“Understanding Condominium Deconversions” – KSN attorney Omar Malik discusses the condominium deconversion trend and challenges presented by these large-scale sales. Topics include board member responsibilities, the property manager’s role, legal challenges, best practices and more. Omar also reviews KSN’s experience with handling over ninety deconversion transactions. (52 mins.)

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Episode Transcription

Speaker 1: You are listening to the KSN podcast, and on this episode, we’re discussing 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. This episode is an edited replay of our May 23rd, 2023, webinar where we discussed condominium deconversions, presented by KSN attorney Omar Malik. Omar discussed the Deconversion trend, challenges presented in these large sales, board member responsibilities, the property manager’s role, our law firm’s experience in handling these transactions, best practices and more. If your condominium, homeowner, or townhome community Association has any legal questions regarding a potential deconversion or any other issues involved in the administration of your community, do not hesitate to contact our law firm. 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 since 1983. If you’d like to reach our law firm, please call 855-537-0500. You can also visit ksnlaw.com, complete the contact form and send us a message.

Speaker 2: Welcome to tonight’s webinar covering condominium deconversions and section 15 sales as they’re often referred to. My name is Omar Malik. I’m one of the attorneys at Kovitz Shifrin Nesbit who will be presenting tonight’s seminar. I am one of the attorneys in our Section 15 department. We have successfully closed just over 90 section 15 sales, ranging in size from three units up to 924 units. Thank you all for joining. In terms of a little bit quickly about KSN, our law firm is focusing on educating our clients, our board members, property managers, and communities. If you have any questions, please feel free to visit our website at ksnlaw.com and there’s an education tab that you can click on where you can find articles, laws, ordinances, podcasts, booklets that are oftentimes very handy for our board members and we also publish a schedule of events available on the website so you can see what other upcoming webinars or events we have in the near future, as well as my bio if you’re interested in seeing my biography or any of our other attorneys.

So, with that being said, let’s get started. First slide, what is a section 15 sale or a deconversion sale? Oftentimes you will hear these terms used interchangeably where you’ll sometimes hear people refer to it as a deconversion sale. Some people will refer to it as a Section 15 sale. The reason they’re referred to as Section 15 sales is because these sales are governed by Section 15 of the Illinois Condominium Property Act. The reason you hear people refer to them as Deconversions is because oftentimes a buyer will come in and actually deconvert the property and make it, so it goes from a condominium to an apartment building. So that’s where the term deconversion comes into play. In terms of what Section 15 says, let’s start there. Section 15 of the Illinois Condominium Property Act, first and foremost, has been a provision of the condo act since the condo act was drafted. The condo act was drafted back in the 1970s. For whatever reason, these Section 15 sales only really became more popular in the last six to seven years and what is a Section 15 sale? It involves a third party buyer coming in and making an offer to purchase all association units, all 100% of the unit and what section 15 of the Illinois Condominium Property Act says is that if someone makes an offer, the only way it can be approved is if 75% of the percentage of ownership vote in favor of the sale.

So, notice I’m saying percentage of ownership. So, each association’s declaration will have a percentage of ownership assigned to it. That’s a percentage that’s not set by your current board, not set by management, and wasn’t set by a previous board. Those percentages are set by the developer at the time of turnover. You pay your assessments in accordance with the percentage of ownership. You vote in your annual meeting in accordance with percentage of ownership. So that’s what I’m referring to. So, in other words, it’s not simple math of if you had a hundred units, you need 75 of the 100 to approve the sale. Rather it’s 75% in accordance with those percentage of ownership listed in the declaration. So, at the state level, according to Section 15, the approval threshold is 75% yes. One of the most common questions I get right off the bat is, well, what’s this talk of 85% that I’m hearing? And within the city of Chicago in 2019, pursuant to the city of Chicago’s home rule authority, the city of Chicago actually raised that threshold percentage up. They raised it to 85%. So that applies within the city limits. In terms of a recent trend over the last six to 12 months, we’ve seen various other cities, towns, villages trying to raise their percentage as well.

So, Waukegan has done it successfully. Skokie has talked about doing it, so we are seeing that as well. But the general rule of thumb is that 75% at the state level, 85% in the city of Chicago. Why are we seeing these sales? I mentioned on the previous slide that these sales had really picked up in popularity in the last six or seven years. So initially, even though this provision had been part of the condo act for years. So, in the history of our firm, we just celebrated our 40th anniversary. I’d say prior to six to seven years ago, we only had done a handful of these Section 15 sales, and as I mentioned, we’ve now handled over 90 that have successfully closed and obviously more than that have negotiated contracts, voted, so on and so forth, and for whatever reason, not closed. So, the reason they started becoming popular, as I understand it, is because oftentimes these buyers realize that it’s cheaper for them to buy an existing asset than do ground up development. You don’t have to worry about the permitting process, building, acquiring land, so on and so forth, which can be a time-consuming process and can really, not only take time, but there’s a lot of uncertainty. You have to rely on third parties, the village, city approval, that sort of thing. So early on, buyers realized there was an opportunity here and they were offering significant premiums. I really only see these Section 15 sales proceed because of one of two reasons, either the buyers offering substantially above fair market value, or number two, because the association has upcoming capital expenditures and perhaps this is a way to avoid those upcoming capital expenditures.

