where they tabulate votes. That’s important to protect the integrity of the vote and also to have your board not involved in that process from a legal perspective. You don’t want your board, property manager or attorneys counting the votes if you can avoid it to avoid any allegations of improper counting or anything like that. It’s always best to put that in the hands of a license professional.
In terms of if a contract is approved. So, let’s say you go through this voting process and over 75 or over 85%, depending on if you’re a city of Chicago or not, vote in favor of the sale. That is what we call the contract effective date where the contract is approved. So again, going back to that first slide with the 75% and the 85%, the board only has authority to sign that contract on behalf of the owners once the requisite percentage of ownership has approved the sale. So, if 75% or in the city of Chicago, 85% or more of the percentage of ownership approve a sale, the board can then execute that contract and all owners, regardless if you voted no or not, a hundred percent of the owners are then under contract and they’re bound by the terms of that contract. Again, whether you vote yes or no, it’s a hundred percent that would then be bound by the terms of that contract and you would initially go into what is known as the due diligence phase. I’d say probably about 95% of the transactions were involved in, have some form of due diligence and due diligence usually consists of two components. There’s physical due diligence, where the buyer will come into the building, they’ll get up on the roof, they’ll inspect the boiler, they’ll inspect the mechanicals they’ll inspect various units and then there’s a document due diligence component where the buyer will review association financials, they’ll review leases that sort of thing.
So, those are the two main types of due diligence and during this transaction, similar to a due diligence on a single-family home sale, the buyer has the opportunity to poke around, prod around and make sure the property is exactly what they bargained for and if everything checks out the due diligence period can either be closed early or it expires. And then we enter into the closing phase of the transaction. So, due diligence traditionally I’d say is anywhere between 30 and 60 days, depending on the size of the property. So, if it’s a smaller association, maybe it’s closer to 30. If you’re dealing with a hundred or more units, the due diligence period may be in excess of 30 days. It may go up to 60 days, even 75 days. It really depends on how quickly the buyer can get out to the property, get its third-party reports, inspect various units, and so on and so forth. And then the next phase would be to go into the closing phase of the transaction and I’m going to go back after I talk about this bullet point. I’ll try to sketch out a timeline from start to finish and put some times in terms of weeks on this, so you have an idea of how long this possibly takes from start to finish. So, the closing phase usually takes about 45 to 60 days, again, depending on the number of units and during this phase of the transaction, similar to a sale of a single-family home, you need to execute closing documents.
However, one way this deviate is because if you go out and sell your condo unit tomorrow, you’re probably going to go down to the title company’s office and spend an hour plus executing documents in person. Because of the bulk nature of these sales, all units will actually close in a single day and the way we do that is as I’m sure you can imagine, we can’t have or rely on all owners converging upon one title company’s office on the same day. Inevitably someone would oversleep, someone would be sick, someone wouldn’t be able to make it to the title company’s office. So, for that reason, we have all of the closing documents executed in advance, and we’ll cover this later on, but the largest number of units we’ve closed and this all occurs in a single day is 924 units and I think the smallest is about three units, but this is the process that we’ve instituted to have all of the documents signed in advance so that we can close several hundred units all in the same day so that people can get paid that same day. They can pick up their checks all in the same day. So, you don’t have a closing that stretches across several days. So, you would still have to sign a deed. You’d still have to sign a bill of sale, all of that, but what we do, and again, this will be in a future slide is KSN will prepare all of those documents for owners, answer any questions that the owners have and all of those documents can be executed in advance of the closing. So, in order to do this, there are quite a few moving pieces and parties that are involved and I think Kelly will touch on that.
Kelly: What Omar conveniently left off about those informational and town hall meetings is that they can be very colorful. Some of them go smooth, but I think as, Omar, you alluded to nothing other than a notice of a special assessment meeting that seems to draw owners out of their units and down to a meeting to share comments with the board, then a notice about a potential deconversion sale. So, for those of you board members and even property managers who might be considering this process, or are already kind of going through this in whatever stage I can tell you from our years of experience and again, attending hundreds of meetings to discuss this topic these meetings can start up very, very rocky. People have a lot of questions and as Omar mentioned, our biggest primary objective is making sure owners have the education they need, especially at that first meeting and one thing– We’ve had board members who’ve brought it up at meetings and we always remind board members, we’re happy to be there to help educate and walk owners through just the process itself and we’re very clear this isn’t a done deal, this doesn’t happen overnight. As Omar mentioned, this is a vote of the ownership, but we’re just going to give you some education. This is what it would look like. This is what the process is because unfortunately there’s so much misinformation out there and people tend to get misdirected.
