By Deborah Goonan, Independent American Communities
The more I learn about condo-to-apartment deconversions, also known as (forced) condo terminations, the more I become convinced that no one ever actually “owns” property as a member of a condominium association.
Condominium ownership differs from ownership in a homeowners’ or property owners’ association in several ways. And the most important difference comes down to land ownership.
In a single family home planned community, while the HOA is a separate corporation that owns the common areas and amenities, each individually owned home comes with its own parcel of land.
But in a condominium association, each individual unit — be it an apartment in a multifamily building, a townhouse, or a detached single family home — there is no individual ownership of land. All property outside of an individual home unit is owned in common by all members of the condo association.
And because of that important distinction, a condo association is inherently vulnerable to hostile corporate takeover, or, alternatively, holdout hell, where some condo owners prevent their neighbors from cashing in on the sale of the entire community to a developer.
It all depends upon your perspective.
No deal is good enough for these condo refuseniks
By ALBY GALLUN, Crain’s Chicago Business
July 13, 2018
If you received an offer to sell your condo for 55 percent more than you paid for it only a year ago, would you take it?
For Lauren Kerchill, the answer is a firm “no,” one reason a pending $111 million deal for her Gold Coast condominium tower could be in danger of flaming out. Kerchill and a group of residents in the Lake Shore Drive high-rise are fighting a push to sell the building to a New York investor that wants to turn it back into apartments.
They are the insurgents resisting a trend that is sweeping through Chicago as developers, capitalizing on the booming apartment market, try to buy up entire condo buildings and “deconvert” them into rental housing. Developers must persuade dozens and sometimes even hundreds of condo owners in a single building to sell their units.
But some cats refuse to be herded, so attached to their condos that they won’t sell, even for a hefty profit. Kerchill says she would receive $345,416 for her condo overlooking Lake Michigan, up from the $223,500 she paid for it in June 2017. Her main concern: Where would she go? “I love the building, I love the amenities,” she says. “We’re not greedy. We’re not holding out because we want some crazy number. A lot of us are holding out because they could never offer us enough money to afford something comparable.”
If condominiums were sold as what they are — risky investments in a real estate commodity — presale disclosure would be a full-fledged prospectus, similar to what consumers are provided for their financial investment in stock or a business.
But, the problem is, condos are sold to buyers with different needs, desires, and financial goals. A condo may be sold to a buyer as an affordable primary home, a seasonal home, a vacation rental, or income producing rental property.
Owner-occupant condo owners tend to be the biggest resisters of a condo deconversion. Why? Often, a condo owner believes the buyer of the entire community isn’t offering enough money to purchase similar replacement housing, especially if the owner has invested a lot of money improving their unit. And, of course, there’s a strong emotional connection when a condo unit is one’s home, as opposed to a real estate investment.
However, as Abby Gallun’s column also points out, non-occupants and landlord owners sometimes object to a deconversion, if the proposed purchase price doesn’t compensate for their up front investment or their future loss of rental income.
Bottom line: owners of condos often value their property ownership for different reasons. That reality creates winners and losers in the event of a proposed termination of the condominium association.
Despite the fact that a few “holdouts” can sometimes frustrate the deconversion process, time and money are usually on the side of well-funded institutional investors, or an entrenched bloc of investor-owners who gradually accumulate multiple units in a condo association.
UPDATE from Crain’s Chicago:
ESG Kullen had offered to pay $111 million for the entire building at 1400 N. Lake Shore Drive and planned to turn the tower back into apartments. It would have been the biggest price ever paid for a condos-to-apartments “deconversion” in Chicago.
But a vote among condo owners tallied last night fell short of the 75 percent threshold required to approve the sale, according to people familiar with the vote. Under Illinois law, owners of at least 75 percent of the units in a condo building must vote in favor of a bulk sale to a single buyer. The vote at 1400 N. Lake Shore barely missed that mark, at 74.6 percent, according to the people.
The vote narrowly missed the mark. I would not be surprise if ESG Kullen makes another attempt to buyout the condo association again, sometime within the year.