So, the joke I often like to make with property managers is, it’s incredibly difficult to get 75% of the percentage of ownership to vote in favor of anything, let alone a sale. Oftentimes, I feel as though you could send an email out to all the owners saying whoever responds to this gets a hundred dollars, and you’re probably not even going to get 75% to respond to something like that but you’d be surprised. When section 15 sale discussions begin, people come out of the woodwork, and you have really tremendous turnout at board meetings. I was at a town hall meeting last night out in the suburbs for a prospective section 15 sale, and they had probably the largest turnout that they’ve had in years, if not ever. So, people are going to often fixate on price, number one. Number two is avoiding upcoming capital expenditures. In terms of the contract terms itself, everything’s negotiable. So, I was talking to a board yesterday, same meeting yesterday, where the buyers offering free rent for the owners who want to stay for three months or less after closing. So, you may be able to negotiate low lease back rates, if not free for a period of time. Various other incentives. Sometimes the buyer will cover all or some of your closing costs. Sometimes the buyer will offer various credits. I’m working with an association in the city of Chicago right now where the buyer offered an additional $20,000 to various owners who voted in favor of the sale.

So obviously that’s not only going to cover their closing costs, but it’s going to cover things beyond that as well. Other incentives I’ve seen negotiated, usually it’s monetary value, whether it’s various credits for owner occupants, people who deliver units with tenants in them, so on and so forth. We try to cast as wide a net as possible so that these incentives apply to as much of the population of owners as possible.

Underwater mortgage issues, I will talk about this more later in the presentation, but an underwater owner sometimes will view a Section 15 sale as an opportunity to get out from underneath a bad investment and what I mean by that is you can file an objection if you’re underwater on your mortgage and have that underwater mortgage balance paid off. So, I just worked with an association late last year in the city of Chicago. It was 24 units and there were four-unit owners that were substantially underwater. Their units were worth about $85,000 each and these four owners owed on average, I think in total, they owed about 220,000 across the four. So, 55,000 per unit average. They were underwater and a buyer came along and was willing to set aside money to cover those underwater mortgages and this was an opportunity for those owners to vote in favor of the sale and get out from underneath this investment that they otherwise would’ve been stuck with for years and years. I mean, maybe the market recovers and the value would get back up to that $160,000 figure or so, and maybe not. So, this was an opportunity to wipe the slate clean. Obviously in the city of Chicago, they had over 85% voted in favor. So, the super majority of owners were in favor of the sale, and this was a fantastic opportunity for owners to get out from underneath this bad investment.

Other times that we see these sales go through is it’s oftentimes when there’s a building that has a high rental percentage, and the reason I say a high number of rentals is because the building is already operating almost like an apartment building. And number two, because it can become difficult for owners to sell or refinance their unit because it’s difficult to obtain conventional financing when you have a bulk owner in the building, or if there’s a set number of– if there’s over, usually we say around 30% rentals, then it can be difficult to obtain conventional financing, which is going to affect the ability of owners to sell their units, number one and number two, it’s going to limit the pool of prospective buyers and number three, this all may have an impact on property values and possibly lowering them. After the surfside tragedy in Florida, we did see, or we still are seeing a lot more focus on the structural integrity of buildings and making sure that the associations are not simply just kicking the can on life safety issues or safety in repairs, capital expenditures that need to be undertaken. A lot of associations will do the band aid fix where they will try to fix the problem or as cheaply as possible and doing so oftentimes isn’t best for the long term of the building, the live viability of the building. So sometimes you need to rip that band aid off, do the full comprehensive fix. The reason associations don’t like to do that is because it’s costly.

So we are seeing the impact here where people, I think on boards are being a lot more cautious and want to implement that full solution, even if it’s going to be more costly and when you start to add up these dollars and cents, sometimes an association will say, Hey, we have millions of dollars in upcoming capital expenditures, we’re going to have to pass a special assessment. Are we even in a position to do that? So, I’m working with a property in the city of Chicago right now on the north side where they can’t even obtain a loan. They have millions of dollars’ worth of upcoming capital expenditures, and they actually can’t get a loan from a bank because they have all these other existing loans. They have high delinquency, so on and so forth. So, they’re voting on a Section 15 sale right now, and this may be a good opportunity, we’ll see if it passes, but otherwise their options are not great just because their hands are a little bit tied with respect to financing.

Speaker 1: KSN is committed to educating our clients and the community. As a service to our current and prospective clients, we’ve authored and compiled a number of educational resources for condo, HOA board members, property managers, landlords, and real estate professionals. If you visit ksnlaw.com/education, you’ll be able to review our educational resources, including articles, legal updates, booklets, podcast, laws, and ordinances and more. You can also sign up for the KSN newsletter where over 30,000 peers receive free industry news, legal updates and details on our upcoming events.