So, the best thing I think a board can do is just simply be prepared, be armed with the right information, going into the process and also as Omar mentioned, we’ve now been doing a lot of these meetings with zoom and everything. I do think after some recent meetings we’ve had; we probably will recommend to everyone to start disabling the chat function in the meetings because while it’s been a great tool to send questions and as Omar pointed out to me this week, there’s a way to do it. So, you could just directly send questions to the host. You know, if you have an association and you might be concerned about owners getting a little bit distracted during your presentation or your town hall meeting it can be helpful to make sure that you kind of limit that so that everybody stays focused on the presentation and people don’t get sort of sidetracked with side comments about who thinks what about the sale and the board. So, the role of parties involved; as we’ve kind of discussed tonight, there are a lot of terms in a potential purchase agreement and there is a lot of work, but there are also a lot of parties involved. And so, on this slide, we just want to go through and explain who are sort of all of the players that may or may not be on your transaction, obviously it varies depending on the size of your association, how you’re set up, whether you have a management company, things like that.
So first and foremost, legal counsel. So, our role, as Omar said, is we represent the association. We represent the unit owners. That means like the board we represent the owners who don’t want to sell and we also represent the owners who want to sell tomorrow and think this is the best deal they’ve ever seen so could the board please get the voting packet out so everybody can vote on this ASAP. It is a difficult position to be in, I think, as a board member, sometimes as you’re getting a wide spectrum of opinions and comments as you begin to undertake this process but legal counsel and the board both, it’s our role to just simply assure that the board goes through the process in accordance with the Illinois condominium property act that legal documents and notices are sent out in accordance with the act and your governing documents, that we give the proper notice to the ownership that the voting percentages and the voting process itself is properly followed. As Omar mentioned many times, associations, especially larger associations will refer out the voting tabulation process to a third-party auditor. Anytime it makes economic sense for a board to select an outside vendor, we are huge proponents of that because it really takes a lot of sorts of oh, what’s the word? Some of the concern away from the owners who might be concerned, well, what if the board members want to push the sale and what if they try to manipulate something. I can tell you; I don’t think we’ve ever actually seen instances of that, but nevertheless, it does give owners I think, some degree of security knowing that the vote itself, it’s very neutral. Everybody sends in their proxy votes; yes or no and it’s tabulated according to the percentages of ownership.
The role of the board of directors. So as Omar mentioned, when these deals begin and I’ll talk first just about when a board receives an unsolicited letter of intent. Our opinion is that the offer is to the association. If a buyer is sending something to the board, I’m sending this to you as a board that represents the elected interests of the unit owners. And so, our position has been if you’re the elected officials of the association, the decision in the information regarding the offers should go to the owners. And so, our further opinion on how the board should handle the transaction is not to provide an opinion one way or the other, you know, I, Kelly Elmore, I’m a board member and I think this sale is the greatest thing, or John Smith think this is a terrible deal for the owners, but really just as a board member, I’m presenting the information to you, I’m obtaining the requisite counsel, whether it’s legal counsel or counsel from another real estate professional but as a board, I’m coming to you just as we would with a landscaping contract or a facade contract or an engineering contract, we’re bringing you the information and while board members typically make decisions on contracts in this case, it’s an owner vote.
I think sometimes some of the comments that we hear from owners at some of the initial meetings as well is, well, how did the board decide to spend money? You’ve talked to a legal counsel, maybe you’ve talked to another real estate professional, you did this without taking an owner vote. As we try to dispel sort of the concern over the process, the boards in an impossible position. If you get a letter of intent and you immediately just want to say, well, we reject it well, if you haven’t fleshed out well, is this the best offer? Are these the best terms? How do you have the ability to go to the ownership and say we received this, and there’s just simply no merit to it. So, we have over the years seen some examples or some circumstances where a board was able to assess a letter because of specific circumstances in those associations, but generally the board’s obligation is to make sure the association is aware of an offer and to properly present and provide full education on what the offer is or could be.
The role of the unit owners in this process. So, as we previously mentioned, this is a unit owner vote. The owners will ultimately decide. If a sale is approved, as Omar mentioned, it does become the obligation and the duty of all owners to execute their documents. So, unfortunately in associations where they have obtained the requisite approval percentage and owners are all sent their closing documents. We do see owners who continue to refuse to sign documents. Usually, we can resolve that by issuing a notice to the owner. The refusal to sign documents and to provide the documents necessary for a closing is treated as a rule violation or a declaration violation as any other type of violation in your association. So, when we have these situations and we usually wait until after we’ve sent notice and notice and notice by email to owners, again, reminding of deadlines. After weeks of attempting to get owners to cooperate, then the board might, at that point, approve sending a notice of violation. As we’re getting closer to the closing process, you might have to send a second notice of violation or a stronger letter but I would say the large majority of owners cooperate and even more so after if you do have to get to the point where a letter of violation is sent. Every so often, we do have to file suit against owners who just refuse to cooperate for whatever reason, but those are generally few and far between. So that’s the role of the owners.
