Common Ground: Windy City Shuffle
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36 ❘ COMMON GROUND JANUARY FEBRUARY 2019 hether he likes it or not, condominium owner Bob Olsen has been swept up in Chicago’s “deconver- sion” craze. WThe retired exchange broker had just moved into River City Condominiums in 2015 when he learned the company that owns the commercial segment of the mixed-use complex wanted windycity to buy its 450 residential units and turn them all into apartments. Under Illinois law, a buyer can effectively force the sale of a large condominium building if 75 percent of the association approves a bulk sale, provided the declara- tions do not call for a higher margin of support. “That was news to me,” says Olsen, who purchased a total of three condominium units at River City, a futur- istic Bertrand Goldberg- designed development in shufFLe the South Loop he had long admired. “I think it’s basically a license to steal property. I know those are strong words. A series of condo ‘deconversions’ It just invites corruption, in my view.” in Chicago is beginning to draw Olsen voted against mul- tiple offers, which report- attention, both good and bad. edly were in the $90 million range. In October, he was among a group of plain- By Mike Ramsey tiffs who sought to apply the brakes when it was Photography by Patsy McEnroe announced buyers had finally received the necessary level of support. The condominium board countersued to make CONVERSION CONTROVERSY. Multiple offers have been made to buy out owners of River owners comply with the City Condominiums, a mixed-use complex completed in 1986 along the South Branch of the Chicago River, and convert the community into apartments. If the conversion goes through, it purchase. A settlement was would be one of many to occur in the Windy City in recent years. pending at press time. JANUARY FEBRUARY 2019 COMMON GROUND ❘ 37 BITTERSWEET SALE? Ninety percent of condominium unit owners in 732 Bittersweet Way, in the city’s lakefront neighborhood of Buena Park, approved the offer of $16.2 million to convert the building into rentals. Owners stood to make double the market value for their one-bedroom or studio units. MOST DECONVERSIONS have gone been converted into comparatively smoothly, without legal condominium units in action or public outcry. In fact, owners the early 2000s but was typically have received a financial pre- morphing back into mium to part with their condominium rentals. units. This unusual cycle in Chicago has “This building had been driven by a demand for multifamily a huge number of rent- rental stock and the aforementioned Illi- ers. We were almost at nois law that sets an attainable trigger to 50 percent who were acquire an entire condominium property. just investors, and they Now, the question seems to be: How were looking for an long can this continue? exit,” Goss says. “The low-hanging fruit has pretty Interra Realty much filtered through the market,” says fielded proposals from David Goss, co-founder and manag- interested buyers and ing principal of Chicago’s Interra Realty, took a $16.2 million which has brokered at least 10 bulk sales offer to owners. Asso- worth nearly $100 million on behalf of ciation members stood to make double member at the Bittersweet Way property, condominium associations since 2015. the market value for their one-bedroom or told Crain’s Chicago Business in 2017. “The secret’s out, but that doesn’t matter. studio units, Goss says. About 90 percent of There are still a lot of deals happening.” the ownership approved of the sale, he says. UNCOMMON OCCURRENCE, He says his firm’s expertise in the real- “When we valued it as commercial ONCE estate niche began with an inquiry about real estate we realized that, ‘Hey, this is For years, the termination of condomin- a condominium building in the lakefront more than what the individual build- ium associations was rare, anywhere. Per- neighborhood of Buena Park. The 101- ing units have listed for in five years,’ ” haps the most frequently cited anecdote unit structure at 732 Bittersweet Way had Lexia Krown, a condominium association was the demise of Naranja Lakes, a South MCENROE PHOTOGRAPHY INC. © PATSY 38 ❘ COMMON GROUND JANUARY FEBRUARY 2019 OVER THE RIVER. Bob Olsen is among a group of River City owners who filed a suit to halt the sale of the complex. The community’s commercial owner reportedly has offered residential owners around $90 million. Among the significant capital expenditures River City owners face is a leaky atrium roof. Florida condominium association that was leveled by deadly Hurricane Andrew in 1992. The Illinois Condominium Property Act dates back to 1963. State lawmakers may have had catastrophic events in mind when they included a bulk-sale component, sometimes referred to as “Section 15.” “I think