Glenn L. Udell, Partner, BUPD Law Ltd.

My promise to you is that the phrases, “in these unprecedented times” and “new normal” will not be used in this blog post.  This is not to suggest that these terms aren’t appropriate during the pandemic of COVID-19, it’s just that their overuse has pummeled any meaning and visceral impact into dust.

That caveat aside, wow, 2020 is not what I had expected.  If I told you on New Year’s Eve that in three (3) months, you’d be ordered, indefinitely, to shelter in place in your home but for going out to buy subsistence living goods, almost all retail businesses would be closed, office buildings would be closed, workers sent home, all gyms and health clubs would be closed, most air travel unused, all professional sports cancelled, all college students sent home mid-semester, all college sports shut down, including the Division I Men’s Basketball Tournament a/k/a “March Madness”, 30 million Americans would lose their jobs, hospitals would become overwhelmed with highly infectious patients, and our State and local governments would basically mandate how we live our every day lives, all due to a type of flu-like virus, you would have thought I was describing a new exciting science fiction series on Netflix!

Regrettably, I am describing the world in which we all now reside.

Charles Darwin, the famous evolutionist once said, “it is not the strongest of the species that survives, nor the most intelligent that survives.  It is the one that is most adaptable to change”.  In a world where it is human nature to be resistant to change, we have all now been involuntarily forced into changing our daily lives. Like it or not, we all have an opportunity to turn this change into something good.  We have more time to spend with family, more freedom to choose where and when we work, more time bonding with young children, more time spent outdoors and much more.

I thought I would take the opportunity to discuss some rapidly evolving changes I have seen in the legal profession which truly highlight how lawyers and their clients adapt to certain events and circumstances.

If you’re an attorney with corporate clients, then you’re an attorney scrambling to understand how COVID-19, and government-imposed restrictions have impacted not only your client’s business, but also the contracts into which they have entered. From business interruption insurance, to missed contractual deadlines, and on to the tens of thousands of commercial tenant and landlord disputes, the Circuit Court of Cook County will be a very busy place.

For example, just recently, a consortium of mega-retailers including the Gap, Athleta, Banana Republic, Janie & Jack and Old Navy filed a complaint in the Circuit Court of Cook County against Brookfield Properties, the nation’s largest shopping mall operator with properties across the United States. In the complaint the plaintiffs, who are tenants in Brookfield Mall properties, ask the court for declarative relief such that:

“…the subject leases and applicable law nullified any obligation to pay rent beginning in March 2020, entitle Tenants to a refund of rent and expenses paid in advance for March 2020, and require that the Leases be modified and reformed, or rescinded, canceled, or terminated as a matter of law.”

The plaintiffs have made the following allegations in the lawsuit:

1. We entered into lease agreements with Brookfield Properties with the understanding that Brookfield would, “…provide (us) with commercial retail space suitable for the operation of retail stores selling apparel.”
2. “…the intended use of the (stores) was frustrated, became impossible, illegal, and impracticable,” based on the restrictions imposed by local authorities and Brookfield Properties.
3. Brookfield has wrongfully demanded that the stores pay rent during forced closures
4. Simultaneously, Brookfield has disputed our right to keep stores closed and to, “modify the Leases due to this radical change in circumstances.”

As you ponder the specific allegations in this complaint, it becomes clear that nearly any retail business operating from leased property that had been shut down due to government action/civil authority by virtue of being deemed non-essential by state and local governments could make similar claims.  These are uncharted waters and nobody has a playbook to deal with these complex legal issues.    Whether you are a dental group that could not see patients, a chain of health clubs that was closed or a computer repair shop reliant on walk-in customers, there is a potential case to be made that the actions of government and civil authorities and separately, the COVID-19 circumstances, were all unforeseeable and made commercial operations and obligation as contemplated in the leasing agreement impracticable.

Force Majeure Clauses in Illinois Commercial Leases and Contracts

Many of you may have seen the words, “force majeure” in the news or print media.  Force majeure, a French word that translates into “superior force,” is defined by Black’s Law Dictionary as, “[a]n event or effect that cannot be anticipated nor controlled.”

Prior to COVID-19, force majeure clauses were typically imagined as legal justification for non-performance as a result of dramatically altered circumstances resulting from natural, catastrophic events such as floods, hurricanes, or asteroids.  (OK, I made the asteroid impact event up, but given where we’ve been the past few months, who wouldn’t write that into a future force majeure agreement!)

If included in a leasing agreement, something that isn’t as automatic as one might expect, the lessor typically prefers a higher level of specificity in the force majeure clause to strengthen the obligation of the lessee to pay rent, even when unforeseen circumstances occur.  For example, rather than simply identifying “floods” as a force majeure event, a more tightly written clause might specify “floodwaters measured at this location exceeding the highest measured waters in the last 100 years.”

Conversely, a lessee would likely favor broader, less specific force majeure provisions that cover  not just acts of God, but also acts of humans (labor strikes, government edicts, civil unrest, etc.) that could neither reasonably be imagined, nor anticipated, when the parties entered into the agreement.