Speaker 2: In terms of the process as a whole, there’s various phases of the Section 15 process. I’ll walk you through from start to finish just so you have an idea of how these typically go. So, you start with the phase one, which is the sale origination and this can happen in one of two ways. The association either lists the property or number two, an unsolicited offer will come to the association and that can be in the form of someone driving by the building saying, I like the area, I like the building, let me send a letter in or an email into the registered agent. They may door drop a flyer to management or various owners to kind of pique the board’s interest in a sale and engage in some sort of a dialogue. So that’s the unsolicited route. The solicited route, or the listing of the property is the other route where sometimes an association will actually go out and hire a broker to market the property and whether or not an association can hire a broker, that’s a board decision period. So I’ll get questions from a lot of owners who say, well, how does the board, or does the board even have authority to list an association with a broker? And the answer is, yes. Signing a listing agreement is like signing landscaping contract. The association board members have the authority to sign that contract. It doesn’t bind anyone to sell. It simply gives the broker the opportunity to go out, market the property, see what offers are available, and to present those opportunities to the association. So it presents the association with options. No one’s bound to sell.

Going back to one of the first things I said, whether or not a sale proceeds is a decision of the ownership, 75% of the percentage of ownership, or 85% within the city of Chicago. So, it’s really critical that as many owners participate in the process as possible, because you all collectively as a group are going to be the ones who determine whether or not the sale proceeds, not just your board. Everyone’s going to vote right alongside the board. So whether you go with listing the property or go the unsolicited route, or I guess you don’t go the unsolicited route, that kind of falls in your lap and a lot of board members will reach out and say, “Hey Omar, I just received this letter of intent from someone, who is this person? What do we do? What sort of obligations do we have as board members? Do we have to disclose this to the owners? What do we need to do to make sure we comply with our fiduciary duty?” And that’s usually the first conversation I’ll have with the board. We’ll help educate the board, present the various options, and provide recommendation on how to proceed. Once you receive an actual letter of intent, you’ll see that it’s usually a one to two page document summarizing maybe five to eight, five to 10 key contract terms. It’s not that comprehensive of a document, it’s really just a short summary and it’s also not a binding document.

So you’ll often see where the buyers will try to get a board to sign that letter of intent. Our recommendation is that you do not sign the letter of intent. Rather, you all should evaluate it, talk to KSN or whoever your attorney is, and we will present you with options, one of which may include negotiating a contract or a purchase agreement based on the terms that letter of intent. Again, the letter of intent’s not binding. The board alone can’t vote on whether or not to approve it. So that’s why it doesn’t make sense to even sign the letter of intent, rather proceed to the contract itself and let the owners vote on the contract itself, which is going to be a lot more comprehensive than the one to two page letter of intent that you get. It’s a lengthy document, 20 plus pages outlining everything you’d ever want to know about the sale and how it would work from start to finish. In terms of phase two, phase two comes into play after you have a contract. The association’s, attorneys, KSN have negotiated a contract the best of our ability, and we present that contract to the owners. So we present it to the owners and then a critical piece comes into play where there’s an education, you see it at the bottom of the slide, education, education, education. It’s absolutely critical, in my opinion, for there to be education and transparency. Education because when a lot of owners bought their unit, they probably had no idea that it was even possible for their units to be caught up in a Section 15 sale or subject to a Section 15 sale where a vote of the ownership, a full vote of the ownership, would determine whether or not they have to sell their unit.

Because if the requisite threshold is reached, whether that be 75% or 85%, all owners, all 100% of the owners would be bound by the terms and have to sell. So for that reason, it’s really important to discuss this, explain to the owners how it worked. So actually, I mentioned I had a town hall out in the suburbs, western suburbs yesterday where we were doing just that. We had sent the owners a copy of the contract about a week or two before the meeting that took place yesterday, and we turned it into a question and answer session. I sat up at the front of the room. I provided a brief summary, or I guess it was a fairly detailed summary of the contract and its terms. I covered a lot of topics that I thought questions would come from, you know, the owners would have questions on and then we turned it into a question and answer section. So we had there– I think we probably had close to 60 to 70 people in the room and another 25 on the Zoom. So we were able to just have a full and open discussion so that each and every person could understand the terms of the Section 15 sale. At the end of the day, I’m not here to make a recommendation on whether or not the sale should proceed. We’re just the attorneys. We provide legal advice, we ensure that the association properly follows the formalities that need to be complied with to ensure legal compliance. So I’m not going to tell anyone to sell or not sell.

