Condo deconversion is a undeniable trend in Chicago. That’s why over 150 people came out to the Montgomery Club on October 18, 2018 to hear expert speakers discuss the ins and outs of this often complex, often lucrative real estate practice at the first annual Deconstructing Deconversion conference.
Howard Dakoff, community associations practice group partner at Levenfeld Pearlstein, LLC delivered the keynote address. He gave a “Deconversion 101″ in preparation of the more detailed panels to come. One point he made was that the investors need to be transparent with the condo owners if they want the deal to go through smoothly.
“All of you out there say that real estate is about location, location, location,” Dakoff said. “In a deconversion, it’s communication, communication, communication.”
State of the deconstruction market
The first panel, moderated by Dakoff, looked at how we got here and the state of the market. Joining the panel were Bill Baumann, principal at Monarch Realty Partners; David Bloomberg, principal at Chuhak & Tescon, PC; Sean Connelly, director of investment brokerage at 33 Realty; Brian Livingston, vice president at Draper & Kramer and Joe Scheck, CFA, director at Essex Realty.
All panelists agree that the deconversion trend will continue in 2019, though they disagree beyond that into 2020 and 2021. As to the where, these transactions are happening in neighborhoods and suburbs throughout the market, though the bigger deals are occurring closer in to the city center.
Communication with the HOA and the condo owners was a recurring theme for the first panel of speakers. That starts with setting expectations early for everyone involved and, when possible, identifying the parties in the condo building who can help deliver that message.
“The first thing I do is tell boards we are going full transparency,” Bloomberg said. “Establishing a sense of transparency, being available to owners and setting up a legal situation that is airtight are important. But the best deals have had a smart board member who has the time and personality to work with the consensus and the buyer.”
Scheck agreed, pointing out that a deconversion is a very hands-on and time-consuming process, so doing everything possible to keep the deal on track is worth the effort. “There is a lot of work that goes into brokering these deals,” Scheck said. “The most important thing is face time. This is the biggest investment in these people’s lives.”
For a deconversion to work, a brokerage should conduct meetings with the association before the listing, during the listing and provide continuous updates. The three key issues that the panelists identified in getting the owners to the finish line are having a good brokerage team, good counsel and someone on the board who is savvy and can communicate to the owners.
Part of that communication is getting owners to understand that a deconversion is not an eviction; if they don’t want to move they don’t have to.
“The key is articulating the benefits to them,” said Baumann. “Also, they don’t have to move. In all the deconversions we’ve done, there’s been an option to set the rental at a discount to market rent.”
The panel also discussed pending legislation in the Illinois General Assembly that would increase the needed vote tally for a building deconversion from 75 to 85 percent, something Bloomberg described as “a game changer.”
While this amendment would likely cut down on the number of deconversions happening in the state, it’s important to know an associations bylaws before going in, as some require up to 100 percent approval. This, again, goes back to the point of communicating properly with those that live in the building.
“The key on the front end is managing the expectations of the owners,” said Connelly. “If you over promise to 100 people, you’re never going to get the vote. When investors look at these buildings, make sure you understand the bylaws and gauge the temperature of the residents.”
Sealing the deal
Jim Hanson, principal at Avison Young moderated the second panel, which looked into the best practices to keep a deal on track. The panelists for this conversation were Shaya Ackerman, senior managing director at Meridian Capital Group; Gary DeClark, senior managing director and principal at Valbridge Property Advisors; Kelly Elmore, principal at Kovitz Shifrin Nesbit; R. Kymn Harp, shareholder at Robbins, Salomon & Patt, Ltd.; Collin McKenna, vice president of acquisitions at Golub & Co. and Edie Radek, vice president and escrow operations project manager at Greater Illinois Title Company.
The panelists for the day’s second discussion focused on more nuanced details surrounding deconversion, such as how to handle condo owners who feel they’ve received an unfair share in the deal, or those who unsuccessfully voted against the transaction. “There are mechanisms in place if there is a disgruntled seller,” DeClark said.
“We’ve seen more and more litigation for people trying to stop the deconversion, almost always unsuccessful,” said Harp. “I know of at least one circumstance where the climate was that the board did not listen to the owners and made a decision on its own. That’s not how it works. It’s a unit owner action.”
While the 75 percent number is fairly well known by now, it can be misunderstood. That’s the percentage of owners needed to approve a sale, but a property can be listed with just two-thirds of owners present at a preliminary meeting voting yes.
Elmore pointed out that the board owes a duty to the entire spectrum of ownerships, such as senior residents who planned on living out their remaining days in the condo, and may not see the deconversion as the once-in-a-lifetime opportunity that other owners perceive.
“I can’t underscore enough that you have to have experienced counsel representing both sides” Elmore said. “There is a tremendous amount of work that goes into wrapping up a deal.”
Legal precedent also holds that a disinterested board that gets an unsolicited offer must bring it to ownership. Other legal matters apply to minority owners who refuse to sign closing documents or otherwise attempt to obstruct a completed deal.
Radek pointed out how the deconversion movement has upended the title business, where organizations like hers can close hundreds of transactions in one day. She points out that having all the paperwork and documents ahead of time will help at closing. They also set up separate closing dates to accommodate hold-outs or owners’ schedules.
“The biggest thing is being sympathetic to the sellers,” Radek said. “You want to give them options, different times, places to do the closing. That’s just for the signing. In the end, that’s what most are concerned about, getting the money.”
What makes an attractive candidate for deconversion? According to McKenna, well-located buildings with smaller units, as well as those with projected rents that could be justified from an investment standpoint. The most important thing, however, is making sure that the deal is actually going to get closed.
“There is a ton of hand-holding,” McKenna said. “Be prepared to work harder on this deal than you ever have. You’re going to spend a lot of time on these and the deal is not done until the close.”