In the context of COVID-19, it’s fairly unlikely that “pandemics” was among the specifically listed events covered by a force majeure clause, but that omission doesn’t mean that a lessee has no cause for action. Many commercial leases make mention of government actions or unanticipated laws as a triggering event for a force majeure clause.

A recently decided case, In re: Hitz Restaurant Group, suggests that at least in The U.S. Bankruptcy Court for the Northern District of Illinois, courts are inclined to side with the lessee when a force majeure clause identifies laws or government actions and orders as a triggering event.

In 2019 the Hitz Restaurant Group, entered into a commercial property rental agreement with The South Loop Shops, the landlord.  By the end of 2019 the restaurant group was late in paying rent and on January 2, 2020, the landlord filed a complaint seeking to compel rental payments. In late February of 2020, just a day prior to the trial date for the landlord’s complaint, the Hitz Restaurant Group filed for Chapter 11 bankruptcy, effectively putting the landlord’s lawsuit on hold.

In the intervening weeks, COVID-19 transformed from a “problem over there” to a pandemic over here, including in Illinois.  With the backdrop of Governer Pritzker’s COVID-19 closures of restaurants, the landlord responded to the Hitz bankruptcy petition by filing a claim for post-petition rental payments. The key point in the landlord’s filing was that even though the force majeure clause specifically identified “orders of government” as triggering events, this was superseded by the following language in the force majeure clause:

“(a) lack of money shall not be grounds for Force Majeure”

Judge Donald R. Cassling, of  the United States District Court for the Northern District of Illinois, reasoned that the executive order issued by Illinois Governor J. B. Pritzker on March 16, 2020 suspending the serving of food and beverages in restaurants, was “unquestionably” the proximate cause of Hitz’s inability to pay rent.

When this holding was handed down, you could hear the sound of landlords across the city rifling through lease agreements looking for the words, “orders of government,” or “actions of government officials” in the force majeure clauses. 

Commercial Impracticability and COVID-19

Taking the discussion of force majeure a step further, In almost every force majeure claim the doctrine of “commercial impracticability,” comes into play, whether or not specific language relating to “orders of government” or “actions of officials” exists.  Commercial Impracticability is an Affirmative Defense that can be raised to the obligation to perform on any contract during the period of commercial impracticability.

St. John’s Law Review explains commercial impracticability as follows:

“Impracticability covers those sets of circumstances where performance is literally possible but is so radically different from that contemplated by the parties as to become impracticable. This doctrine is predicated on the theory that the parties to a contract made their bargain with specific circumstances in mind, and that their basic assumptions about the world in which the contract was to be performed were thereafter upset by a contingency whose nonexistence was a basic assumption of the contract. “

The plaintiffs in the Brookfield Properties case never mention the term “force majeure” in their filing, but scattered throughout the 20 page document are multiple uses of the terms impracticable (18 times), impossible (22 times) and unforeseeable (8 times). Do you see a pattern here?   In Hoosier Energy v John Hancock Life, 588 F. Supp. 2d 919 (S.D. Ind. 2008), the Court held the doctrine of “Temporary Commercial Impracticability” can be asserted as a valid affirmative defense provided a party can show that unforeseen circumstances or events, beyond a party’s control, render their obligation to perform  impractical.  The court found that  the doctrine excuses the obligation to perform on a legal contract until the circumstances of impracticability lasts plus a reasonable time afterwards.  This equitable affirmative defense is essentially the equivalent of a common law force majeure clause.  This equitable affirmative will undoubtedly be litigated in the courts during this COVID-19 Pandemic  and both lawyers and business owners should be aware of how and when to assert the same.

In essence, the retailers who brought the Brookefield Properties case are suggesting that because of the edicts of local authorities shutting down non-essential retail business activities, and operating decisions made by the lessor, Brookfield Properties, that transacting retail businesses from these stores during COVID-19 have met the legal hurdle for commercial impracticability and therefore the courts should grant the stores a myriad of relief from their lease agreements.

The Future of COVID-19 Litigation Relating to Lease Agreements.

By definition, cases like this end up in court precisely because there is a disagreement on the law.  In future blog posts I’ll delve into the miasma that attorneys and their clients on both sides of a commercial lease case can expect as these disputes wend their way through the State of Illinois and Cook County courts.

For example, could either party to the agreement imagine that a pandemic might impact their ability to carry on commercial activity as anticipated under a lease agreement?  At first blush you might think “no”, but there was the SARS scare of 2003 that foreshadowed what we’re experiencing with COVID-19 today. I’m betting that deep in the bowels of large retail organizations is a contingency document that a low-level staffer or intern had written a decade ago in response to SARS.  I will also delve into the area of business interruption insurance and the plethora of claims that have been brought by business owners against their commercial general liability insurance carriers for their lost business revenues.

Did the retailers make a reasonable effort to carry on with business during the prohibition of in-store shopping? One might argue that if the GAP or Athleta did not engage in curbside sales during the shutdown, it was their own operating decisions that have put them on the wrong side of the commercial impracticability argument.