The role of the brokers; so as Omar mentioned previously, there are some associations who do decide to use a residential real estate broker to locate and find buyers. This is a very niche market. There are not a whole, whole lot of buyers who are interested in doing this, although the list is kind of expanded and contracted here and there in the Chicagoland area. So, if you do hire a broker to list the property the broker can be incredibly, incredibly helpful in that, as Omar mentioned, they’re working free of charge, unless, and until you close on all of the units. The broker can help by contacting owners to explain contract terms. The brokers help negotiate the purchase price initially and other terms that the board would like them to be involved in. Many of the brokers that we deal with in Chicago who are experienced and we certainly recommend you that any association thinking about hiring a broker looks at the references and the prior deconversion deals that a broker has handled because there aren’t a ton of them who do deconversion sales specifically but the broker can really assist you with evaluating terms that might be unique to your association that might need to be covered, whether there’s environmental issues that will need to be addressed.
I think from our perspective, we’ve seen many of the skilled brokers also on the other hand, explain issues to buyers. We have an association right now we’re working with where there was a massive casualty with a fire and in that case, the broker is very instrumental on not just working with the owners to get an understanding of what the sale might look like for the owners, but is also speaking with the buyer to say, here’s what you can do with this and here’s how you can repair this. And so, the broker can be very instrumental on both sides. Obviously, the broker receives a commission payment. That’s something you negotiate in a listing agreement up front which we can assist an association in doing. The role of the buyer; many, many buyers that we deal with can be very hands on in the deconversion sales. So, I think as we’ve mentioned a couple of times, again, not a huge, huge pool of buyers who necessarily do deconversion deals. There are a lot of buyers out there who will buy apartment buildings, or multi-family commercial real estate but we found that there’s definitely a specific subset of buyers who really and actually enjoy purchasing these types of deals. They understand them, they understand while many buyers don’t that they’re dealing with hundreds of owners on the other side. So, it’s not just a simple negotiation between one buyer and one seller.
Some of the more skilled buyers understand that every deal is different. There are unique features in each association. For some associations, just a large purchase price is going to be what gets the owners to vote yes. On other deals we’ve had, buyers have had to get very creative with incentivizing owners to vote yes on their deals. Whether it’s incentives upfront in the contract, or incentives to receive funds after closing. For example, we just had a buyer who agreed to do a garage association expenditure reimbursement. So, if the sale closes, the buyer’s going to give the association X amount of funds back, which all go back to the owner. So, buyers are all very different. The buyer is a lender. Although we don’t usually deal with them a lot until the very end of these deals, they can become instrumental as we are kind of near the end of due diligence, sometimes the buyer lenders have specific issues or requirements, whether it’s in due diligence or later with certain closing documents they want to see. So just goes to show you, we’re dealing with a lot of people, both on the seller side and the buyer side.
Then you have the title company who processes the bulk closings. For us, fortunately, Omar and I work with several companies who have done a phenomenal job establishing actual deconversion departments as we have within our firm to specifically handle these types of transactions and I can’t stress enough how important it is for all of these professionals, whether it’s your attorney or your broker, or even the title company. You really, really, really want to work with individuals who have extensive experience. Not, well, I’ve done one or two or someone at my firm’s done one. You really want someone who knows what they’re doing, because there are always issues that pop up on every deal and you want to have someone who knows exactly how to resolve it and to address it, and then last, but certainly not least are the property managers who assist associations in getting to the finish line on these deals. And I always say, I think the property managers are in the most difficult spot because you’ve worked months, maybe years with an association and always the goal has been to keep maintaining the association in great condition and doing projects for the benefit of the association.
Well, in these deconversion deals, the focus sort of switches, and now you’re working with a board of directors to really focus on, well, what do we need to do to continue to maintain and run the association while at the same time being cognizant of everyone’s focus is now sort of on this deconversion sale and getting to the closing, and that affects a number of things in the association, whether it’s your budget, your capital expenditures, your projects that you might be working on that might be affected but I can tell you, we really, really rely heavily on the assistance of the property managers. We greatly appreciate those managers who work with us. We know we ask a lot; the board asks a lot just because it is a lot of additional information that’s needed during due diligence. As Omar mentioned, the buyer’s team is coming in, they want to see anything and everything looking under the hood and a lot of times it’s reviewing documents, reviewing contracts. So there really is a lot that goes into it and we truly respect and appreciate the role that property managers have in these deals.