At the end of the day, my goal is to give owners all of the information that they need so they can then in turn, make an informed voting decision and I encourage every owner to do what’s best for them in their individual capacity. I can’t tell them what their individual finances are like how much they paid for their unit, what sort of upgrades they made to their unit, if any. So I encourage everyone, if you’re faced with a Section 15 sale, talk to as many people in your life as possible and then do what’s best for you. Evaluate your individual situation. So the town hall meetings are really critical to reaching owners and explaining this. It’s unfair for the owners to expect either the Association or Property Manager or the board members to be well versed in how Section 15 sales work. They may have had a conversation with KSN, but it’s not fair for anyone to expect them to be an expert after half hour, one hour call with our office. So that’s where we come into play, where we’re serve as an educational resource for everyone, property managers, board members, unit owners.

Voting process, depending on the size of the building, if it’s a smaller building, we’ll call it 10 units or less, that can happen fairly quickly where everyone can be reached and perhaps owners can return their votes within a week or so. In a larger building, it may take more time. The reason I say that, and by more time, I mean it could take a month or longer, and you may have owners in a large building that are completely on autopilot where they pay assessments automatically. They live out of the country and they don’t read any emails pertaining to the association whatsoever. They collect their rent check, they pay their assessments, and they call it a day. We want to, and should make every effort to reach every single person. When we’re talking about the sale of someone’s home, it’s important to reach every single person and give them an opportunity to ask questions about the sale and make sure they understand it fully. In terms of the contract itself, so I alluded to some of the buyer incentives, which are one of the items on the slide.

People are often going to fixate on the purchase price, right? The dollar figures is what people are going to gravitate towards the most. I mentioned the leaseback terms and the rental rates where everything’s negotiable. Sometimes you can negotiate free or discounted rent, whether that be for one year, five year, it really depends. Contract to contract due diligence period. There’s almost always, I’d say 99% of the time there’s a due diligence period where the buyer can come out to the property, inspect it, inspect individual units, get up on the roof, check the building mechanicals, review association financials, just to make sure, similar to when you’re buying or selling a single family home, you have a due diligence period to truly evaluate the sale. Same thing here. And the buyer’s not going to come and do due diligence prior to the sale being approved because it’s a decision of the ownership. There’s not going to be certainty. So the buyer’s not going to commit to spending all this time and money up upfront when they don’t know whether the owners are truly even going to vote in favor of a sale or not.

Earnest money. So the buyer will put up earnest money. Usually there’s two different deposits, a first deposit and a second deposit. First deposit if and when a vote is approved by the owners. Second deposit after the conclusion of due diligence. Buyer incentives, again, we touched on that. Sometimes the buyer will offer– I think the largest incentive I’ve seen offered for owners that voted in favor was $20,000. I’ve seen 17,500, I’ve seen 10,000, 3000. So all sorts of incentives. Again, if there’s one thing you take away from this slide, I would say it’s that everything is negotiable. Credit for expenditures. So this goes to the category of associations that may be facing upcoming capital expenditures. I’m working with an association right now where they have a garage project that cost them 2.75 million. The buyer agreed if the sale was approved to cover the cost of that 2.75 million garage repair. So that was just something that these owners took into account when they were voting on the sale. That’s probably an extreme example. I’ve seen other buyers. Right now I’m working with an association that has a roof issue where the buyer said, no problem, I’ll take care of the roof if this sale is approved. That takes that item off of the board’s to-do list where they’re going to have to go out, obtain a loan, possibly pass a special assessment. A professional buyer’s just a lot better equipped. They have their relationship, they don’t need to deal with the formalities of the condo act to get these projects taken care of as opposed to you, which may be a volunteer group of board members.

Responsibility for fees and costs. Traditionally, the seller will pay their usual costs and fees unless something’s been negotiated. Sometimes there’s no broker involved whatsoever. Sometimes the buyer will agree to cover legal fees or closing costs on behalf of the owners. Again, everything is negotiable. Phase three, sale approval occurs if and when the owners approve the contract. At that point in time, we call that the effective date of the contract, and all owners would be bound by the terms of the contract and be bound to sell and then the due diligence period would begin that I was referring to just a moment ago. Unless and until they’re through due diligence, the buyer has the ability to walk away from the transaction.

So again, similar to a single family home, a buyer may make an offer and they come in and they inspect the roof and see that it needs to be torn off completely. Perhaps the buyer walks away and terminates the contract during the due diligence period. So that is a possibility whether you’re selling a single family home or whether you’re participating in a Section 15 sale. The objection period, this is one that’s really important and I probably give a full seminar on the objection period alone. Under the Condo act, there’s two types of objections that owners can file. There’s the fair market value objection number one, underwater mortgage objection number two, I touched on the underwater mortgage objection when I was talking about the property in the city of Chicago where the owners were underwater by over $200,000. So under the condo act, an owner can file an objection saying I’m underwater on my mortgage and have that underwater mortgage balance paid off from the sale. What do I mean by underwater? If you call up your mortgage company and ask them for a payoff letter, they’ll tell you how much you owe on your mortgage. Let’s use an example. If I call my mortgage company up and say, can you send me a payoff letter? And they say you owe $150,000 and I’m presented with the section 15 contract where my gross sales price is a hundred thousand dollars, that would mean I’m underwater by $50,000, right? I owe 150,000, I’m getting a hundred thousand dollars from the contract. And note I should have said this earlier, everyone’s purchase price is listed out as an exhibit to the contract. So if you go through the process of a section 15 sale, there’s one contract governing all units. The purchase price for each and every unit is listed in that contract. That’s an example of someone who’s underwater.

