By Deborah Goonan, Independent American Communities
Today I’ll feature the crazy, mixed up world of condominiums.
In Chicago, real estate investors who have acquired dozens of condos in the housing slump – for the purposes of renting them to tenants – are now trying to buy out remaining owners.
In a process called deconversion, the condominium association is terminated, and the units are converted to rental apartments. In most cases, condo deconversion candidates are older buildings that were originally built as rental apartments, then converted to condos in the real estate frenzy prior to the 2007-2008 bust.
But the process is not exactly a bonanza to remaining owners. Many are still underwater on their mortgages, so they are reluctant to vote in favor of a buyout. However, eventually investors will own enough units to force owners to sell – like it or not. In most cases, the proceeds of the sale will not provide enough money to buy another home, and it may not even cover the balance on the mortgage. Hardest hit are owner-occupants with limited or fixed incomes, and those who purchased when condo prices were at their peak.
The deconversion process will also displace current tenants that are now paying relatively low rent. Once the new owner remodels the apartments, the rent will increase by $300-$400 a month or more. That means low income tenants will have to search for somewhere else to live, in a market that already has a severe shortage of affordable rentals.
To real estate investors and industry stakeholders, your condo is simply another investment commodity to be traded on the market.
And the crazy part is that if the market shifts again in a few years, these apartments may once again be converted to condos for sale.
Deconverting condos feeds renters’ growing demand
Exceprts:
Under Illinois law, if a developer convinces 75 percent of a building’s owners to sell, unwilling owners can be forced to go along and must sell their units. Then the developer buys all the units, brings in the remodelers, spruces up the building, and attempts to rent the units at prices above what amateur landlords were getting for their individual units.
But it’s not an easy process, said David Ruttenberg, a partner at Marc Realty Capital.
He thought condo owners at 458-unit River City Condominiums in the South Loop would go for a deal in which they were offered $225 a square foot, or a total of $83.1 million. The offer, he said, topped the $125 a square foot he figured they’d get if they tried to sell their own units. But the remnants of the housing bubble stood in the way. Ruttenberg estimates half of the condo owners had so much mortgage debt left to pay off they couldn’t afford to sell.
Instead of getting 75 percent to approve the deal, only 60 percent voted for it, he said. The deal didn’t go forward, but Ruttenberg says “we’re still talking,” while he looks at other buildings to deconvert.
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As investors push to get deals done now, the easiest to accomplish are those in smaller buildings filled with renters, Imber said.
That was the case with 915-925 W. Schubert Ave. in the Wrightwood Neighbors area near Lincoln Park, a 29-unit building recently sold to a partnership of Chicago-based Golub & Co. and Boston’s Alcion Ventures for about $5.1 million, said Larry Kanarek, the building’s former condominium association president.
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But it’s not an easy process, said David Ruttenberg, a partner at Marc Realty Capital.
He thought condo owners at 458-unit River City Condominiums in the South Loop would go for a deal in which they were offered $225 a square foot, or a total of $83.1 million. The offer, he said, topped the $125 a square foot he figured they’d get if they tried to sell their own units. But the remnants of the housing bubble stood in the way. Ruttenberg estimates half of the condo owners had so much mortgage debt left to pay off they couldn’t afford to sell.
Instead of getting 75 percent to approve the deal, only 60 percent voted for it, he said. The deal didn’t go forward, but Ruttenberg says “we’re still talking,” while he looks at other buildings to deconvert.
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Most of the units in the Schubert building are small studios, around 325 to 350 square feet, and all but three units were being rented out by the condo owners, Kanarek said. He figures that after all are remodeled, monthly rents will be raised to $1,200 or even $1,400 compared with the $850 or $900 a unit some condo owners had been charging.
http://www.chicagotribune.com/business/ct-condo-conversion-0626-biz-20160624-story.html