Malik: Thanks, Kelly. So, this next slide. So, I alluded to this earlier, so Kelly and I and KSN as a whole, we represent condominium associations and homeowners’ associations. And so, for that reason, when these sales started to become very popular around 2016 or so, we just started to handle a lot more on behalf of our clients and over the last five years we’ve completed about 67 successful closings with the most recent one occurring yesterday. It was a 72-unit property in Arlington Heights that literally just closed a $16 million transaction. Here we just have a sampling of some of the other transactions that we’ve handled over the years. So, I did allude to that largest one there, Heritage Village Point, 924 units. And then that same year was 1400 Lakeshore Drive that was in the press a lot because there’s a lot of cranes articles about it, and it was considered one of the largest deconversions in the country, I believe.
So again, these are just a representative sample of some of the sales we’ve handled over the course of the years and if there’s one takeaway from this slide, I would just say that because of the number of transactions that we’ve been involved in, Kelly and I have seen almost all of the issues that can come up cause we’ve just seen them over time, based on the number of sales we’ve been involved in and we have the experience to overcome those obstacles as they come up, because these are oftentimes very time sensitive deals where you think the transaction’s going to be smooth going in, but inevitably a curve ball is thrown your way. So that’s why it’s important to have very experienced counsel representing you in these transactions and as Kelly covered in the previous slide, experienced professionals on the team, period, so that the sale can successfully close because once a transaction has been approved by the ownership, the goal is to then close that transaction. It’s been approved by the owners. They have spoken, the super majority have said they want a sale to proceed. So, then it becomes our obligation and our duty to shepherd them through to the closing. The only other thing I would say on this one is the slide highlighted how many sales we’ve been involved in that have closed. We’ve been involved in hundreds of other transactions that have negotiated contracts, voted on contracts and for one reason or another not closed.
Kelly: So just a couple of notes on the current deconversion landscape. So again, as we mentioned, the recent city of Chicago approval percentage is 85%. So, if you’re downtown in the city of Chicago, well not downtown, but if you’re in the city of Chicago, it’s 85%. Potential buyers have changed it a little bit here and there over the last six years but for the most part, we’re still seeing the same core buyers doing these deals. COVID 19 impact on these deals; I think last year, pretty much everything kind of came to a halt in every single world but we really haven’t seen, especially now that we’ve been in 2021 much hold up at all as far as COVID 19 is concerned. I think the biggest change that we did see, which was a positive change was the governor of Illinois enacted legislation that has allowed us to do mobile signings and remote notary signings. Previously in order to sign documents, you had to be physically in person with a notary. A lot of times, it means going to a title company or we bring teams out to the association to sign documents but one positive change that appears at least for now to be sticking is that owners can sign documents remotely. And then lastly, again, as we mentioned, just after what we saw in Surfside, I think a lot of associations who– I mean, we have one in particular who said a year ago, we wouldn’t have even considered this, now we really are taking another look at our budget and our upcoming expenditures and we are really going to be educating our owners what they can expect over the next few years if we do all decide to remain as a condominium association, versus if we decide to pursue a section 15 sale and sell to a buyer. Omar, you want to end it off with technology.
Malik: So, over time KSN has really streamlined our closing process in terms of how we can effectuate the closing on so many units in a single day and what we’ve done is that we have automated a lot of the system and we’ve actually developed some proprietary software that allows us to prepare closing documents on behalf of each individual owner in a very efficient manner. This also helps cut down on how many papers involved in the transaction. So, when you’re closing Kelly just talked about this in the previous slide, the closing process is pretty antiquated in the sense that the state of Illinois requires or prior to the legislation that the governor enacted that Kelly alluded to required wet signatures on documents and physically meeting in person with a notary. So, over the last 16 months or so, we’ve been able to take that legislation that the governor has implemented and digitize a lot of the closing process. You don’t need to physically sign these documents in person anymore, and you can actually sign them electronically and those that do need to be notarized, we give flexible notary options as Kelly talked about where you don’t need to physically meet with that person in person. So, we have tried to streamline the process and make it as pain free as possible, and as efficient as possible from a timing perspective.
I’d say, this is what differentiates us from a lot of the other firms out there is that we do have this proprietary technology. We have an entire department dedicated and who’s equipped to handle these particular sales and most importantly, answer those questions from the ownership and serve as a resource for the ownership. So, I think this really benefits in an efficiency standpoint from your ownership, which most importantly are very important to the associations we represent. This allows us to reduce the legal fees involved and to complete these transactions in a much more timely manner and the associations very much enjoy those cost savings involved. So, I’d say we’ve been really able to rely on technology to streamline the process.
