Did Chicago just deep-six deconversions?

Chicago’s City Council has passed a resolution to increase the voting threshold on condo deconversions. Now, any building looking to switch from condo to rental will need the assent of 85 percent of the condo owners, instead of the 75 percent threshold that previously held true.

The bill was introduced by 42nd Ward Alderman Brendan Reilly, in response to constituents’ complaints that the process invites unwelcome, “predatory” buyers making offers on their building, as well as ownership groups that acquire units in bulk to drive a property toward deconversion.

“Many people, especially our senior citizens, when they purchased 30 to 40 years ago they expected these would be the homes they’d retire in,” Ald. Reilly said when the bill was before the housing committee.

According to Andy Friedman, a broker with Kiser Group, the new legislation may have unintended consequences that exacerbate the very problems they were seeking to solve. For example, deconversions are a relief valve for condo owners facing a hefty special assessment to rectify severe maintenance issues.

“Were it not for a deconversion sale, the only way out for those people is to sell their units,” Friedman said. “But when you have a large amount of units for sale in a building that is facing a high special assessment, the values go down. You are going to have people thrown into short sales and foreclosures.”

This sets the table for distressed buildings to become even more distressed without the escape hatch of a deconversion. No matter how dire the maintenance situation of a building, there will usually be a vocal minority unwilling to vote yes.

“This was a knee-jerk reaction in my mind, because aldermen listened to a couple of unhappy, loud voices,” Friedman said. “With 85 percent, when deconversions happen, there are still going to be loud, unhappy voices. There are, at a minimum, three happy voices to every one unhappy voice, they’re just not as vocal because they’re happy.”

One issue in particular—the bulk owner scenario—is likely to occur more frequently, not less, due to the legislation. When a bulk owner is able to covertly snap up a number of units in a building, that makes it harder for the other residents to acquire conventional financing. It also puts off potential condo buyers who read the association minutes and see a hostile environment between the bulk and individual owners. The only option for the latter group is to sell to the former.

“At least in a deconversion, everyone is getting top-of-the-market pricing,” Friedman said. “Now when someone gets enough of a building that it makes it hard to get financing, or undesirable for anyone to live there, these people are forced to sell to one buyer and he’s not going to pay up. He’s buying wholesale now.

Going forward, there may be fewer deconversions begun in Chicago, but those that do start the process are more likely to reach completion because the board is unlikely to move ahead without being relatively certain of hitting such a high mark. They are more likely to occur in smaller properties.

“In a 300-unit building, it’s hard for anybody to really know where the vote will lie until you put a contract in front of them,” said Friedman, “whereas in a 20- or 30-unit building it’s pretty easy to know the people in their building and to know what the temperature is.”