Here’s where the misconception comes into play. I’ll have some owners who say, Hey Omar, I’m underwater because I bought my unit all cash for $150,000 and now I’m only getting a hundred thousand. That owner is not underwater because they don’t have a mortgage. So the underwater mortgage objection is in relation to the outstanding balance on the mortgage. If and when an association gets through the due diligence period, there’s a bulk closing. Unlike when you purchased the unit, when you purchase the unit, you probably went to the title company on the day of closing, you sat down in a room, signed all the documents and called it a day. Here, whether it’s three units, 10 units, 20 units, a hundred units, it’s not realistic to expect everyone to be able to carve time out of their schedule, go in person to the title company’s office and sign their documents in person. So for that reason, we have a bulk closing. We handle these closings all remote. The owners actually don’t need to go physically to the closing. We’ll have owners pre-sign their closing documents and what I mean by that is they’ll sign the deed, the affidavit of title, the bill of sale, so on and so forth. We will have them do that prior to the actual closing date so those documents can be reviewed by the buyer and then funding can occur on the actual closing. So we can actually close and fund, the title company will fund and send the proceeds to each and every one of you, whether that’s one of you, three owners or a hundred owners.

Objection. So again, I touched on the underwater mortgage objection. The fair market value objection is the second type of objection. Again, this is all set forth in section 15 of the Illinois Condominium Property Act and the short summary of the fair market value objection is that it involves a panel of three appraisers, right? So someone would file a fair market value objection if they think that the price offered for the unit in the contract is less than what the unit is worth on the open market. So that owner could file a fair market value objection and have a panel of three appraisers who would determine what the value of the unit is. For example, if the panel of appraisers determine the prices worth is higher, then it’s set forth in the contract that owner gets the higher price. If it’s lower than set forth in the contract, the owner gets the lower price. There’s some risk involved. That’s why I do like to tell owners to just be aware of that. Do your research, see what is best for you. Talk to real estate agents, talk to appraisers, talk to professionals before you file an objection to see if this is something that you might be interested in. In terms of the timing, the timing component to be aware of is that the time period to file an objection is within 20 calendar days of The vote.

So what I mean by that is before a sale is approved, it’s premature. The window to file an objection hasn’t even open. The window opens when a sale approved and extends for 20 calendar days thereafter. This is not some sort of requirement that KSN imposes. It is actually set forth in section 15 of the Illinois Condominium Property Act. Underwater mortgage objection, again, we talked about this already. I think I got ahead of myself when I was just describing what truly qualifies as an underwater mortgage balance and this law changed January, 2019. When they changed this law– and if you think about it, it makes sense because prior to this language being modified, you could have this scenario where 75% or 85% of the owners vote in favor of a sale. And let’s say I’m an owner and I’m underwater, and I would otherwise, prior to the law changing, I’d be forced to come up with that underwater mortgage balance and pay it out of pocket to sell just because my fellow owners voted in favor of a sale.

So from a business perspective, it didn’t make sense. That’s why the law was changed to account for that and to allow for owners, you know, it’s almost like a get out of jail free card, get out from underneath a bad investment without being unnecessarily penalized and having to come up with that money out of pocket. Fair market value objection, same thing. Here’s some of the quotation from the act in terms of the language. Again, the takeaway from this slide is that a panel of three appraisers would determine what the unit is worth and how much that owner were to get for the property as a whole by majority vote. So you need at least two of the three appraisers to agree on pricing. Role of the parties. So as you can see, there’s a lot of parties involved in order to make a transaction proceeds smoothly. Even in a single sale where you have one buyer, one seller, you may have title company, you may have brokers, you have multiple attorneys, here, multiply all of that. You have possibly tens or hundreds of owners. You have board members, you have legal counsel on both the buyer and the seller side. The lender has an attorney as well. The association may have a broker, the buyer may have a broker. There’s a closing team that KSN has. We have a full closing team to assist with the sale of the units. There’s a title company with underwriters and obviously we have the property manager.

