River City Condo deconversion breeds lawsuits

By Deborah Goonan, Independent American Communities

A few weeks ago, a group of unit owners at River City Condominium in Chicago filed a lawsuit intended to halt the $90.5 million sale and condo deconversion of their iconic vintage Chicago riverfront building.

River City Condominium Association includes 449 residential units. Since 2016, Marc Realty along with its equity partner, Wolcott Group, has been interested in purchasing River City for the purposes of a condo-to-apartment deconversion.

After owners rejected the first two condo deconversion purchase offers, they approved a $100 million sale agreement, by a 79.1% vote of owners, in December 2017.

But the deal fell apart in May 2018, when Marc Realty cancelled the purchase and sale agreement (PSA), shortly after it discovered building significant defects requiring repair.

Condo apartment interior 2
Condo apartment interior (Free Photo by @grovemead on unslplash.com)

Members vote on Marc Realty’s lower bid in condo deconversion attempt

Shortly after cancelling its $100 million offer, Marc Realty did not give up on completing a condo deconversion at River City.

The buyer submitted yet another offer to the Association, this time for $90.5 million, with a $1 million premium to be paid if the sale closed prior to September 24, 2018.

The lower purchase offer required the condo association to organize another membership vote. New proxies were printed and distributed to members, and Nyborg & Company Ltd. was once again selected as the association’s independent auditor.

In their lawsuit, Plaintiff condo owners contend that River City Condo Association put pressure on owners to move forward with the condo deconversion, and sell to Marc Realty. They accuse the Association of making threats to substantially increase assessments, in order to pay for deferred maintenance, if owners were to reject the sale offer.

The Plaintiffs also allege that the condo board worked directly with Marc Realty to delay the membership vote on the condo deconversion PSA until a sufficient number of “yes” votes were collected by proxy. After numerous delays, the final vote was held on August 28, 2018.

The lawsuit also alleges that Marc Realty made ‘side deals’ with about 5% of unit owners, offering them substantially higher prices for their units, in exchange for changing their “no” votes to “yes” votes on the PSA.

In its answer to the Plaintiffs, River City Condo Association denies any collusion with Marc Realty. The condo association, through its legal counsel Kelly Elmore (Kovitz, Shifrin, & Nesbit), states that although Illinois statute requires a minimum quorum of 20% for a valid vote of membership, the law does not prohibit postponing a membership vote multiple times, in order to continue to collect votes by proxy.

Furthermore, Elmore denies that the condo board played any role in negotiating or encouraging ‘side deals’ with individual unit owners. The Association argues that the PSA specifically allows for the buyer (Marc Realty) to negotiate additional payments for unit upgrades and ‘underwater’ mortgage differentials.

Thus, the Association believes it was legally justified in holding out on the final vote until they were sure they had ‘enough’ proxies to approve the condo deconversion deal and sale of the building.

Ballot box

Dispute over ballot count

Condo owners allege that an independent audit of the ballots from the August 28 vote shows that the association fell short of the required 75% affirmative vote on the sale agreement. The Association argues that their audit confirms that nearly 78% of unit owners voted in favor of selling the condominium to Marc Realty.

Condo owners further contend that 18% of the votes contained ‘irregularities’ that the Association denies.

Specifically, the Plaintiffs’ complaint and Defendant’s answers state:

111. The review by the independent audit found that, contrary to the report provided by the Association that 77.9% of the Association voted in favor of the Ninth Amendment with 94.6% of the Association submitting proxies, only 72.2837% of the Association had voted in favor of the Ninth Amendment, and only 89.3904% of the Association had submitted proxies in connection with the vote. See Report of FSB&W, LLC, attached hereto as Exhibit L.

ANSWER: Defendants admit that Plaintiffs have submitted a report of FSB&W, LLC, but deny the report accurately sets forth the percentage of votes on the Ninth Amendment.

112. FSB&W’s count further indicated that approximately 18% of the votes contained irregularities that called into question whether they should have been accepted by the Association. See Ex. L.

ANSWER: Defendants admit that Plaintiffs have submitted a report of FSB&W, LLC, but deny the report accurately sets irregularities as to certain proxies.

It’s worth noting that the Association admits that its election auditor, Nyborg, was not the sole party in possession of proxies.

Defendants admit that at any time throughout the process, Unit Owners could submit proxies directly to Nyborg, KSN, management or through any third party so that the proxies could then be sent to Nyborg.

Plaintiffs allege that the board violated its fiduciary duties, and that they have ‘injured the owners as a whole in an amount in excess of $10,000,000.’ The complaint does not specify how the Plaintiffs arrived at their estimate of financial damages.

