As the demand for rental units has increased over the last few years, the transactions commonly referred to as “condominium deconversions” have become more commonplace.
Deconversion transactions involve an investor (ex. real estate developer) who purchases all of the units in an association from the individual owners, and then transitions or “deconverts” the property from condominium units into apartments.
While motivations are varied and unique for each association, below are four factors that can motivate an association to move forward with a condominium deconversion.
1. Deferred Maintenance
As buildings age, they may need extensive and costly improvements. Facades, roofs, elevators, and mechanical systems can show signs of degradation. These deferred maintenance issues can be particularly impactful in properties built pre-1970s.
If the community association’s reserves are insufficient to address upkeep issues, the association’s board is put in a tough position. Along with financial concerns, deferring much-needed repairs can pose significant safety risks.
Increasing assessments, levying special assessments, or taking out a loan can be viable options to address a funding gap. However, residents may be unhappy or unable to afford their share of the required improvements.
In these cases, a condominium association with deferred maintenance issues may be attractive to an investor who is financially situated to undertake expensive repairs and modernize the building’s distressed infrastructure.
2. Financial Issues
Unfortunate circumstances have landed many communities in dire financial situations.
National crises including the 2008 housing bubble and the coronavirus pandemic have impacted many unit owners. Association members who have experienced reduced or inconsistent income may now find it difficult to afford association assessments.
Even proactive associations that budget for regular maintenance projects can be blindsided by a combination of emergency situations that result in low reserve funding or high delinquent assessments.
3. Low Resale Prices
In some regions, condo buildings have not seen the prices of their units fully recover since the mid-2000s. With a reduced market value, disappointed unit owners may consider a deconversion as a way of getting a decent return on their investment.
4. Low Owner Occupancy
In some condominium associations, there may be a high proportion of renters compared to unit owners. Mortgage lenders often have minimum owner occupancy rates for condominium mortgages to protect the resale values of their investments. It can also create problems for associations by making it more difficult to obtain quality hazard and liability insurance.
Deconversions are subject to state and local laws and ordinances. For example, the Illinois Condominium Property Act indicates that for most Illinois associations, if 75% or more of the ownership approves the sale of the units, the action is binding upon all unit owners. In the City of Chicago, the threshold approval for a vote is 85% of the owners.
Once the sale has been approved at a meeting of the owners, it becomes “the duty of every unit owner to execute and deliver such instruments and to perform all acts as in manner and form may be necessary to effect such sale”.
In other words, all owners are required to execute and sign the sales documents or face being in violation of the Illinois Condominium Property Act.
When discussing deconversions, it is important to understand the full picture. A board must address a myriad of important governance issues including written objections, unpaid assessments, informational meetings, contract distribution, and voting.
Deconversion transactions are complicated, challenging, time-consuming, involve several parties, and encompass numerous legal considerations. Proper preparation, continued communication, and guidance from legal counsel can provide better understanding and outcomes during the deconversion process.
If your association has been approached by an interested buyer, your association is in the middle of a potential sale or de-conversion, or you are a buyer interested in converting income property into condominiums, please contact KSN to discuss your legal needs.
Our dedicated condo deconversion team has the full suite of resources and services needed to successfully complete the complex deconversion process.
Visit www.ksnlaw.com or call our law firm at 1-855-537-0500 to get started today.
Since 1983, KSN has been a legal resource for condominium, homeowner, and townhome associations. We have four office locations, serving hundreds of clients and thousands of communities throughout Illinois, Indiana, and Wisconsin. Our attorneys are also licensed in Arizona, Florida, and Missouri.
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