So all of these members are critical parties in order to ensure that a section 15 sale proceeds smoothly. Each of them plays a role, a critical role in order for a sale to proceed because there are a lot of moving parts. What I like to say to board members that reach out is to assemble your team. If you’re going to venture down this path, assemble your team, get your attorney in place, have a broker, if any, know who all of the parties are and then lean on them for their strengths. As a board member, you can’t go through this alone and no one should expect you to. Lean on these other parties and professionals and assemble that team around you to help you navigate the process. That’s what we’re here for, KSN. That’s what these other parties are here for as well. Here’s one of the most common questions I get, and this is actually one of the questions I have here in the Q&A. When is a vote of the ownership required? I’m going to go through each of these and I’ll refer to you the case law that governs this particular topic. Is a vote of the ownership required to consider Section 15 sale? The answer is no. Is a vote of the ownership required before the board can even talk to a broker? The answer is no. What about to execute the listing agreement with the broker? Again, the answer is no. Do you recall my comment earlier when I compared signing a listing agreement to a landscaping contract?

Again, the board’s not going to consult with the owners and ask all the owners whether or not they approve of signing a landscaping contract with ABC landscape. That’s within the authority and the purview of the board to vote on something like that. Vote on the sale of the property, yes, the board would need to conduct a full vote of the owners. Remember section 15 is a decision of the owners either 75% or 85% based on percentage of ownership. Vote on amendments to the contract, no, that’s a decision to be made by the board, with the exception being if there is a material or significant decrease in the purchase price. At the bottom here, I say do not confuse section 18 of the act with section 15 of the act. I’m going to go to the next slide and continue to talk about this very topic. A lot of owners, including at the meeting I was at last night, will cite a provision of the condo act oftentimes section 18 or they will simply cite articles they’ve read online saying that the board cannot, they’ll pound the fist on the table, the board cannot even talk about a section 15 sale before they conduct a vote of the ownership. And the answer to that is no, those owners are incorrect. And KSN has been providing this advice for some time that here’s what the board can do without conducting a vote of the ownership. The owners need to be consulted and they are involved in the vote of the sale of the property as a whole, but not the steps leading up to it. Signing with a listing, signing listing agreement with the broker, discussion section 15 sale, so on and so forth. And there is actually an appellate court case from 2022 that speaks to this very issue where a group of owners filed a lawsuit against the association saying that the board was required to obtain the approval of the owners before the board even contemplated negotiating a Section 15 sale. And by failing to do so, they had violated the Condominium Property Act. This is an appellate court case which is binding law on all associations in the state of Illinois. It’s good law and it says the association does not have the duty under the condo act to obtain the approval of the owners prior to investigating or negotiating a bulk sale of the property. So this is a tremendous case to know if you are contemplating a sale and it’s one that oftentimes comes up when I am discussing what a board should do or can do when they receive an offer.

In terms of KSN’s role, I see this question here in the chat. I should have led with this. We are an association law firm. We represent condominium association’s, homeowners associations, townhome associations. We do not represent any buyers. We are very cognizant of that. So there’s no perceived or real conflicts ever. We represent associations only period. We are here to help you all as associations navigate this process or any of your other association needs. I mean this is just a part of my practice. Other component of my practice is the general corporate work, whether it be talking to you about collections amending, restating your declaration, helping you review a contract, that sort of thing. In terms of is whoever voted yes or no visible to other owners? The answer to that question is during the voting process, no one can see the vote. Similar to in your annual meeting when you’re voting, the votes are not viewed and you can’t review them while voting is open. After a vote is concluded pursuant to section 19 of the condo act, yes owners can request to review the ballots and proxies that’s in section 19 of the condo Act and then they can see after the conclusion how people voted.

What is considered a significant decrease in offering price. I think that would be treated on a case by case basis in relation to the purchase price. So there’s no bright line rule where I can say, you know, for example, $10,000 per unit, that’s a significant decrease. I think I can say that right off the bat. Is a hundred dollars per unit decrease significant that would trigger a revote? Unlikely.

Obstacles in a deconversion sale and they’re going to arise. You know, there’s going to be perceived or real emergencies that come up during the course of a Section 15 sale. That’s why it’s really, really important to have an experienced team surrounding you because the attorney will earn its worth. When you face one of these challenges that’s inevitably is going to come up. Same thing with the title company. You need them to be flexible, have a firm understanding of an issue and how can they impact the sale as a whole. For example, 99% of the time the buyer only wants to close on 100% of the units at once period. They don’t want to close in waves, they don’t want to close on whoever’s ready. So part of the attorney’s job is to deliver 100% of the units to the closing table so they’re ready to close and sometimes that’s easy, oftentimes an issue’s going to come up. Maybe an owner has an IRS tax lien, maybe an owner is in jail, maybe an owner’s in rehab, maybe an owner lives across the world. We face all of these situations. We’ve had owners sign on six different continents. We’ve had owners sign from prison. We’ve had owners sign from rehab. Believe it or not, it’s more difficult to get in touch with the owner in rehab due to confidentiality and privacy than someone who is in prison. But we’d be able to track down all of these owners.

A real life example of something that I was dealing with today is an owner who was sentenced for a crime about 30 years ago, a violent crime and has had no involvement with the unit for 30 plus years and we needed to get someone to sign the closing documents on behalf of that unit. So fortunately we have a good relationship with the title company and they were able to come up with a creative solution that works so that that last unit can be conveyed even though this person is less than available due to other life events.