Legal gavel lawsuit
(Pixabay.com free image)

Condo Association sues condo owners for not cooperating with the sale

While the unit owners’ lawsuit continues, the condo association is proceeding with the condo deconversion and sale agreement, assuming it is valid. A closing date for is scheduled for November 28, 2018.

As part of the sale process, the Association is requiring certain pre-sale documents from unit owners. But a few owners are refusing to provide the necessary information.

In response, according to a report in the Real Deal, the River City Condo Association is suing at least 19 unit owners for interfering with the sale process.

River City unit owners not complying with deconversion sale process, new lawsuits say

The suits are the latest legal salvo in a condo deconversion deal besieged by drama

By Joe Ward | October 15, 2018 02:30PM

The River City condo association lobbed the latest legal volley in the drama-filled deconversion of the South Loop building, accusing owners of multiple units of failing to comply with the sale process.
The association filed suits against at least 19 unit owners in the building, accusing them of failing to turn over documents needed to close on the sale.

The unit owners’ reluctance to comply puts the deal in jeopardy as a Nov. 28 closing date looms, according to the lawsuits.
It is the latest legal controversy surrounding a deal that at one point was poised to be the biggest deconversion in city history.

Read more:

therealdeal.com/chicago/2018/10/15/river-city-unit-owners-not-complying-with-deconversion-sale-process-new-lawsuits-say/

Fight over money

Winners and Losers

In any condominium association controversy, there’s bound to be winners and losers, especially when the condo association sells to a real estate investor or developer for a condo deconversion.

The majority of unit owners may be happy to unload their condos, rather than deal with higher and higher maintenance costs in the future. But a significant minority of owners usually prefer not to move. That’s especially true if the sale price offered for their units, less any outstanding mortgage, leaves them with a small sum of money that won’t even provide a decent down payment on their next home purchase.

Unfortunately, most condominium buyers are not made aware of the possibility that a super majority of their neighbors can vote to sell all of the commonly owned property, forcing them to sell their unit against their will. In a deconversion deal, the unit owner must either become a rent-paying tenant or vacate their home for good.

Likewise, most condo owners are not aware that a small number of unit owners can prevent the majority of their neighbors from cashing in on their difficult-to-sell condo units.

It’s an unpredictable risk one takes when purchasing a condominium.

 

 

Additional references:

River City saga highlights complexities, popularity of condo deconversions
Here’s why the often complex deals are worthwhile to investors

River City saga highlights complexities, popularity of condo deconversions

Answer to Plaintiffs complaint

Applicable section of Illinois Statute:

Section 15 of the Act, provides: Sale of property.
(a) Unless a greater percentage is provided for in the declaration or bylaws, and notwithstanding the provisions of Sections 13 and 14 hereof, a majority of the unit owners where the property contains 2 units, or not less than 66
2/3% where the property contains three units, and not less than 75% where the property contains 4 or more units may, by affirmative vote at a meeting of unit owners duly called for such purpose, elect to sell the property. Such action shall be binding upon all unit owners, and it shall thereupon become the duty of every unit owner to execute and deliver such instruments and to perform all acts as in manner and form may be necessary to effect such sale, provided, however, that any unit owner who did not vote in favor of such action and who has filed written objection thereto with the manager or board of managers within 20 days after the date of the meeting at which such sale was approved shall be entitled to receive from the proceeds of such sale an amount equivalent to the greater of: (i) the value of his or her interest, as determined by a fair appraisal, less the amount of any unpaid assessments or charges due and owing from such unit owner or (ii) the outstanding balance of any bona fide debt secured by the objecting unit owner’s interest which was incurred by such unit owner in connection with the acquisition or refinance of the unit owner’s interest, less the amount of any unpaid assessments or charges due and owing from such unit owner. The objecting unit owner is also entitled to receive from the proceeds of a sale under this Section reimbursement for reasonable relocation costs, determined in the same manner as under the federal Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, as amended from time to time, and as implemented by regulations promulgated under that Act.

(b) If there is a disagreement as to the value of the interest of a unit owner who did not vote in favor of the sale of the property, that unit owner shall have a right to designate an expert in appraisal or property valuation to represent him, in which case, the prospective purchaser of the property shall designate an expert in appraisal or property valuation to represent him, and both of these experts shall mutually designate a third expert in appraisal or property valuation. The 3 experts shall constitute a panel to determine by vote of at least 2 of the members of the panel, the value of that unit owner’s interest in the property. The changes made by this amendatory Act of the 100th General Assembly apply to sales under this Section that are pending or commenced on and after the effective date of this amendatory Act of the 100th General Assembly.

765 ILCS 605/15.
Relevant Provisions of the PSA

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