when the Condo Act was ini- tially contemplated, the law didn’t imagine that some entity could create an offer that would be so lucrative that existing owners would jump at the chance to get out,” says Chicago attorney Howard S. Dakoff, a fellow in CAI’s College of Community five years, it’s switched to opportunistic may require significant capital expendi- Association Lawyers (CCAL). buyers, with the trend kind of hitting a tures that owners prefer to avoid. Olsen Dakoff, who has worked on several fever pitch in the last two years.” notes his concrete-facade building, com- deconversions, says the current Windy New construction of rental property, pleted in 1986 along the South Branch of City craze has its origins in the recession especially Class A stock around Chicago’s the Chicago River, has a beautiful indoor of a decade ago. At that time, some newly Loop, has been healthy of late. Many atrium that, unfortunately, leaks. completed condominium projects were deconverters seem to be looking in outly- “There are always buckets in the transformed into apartment buildings out ing neighborhoods for older condomin- atrium. It’s not dangerous or anything, I’ve of necessity (Florida also saw a burst of ium buildings to acquire and upgrade, if just learned to live with them,” he says. deconversions for the same reason.). they can do it at a cost that is reasonable As Class B rental stock, these “Banks took back the bulk unsold to them. revamped condominium buildings can units,” says Dakoff, a partner at Leven- Like River City, many of these sought- still draw lucrative rents as apartment feld Pearlstein. “Developers started to after Chicago properties started off as towers. Potential tenants range from buy those units and thought, ‘If I own 95 apartment buildings before being con- young professionals to empty-nesters who percent of the units, why don’t I buy the verted into condominiums under previous wish to live in the city but don’t want to other 5 percent and deconvert?’ In the last market conditions. These structures now take on a mortgage. JANUARY FEBRUARY 2019 COMMON GROUND ❘ 39 RENTAL DEMAND. The deconversion trend in Chicago has been driven by a demand for multifamily rental stock. River City’s prime location (seen here) could draw lucrative rents from young professionals and empty-nesters who wish to live in the city but don’t want to take on a mortgage. Suburban condominiums also have drawn interest from real-estate investors. A company offered $42.2 million for River Trails Condominiums (opposite page, below) in northern Chicago suburb Prospect Heights. The deal was scuttled by a lawsuit. Dakoff says buyers in the transac- In many cases, Goss says, building the sale of River City Condominiums tions he’s worked on have been real estate buyers will agree to lease to residents for claimed some owners were being offered investment trusts, or REITs, while Goss up to a year at a preferred rate. side deals to secure their support. says his firm has dealt with established “There are some landlords who don’t “I had a lot of voicemails, let’s put it companies that own and manage large want to have these holdovers, these cheap that way,” Olsen says, when asked if he apartment buildings in Chicago and rents, but that’s the price you have to pay. was approached. nearby suburbs. It’s a deal-sweetener,” he says. His group engaged Bloomberg, who “You’re looking at all sorts of multi- There are other potential sticking points. typically has represented condominium family investors that are looking at new Some condominium unit owners may have boards or developers. The attorney declined vehicles by which to obtain assets for their invested significant money in their resi- to discuss the case or the pending settle- portfolios. It’s just a new line of stock that dences and insist they deserve more money ment between his clients and the River maybe they weren’t thinking about years than a neighbor who hasn’t. Goss says he City board, but he stressed transparency is ago,” says Chicago lawyer David Bloom- tells these owners, simply, “You need to look paramount in deconversions: “Especially berg, principal at Chuhak & Tecson, who at this in a vacuum. Are you getting enough under the statute in Illinois, where you’re has worked on several deconversions in money to make you happy?” looking at a high number of unit owners the past four years. “(Associations) get a lump sum offer, who will be forced to sell their building Not surprisingly, Goss says, the easiest and it’s split by percentage ownership,” he against their stated will.” properties to acquire have been buildings adds. “Because if you start doing some- That, of course, is the obvious flip where there is a significant percentage of thing else, it’s a can of worms, and you’ll side of deconversion: Somebody usually investors.