IRS taxing, that’s not overly challenging, it’s time consuming. That’s the type of an issue that comes up. You may have an owner who has a significant personal judgment against him or her. That in the context, if I were to go out and sell my unit tomorrow wouldn’t be a big deal. But if we’re selling as a group where all a hundred percent of the units have to be conveyed and my next door neighbor has this issue, or my next door neighbor is going through a contentious divorce, or my next door neighbor has someone on title to their unit that’s deceased, these are all the types of units are the issues that would have to be addressed at the time or prior to closing so that the association and all owners can deliver a clear and marketable title. If there’s no other takeaway for title clearance component, it’s really important to have a strong team around you so you can resolve all of these issues in a timely fashion because all it takes is one item to hold up the closing.

Association issues, the association may have pending litigation, the association may have owners who are delinquent, the association may have contracts that it needs to deal with that either terminate or union contracts to assign. Just keep in mind the day-to-day affairs the association are going to continue, but at some point all of those are going to have to be wrapped up nicely with a bow and delivered in a clean package to the buyer at the time of closing. Some issues that associations have been picking the can on for years may come to light and have to be addressed, ultimately, in order for a sale to proceed. Litigation, that would be something that appears untitled. So we need to make sure that there is clear and marketable title, meaning no litigation out there. Uncooperative owners, you may have an owner who digs in and says, I’m not paying my or I’m not going to assign anything and in that case, the association has many tools in its tool belt that it can use specifically with consulting with their attorney. They can levy fines, they can send demand letters, they can charge back legal fees, they can find owners and ultimately they can file litigation if need be. And we’ve had court in Cook County in McHenry recently where the judge order that the uncooperative owner execute their closing documents within three days.

I was dealing with one of those situations today, in fact, three days for the owner to sign their documents, otherwise someone was given authority to sign for them. So that all goes back to the topic of assemble that strong team around you. If you all go down the route of a section 15 sale and as sales approved, as long as all the proper formalities are complied with, everything should be in order so that any uncooperative owners are violating not only the terms of the Section 15 sale, but the declaration and the contract and they can be charged back for the legal fees incurred. So not only are they going to be forced to convey their unit to comply with the law, but all of the legal fees incurred can be charged back to that uncooperative owner. So again, if you have an attorney who just does a real estate closing and they think they can handle this sale, they may not be able to when you add these layers of complexity in terms of title clearance, the various issues you may face, having to have that background knowledge and familiarity with the condo act and what tools you have to compel owners to sign. Out of the country, not a problem. Owners don’t have to fly in town to sign their closing documents. You can sign your closing documents remotely from wherever you are in the world. 22.1 disclosure, there are certain things and we can advise board members and property managers about what needs to be disclosed and when in the 22.1 disclosure.

Next here, current deconversion landscape. So we talked about city of Chicago, the approval percentage is 85%. We’re seeing more potential buyer shop in the sense that as you see more articles about these sales, I think people realize this is a potential opportunity in terms of qualified buyers. I’d say there’s less just because these can be challenging and if you have a buyer who’s traditionally an apartment buyer, they may not be used to having to deal with this or understand that they can’t just get a quick answer from the board or the seller needs to hold a board meeting and contemplate things in an open board meeting as opposed to picking up the phone and saying, Hey, apartments building seller, give me a yes or no answer. So that’s just something to account for. Covid 19 impact, a lot of impacts, whether it be pricing, whether it be on how documents were signed and Illinois is a little bit archaic in the sense that we liked our wet signatures, our original signatures in Illinois. That requirement was relaxed a little bit during covid 19 so that we could have more remote and virtual signing, which I think has increased the efficiency. In terms of the signing, we usually would have KSN come out to your property along with title company representatives and underwriters and notaries so we can meet with owners to sign their closing documents, walk them through any and all questions that they may have page by page.

Threading legal challenges. So these are things that have come up probably in the last maybe 12 to 24 months. We talked about the ability to approve the listing agreement. So that was that 10 East Ontario case, private residences of Ontario Place that I referenced a few slides ago. The appellate court case from 2022. Same thing with the second bullet point, board’s ability to approve the investigation of a Section 15 sale. Lastly, the proper method for the appraisal of unit. This has become a very contentious topic lately because how do you appraise a unit? Do you appraise it as a condominium unit? Do you appraise it as an apartment unit? Do you appraise it as a portion of the building as a whole? My position on this is that you appraise it as a condominium unit because that is what the current status of the unit is. Selecting legal counsel. Again, I talked about KSN and the importance of assembling the team. Here, I’m going to focus just on the legal side because that’s what I do, but it’s incredibly important to have competent council and a team supporting that council. So when you hire KSN, you’re not just getting me or any of the other attorneys in our department, you’re getting a full staff of closing team members, paralegals that can assist from start to finish. We like to publish a weekly update email to all owners with all questions and answers received that week. We understand that there’s high volume, high number of questions. We found that publishing the list of questions and answers to all owners is an effective way to communicate answers to all owners as opposed to me responding directly to an owner and only that one owner getting the benefit of the doubt.