Kelly: As Omar said, we really have created a department around these types of deals. We have certainly recognized that you really need a skilled team with your attorneys and not just attorneys, but also the individuals who are going to be working to get you to the closing. So, paralegals, coordinators to be able to respond to owner questions. You don’t realize I think as a board member or someone in an association, how many questions are generated on these deals and questions on the contract, questions on the closing process, what happens after the closing, what’s the buyer going to do with the process or with the property after we close? So, it’s a lot and you need a good team in place to represent you and to assist and we’re happy to do so.
Malik: Thanks, Kelly. We have another question here. How do you deal with non-responsive out of the country owners? I can speak to this one. So again, by the simple fact that Kelly and I have been involved in so many sales, we’ve seen this situation come up time and time again and I think this is where our experience comes into play where we know exactly how to tackle these issues in terms of, if we need to engage the services of a third-party vendor to assist, we know who to reach out to. Believe it or not, I think the most challenging person to get to sign was an individual in rehab. So, we’ve had owners who were in jail that we’ve had to sign closing documents. We’ve had owners that were in rehab. We’ve had out of the country owners, I think in six of the seven continents, the only one was Antarctica that we haven’t dealt with. But when you’re in rehab, there’s a lot of protections of the individual’s privacy, so it’s very difficult to get that person to sign, but we have the resources to reach out to those folks and to explain the sale to them wherever they may be and to get them to sign. So, the actual question itself was talking about out of the country owners.
So, there are mechanisms in place first and foremost on every single sale. If you have enough units, the chances that you have an owner who is either temporarily out of the country or permanently out of the country is relatively high and we provide instructions on how to execute those documents abroad, whether it’s visiting a country’s embassy or otherwise. So, once we’ve located them, it’s relatively straightforward. We have a process in place to ensure that those owners can sign their documents and have those questions, any questions that they have about the documents answered. In terms of locating them, again, we have access to various databases where we can track these people down. We sometimes engage the services of third-party vendors that we’ve established relationships with over the years. So, there’s never been a single unit owner that we have not gotten a hold of and this involves owners all across the globe. This involves, like I said, owners who are in jail or rehab. We’ve dealt with situations where owners have passed away, unfortunately, just before a sale and one of the previous slides that Kelly kind of flew through at the end, there was how we have various departments and because of the nature that we are a larger shop, we have a lot of resources available under one roof. We’re able to track these people down. If it’s a probate matter because of a deceased owner, we have the resources to deal with that. So, we can assist in tracking down any and all people so that they can have their questions answered and then execute their closing documents.
Kelly: I will reiterate, as Omar said, we found in the last years, it is actually easier to get someone to sign their documents in jail than it is in rehab. And also, we know that it takes 21 days if you mail closing from what is it, Canada and also England. So, one time, sadly we learned a harsh lesson back in 2018, as 300 owners were waiting to close, and one owner mailed their documents from; it was Ireland, wasn’t it? It was Ireland and that was a very long wait. So don’t ever mail documents and if you have any follow up questions, feel free to email us. We’re happy to answer questions anytime and we thank you so much for your attendance tonight. Thank you.
Malik: Thanks everyone.
Nikki: That was KSN attorneys, Kelly Elmore and Omar Malik. They both practice condominium, townhome and homeowner association law. KSN is an experienced legal resource, ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we’ve earned the trust of thousands of clients over the past 35 years. If you’d like to reach Tim or any one of KSN’s experienced attorneys, please call 855-537-0500. You can also visit ksnlaw.com and complete the contact form to send us a message. Thanks for listening.
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Please note the material contained on the KSN Podcast is for informational purposes only and does not constitute legal advice. No attorney-client relationship is established by your review or receipt of the information contained on the KSN Podcast. You should not act on the information discussed on the KSN Podcast without first obtaining legal advice from an attorney duly licensed to practice law in your State. While KSN has made every effort to include up-to-date information on The KSN podcast, the law can change quickly. Accordingly, please understand that information discussed on the podcast may not yet reflect the most recent legal developments. Material is not guaranteed to be correct, complete, or up to date. KSN reserves the right to revise or update the information and statements of law discussed on the podcast at any time, without notice, and disclaims any liability for your use of information or statements of law discussed on the podcast, or the performance of the podcast generally. The KSN Podcast may be considered advertising in some jurisdictions under applicable law/s and/or ethical rules/regulations. © 2022 Kovitz Shifrin Nesbit, A Professional Corporation.