By Deborah Goonan, Independent American Communities
According to local reports, the residential tower at 21 E. Chestnut was constructed as apartments in 1962, and converted to condominiums in 1979. Four decades later, the process has come full circle, with a pending deconversion to apartments.
Earlier this month, 92% of owners in the 163-unit condominium building at 21 E. Chestnut St. voted in favor of a $44 million buyout by Strategic Properties of North America. The investor plans to change the building back to rental apartments, under the ownership and management of a single entity.
Prior to the sale, Strategic Properties owned 40% of units at 21 E. Chestnut. According to local reports, more than half of the units in the building were already owned by investors and inhabited by renters.
The vote on the sale of 21 E. Chestnut came just a few days before Chicago’s new deconversion ordinance kicked in.
Illinois law requires owners representing a 75% voting interest to vote in favor of selling their condominium community to a developer or investor. As of October 16 in the city of Chicago, condo owners must reach a higher 85% threshold to approve the sale of their condo building.
The intent of Chicago’s ordinance is to make it more difficult for investors to force owner-occupants to sell their units against their will.
But, as the sale at 21 E. Chestnut illustrates, although it might take a bit longer for investors to accumulate an 85% voting majority, the higher threshold won’t necessarily prevent the forced sale of condo units.
At 21 E. Chestnut, 8% of owners will be forced to sell their homes, to satisfy the desires of the other 92%. Proving that when you own a condo, your property rights are severely limited.
A forced condo termination and deconversion is a very real risk for condo owners, especially in Chicago’s hot rental market.
And if condo owners want to avoid being forced out of their homes, they must take action before investors start buying up condo units in bulk.
Condo owners vote on amendments to prevent hostile takeover and forced condo deconversion.
Unit owners of Lake Point Tower Condominium don’t like the current deconversion trend in Chicago. They fear they, too, could be forced out of their homes.
Lake Point Tower is a 51-year-old residential building that’s ripe for renovation and redevelopment. Its lakefront location is particularly enticing to apartment investors.
So when Lake Point owners noticed an increase in condo sales to non-residents, they knew they had to act fast to prevent their community from eventual takeover by investors.
Like many residential towers in the city, the Lake Point Tower building began as apartments in 1968. By 1988, all 875 units were converted to condominiums. Over the years, some of the units have been combined. Today, Lake Point Tower has 758 residential units.
The majority of residents in the building own their condos. They love where they live, and have no interest in moving or cashing out their equity.
That’s why owners recently voted to approve two amendments to their bylaws, designed to fend off purchases by investors.
The Chicago Tribune reports that on August 22, owners voted to approve a 25% cap on the number of units that can be rented at any given time.
Then on September 26, owners voted in favor of limiting ownership by any person or group to 2% of the condominium corporation.
New rental restrictions unattractive to apartment investors
Lake Point’s new restrictions address the risk of forced deconversion on two fronts: rental restrictions and ownership restrictions.
Rental restrictions have pros and cons. On the plus side, investors may be far less interested in buying condo units that they cannot rent.
But a 25% rental cap in the building may also limit owners from renting their condos when their life circumstances change.
For example, a job offer in a new city, a 2-year contract job, or a military deployment might force an owner to leave their unit vacant until they can return or sell the property.
It’s true that, without rental income, an investor will have to cover the full carrying cost of each unit, while gradually accumulating additional units in the condominium.
That could be a significant deterrent to some investors. But a bulk investor with deep pockets and a bit of patience still might be willing to hold onto empty condo units until it owns enough of them to gain seats on the condo board.
But owner participation in many condo associations is low. Even a 25% interest in the condo association can influence who gets elected to the board, and lead to further amendments to the condominium documents to relax or undo rental restrictions.
Ownership restrictions key to preventing a hostile takeover
Lake Point Tower owners were wise enough to realize that they needed a way to prevent one or a few people or corporate investment entities from owning a high percentage of condo units.
After all, each condo purchase is effectively a purchase of additional shares in the condo corporation.
Despite the fact that most condominium associations are registered as non-profit organizations, investors often exploit the for-profit corporate structure of voting rights in condominium associations.
Buy more shares in the corporation (condos in this case), gain more voting power. The greater the voting power, the greater an investor’s access to the assets and profit potential of a corporation.
That’s why history reveals the current cycle of apartment to condominium to apartment conversions in the U.S. over the past 50 years. Most condo documents are designed to benefit a few wealthy real estate industry stakeholders at the expense of homeowners and small-time real estate investors.
That’s why Lake Point Tower condo association’s new ownership restriction is pure genius.
By limiting any one owner’s share of the association to 2% of all condo units, voting power remains more evenly distributed among many owners.
For that reason, Lake Point Tower is less likely to experience a hostile corporate takeover of its community. ♦
Investors were eyeing the 70-story Lake Point Tower for a condo deconversion. The owners just fought back.
By RYAN ORI
CHICAGO TRIBUNE |
OCT 04, 2019 | 5:03 PM
$44 million sale of Gold Coast condo building could be the last before new Chicago law makes deconversions much harder
By RYAN ORI
CHICAGO TRIBUNE |
OCT 09, 2019 | 2:36 PM
Owners of Gold Coast condo tower approve $44 million sale
The 163-unit high-rise at 21 E. Chestnut St. joins a growing list of Chicago condo buildings to sell out to developers that bring them under a single owner and “deconvert” them to apartments.
Alby Gallun | Crain’s Chicago | Oct. 17, 2019
City Council vote gives more power to condo owners who want to keep homes
By Jason Knowles and Ann Pistone
Wednesday, September 18, 2019CHICAGO (WLS)