Again, with KSN, since we have so many services we can provide under one roof, we’re able to assist when any issue comes up during the course of the section 15 sale and you’re going to come across litigation issues, there’s going to be landlord tenant issues, collection issues. In terms of anyone who has a balance on their account, those assessments would be collected at the time of closing. In terms of other contract terms I didn’t touch on earlier, and here’s a question in the chat, what happens to the operating account and the reserve account for the association? Do the funds go back to the owners? The answer is yes. 99% of the time the funds go back to the owners and are distributed in accordance with percentage of ownership. Do the owners still look to pay the association dues until the closing date? The answer is yes. It’s business as usual until the closing date. I didn’t touch on this, but this is two of the most common questions I get, which I’ll focus on quickly. What happens to owner occupants? What happens to tenant? Owner occupants 99% of the time are given the opportunity to stay and lease back their exact same unit after closing. The only instance I know of where that was not the case was a property last year out in Elmhurst where the building had a tarp on it and it was torn down after closing. Everyone knew it was going to be torn down and so there obviously the owners could not lease back their units after closing.

Tenants’ owners with existing leases, those leases will be assigned to the buyer as long as those lease terms are reasonable. What I mean by reasonable is at around fair market value, one to two years in length. After the sale, if there’s a lawsuit against the board years on down the road, will the D&O insurance policy cover us? The answer is that our recommendation is that an association obtained a five-year directors and officers hail policy. And the reason we say five years, because that’s the statute of limitation on breach of fiduciary duty claims. So, if you obtain such a policy, which is what we recommend our clients do, then the board is cover. Is the purchase price of a unit determined by the contract or by the percentage of ownership? I would say 90 to 95% of the time it’s determined based on percentage of ownership, simply because that’s seemingly the most fair way to distribute the price as opposed to– we never want the board to be in the position of trying to assign prices to units because that’s going to open up allegations of the board to allegations of favoritism. Why did you give this unit more than they otherwise should have? So, to eliminate that risk and exposure, most associations will simply go based off percentage ownership, unless there’s some obvious reason that the prices should be allocated differently, maybe the studios are undervalued for whatever reason. If that’s the case some associations will say, we’re going to assign this value for studios. This for one bedroom, so on and so forth and here’s the math to back it up where they have hard numbers in place to support that.

Here’s a question. You mentioned some things that the buyers look at in choosing a property to deconvert. In your opinion, do these buyers look at Fannie Mae’s new blacklist? Does that make a property more attractive? And so, this is a really great question and a recent trend where this blacklist has been in the news recently. And I would say yes, that probably does make an attractive candidate, not just for buyers, but for an association as well. Because if they’re going to be on this blacklist, they’re going to really feel the impact of that. It may not be right away, but that may make this something that an association on that quote unquote blacklist may want to consider as an opportunity to get out from underneath this investment and just wipe the slate clean. I’m not saying it’s a bad investment or not, I’m just saying it’s got to the point where the day-to-day affairs of the association are impacted, so they may want to consider a section 15 sale. Does an owner have to vote no to be considered for the fair market value adjustment and where do the additional proceeds come from if the appraisal is higher than the offered price? So, there’s two components to that. So, an owner needs to either vote no or abstain from voting to file a fair market value objection. Where’s the money come from? It depends, according to the condo act, it comes from the price itself. We try to negotiate so that the buyer will set aside a pool of money to cover those costs. But the bottom line is that is something that can be negotiated.

Does the association have to disclose an unsolicited letter of intent to the owners? The answer is it depends. It depends on whether the offer is reasonable. If the offer is reasonable, meaning it’s at or above fair market value, yes, we recommend disclosing that to the ownership as a whole, but there may be some other factors involved.

Please reach out to us. That’s one of the primary reasons we get reached out to is that an existing client will say, hey, what do we do here? And they set up a call with myself or one of the other attorneys in our office and we will give you advice based on that specific letter of intent and help present you with options. Thank you all for attending this evening for your patience. Again, I’m Omar Malik. Feel free to reach out to me by phone or email. We’ve handled, successfully closed, over 90 section 15 sales on behalf of the associations we represent. We’re here to answer your questions. Our resource, whether you’re a board property manager, we have a dedicated team here to assist and we would love to be able to help guide you and navigate through this process together. So, thank you all for the time this evening. Look forward to hearing from you. Have a great evening everyone.

Speaker 1: That was KSN attorney Omar Malik. If your condominium, homeowner, or townhome Community Association has any legal questions, do not hesitate to contact our law firm. 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 since 1983. If you’d like to reach Omar or any of KSN’s experienced attorneys, please call 855-537-0500. You can also visit ksnlaw.com. Complete the contact form and send us a message. Thanks for listening.

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