It’s going to be a very busy Fall for commercial real estate and other litigation.

If you are a business or commercial property owner with questions about your lease agreement, please contact me at gudell@bupdlaw.com.  I’d be happy to answer your questions.

According to the Wall Street Journal and RealPage, demand for apartments surged nation-wide in the second quarter of 2019.  Chicago boasted one of the highest demand imbalances with a whopping 7,418 units sought by renters and only 2,617 rental units completed during the quarter.

It is no wonder then that investors continue their search for Chicago condominium buildings that can be converted into rental properties.  The latest high-profile condo deconversion target is the 39 story high rise, 2 East Oak Street, that sits dead center in what is affectionately (or derisively) known as the “Viagra Triangle”. (photo) Bounded by Rush and State Street on the east and west side, and Oak Street to the south, 2 East Oak is a concrete structure built in 1967 during a time when the address wasn’t so tony.

In the late 1960’s and early 1970’s, Rush street was a bawdy, liquor-filled strip bounded by some of the oldest, most expensive Chicago mansions to the north, south and east. If you look just behind the marquee for the infamous Faces nightclub in the photo below, you’ll see the 2 East Oak Street building in the context of the location in which it was built.

While my research hasn’t yet confirmed it, I’m inclined to believe that when built, 2 East Oak Street was originally constructed as a rental property. It would have been unusual for an expensive, new condominium to be built in an area that was still 20 years away from its rebirth and gentrification. (If you have any knowledge about the original commercial intent of the building, please email me.)

Today, given that the neighbor to the south is Barney’s of New York, and to the north, Gibson’s restaurant, it’s easy to see why New York real estate investment firm ESG Kullen is making a play to execute a Section 15 condominium deconversion of 2 East Oak Street.

For those who are occasional readers of my blog you’ll remember the name ESG Kullen as the suitor for 1400 N Lake Shore Drive. This condominium deconversion effort lasted over a year and featured:

• A failed condominium association vote for ESG Kullen’s initial offer
• A sweetened offer and subsequent winning vote to force a Section 15 deconversion
• A terminated deal as a result of ESG Kullen’s inability to secure timely financing
• A resurrection of the deal and favorable association vote after ESG Kullen secured financing

While the deconversion effort at 2 East Oak Street might go more smoothly than the 1400 N Lake Shore Drive transaction, the process has started – or stalled – in the same manner as the  aforementioned deal. As reported by Alby Galun in Crain’s, the condominium association board at 2 East Oak held a vote on June 25^th to consider ESG Kullen’s $92 million offer. Of the 86% of owners (265 of 309) who cast a vote in person or by proxy, only 68.6% voted in favor of the deal.

The Board, likely dominated by absentee owners/investors who own multiple units, decided to extend the vote through July 16, ostensibly to allow those who didn’t vote to cast a vote.  I suspect there’s going to be a great deal of lobbying by ESG Kullen and board members sympathetic to the sale over the next two weeks.  Indeed, if history is any guide owners might expect a sweetened offer by ESG Kullen to nudge the owner vote to exceed 75%.

Section 15 Condominium Deconversion Investors are Very Sophisticated

As detailed in a previous post, no matter how generous the Section 15 deconversion offer, there will always be a percentage of owners who emotionally embrace their unit as a home, rather than an investment to be maximized. As one recalcitrant owner at 2 East Oak Street was quoted by Alby Galun in the Crain’s article, “There’s no reasonable price that anyone could pay us that we’d accept . . . It’s a sentimental investment.”

Large investors bidding for a Section 15 condominium conversion are very sophisticated. They are experts in real estate, finance, and with the help of counsel, the relevant laws. Partnered with an Association Board sympathetic to deconversion, there’s a lot of momentum on the side of the Section 15 buyer.

When BUPD Law represents a Section 15 buyer, or a condominium board sympathetic to deconversion, we counsel the highest level of transparency possible.  The most efficient deal is the deal that closes the first time, on-time and with a minimum of surprises.  Because there are so many “decision-makers” in a condominium deconversion – essentially all of the unit owners – the goodwill engendered by transparency goes a long way.

We also recommend the inclusion of several incentives to owners, enumerated here, that have been found to encourage a quick, positive deconversion vote from owners.

What Owners Reluctant to Sell Should Consider

For owners that would prefer not to sell their units, the first thing to do is to realistically evaluate not only the offer, but also the financial state and forecast for the condominium association.  Especially with buildings 20 years or older, there can be hundreds of thousands or millions of dollars in deferred maintenance, repair and compliance costs that have been ignored for years.

For example, the 2 East Oak Street building was constructed in 1967, a time when fire and safety provisions were not as strict as they are today. As recently as 2015 the building was on the City’s list of residential buildings not in compliance with the Life Safety ordinance. With fines of up to $500 a day, and untold costs to bring the building up to compliance, these costs will normally be born by the investors buying the building and should be considered when evaluating the deconversion offer for each unit.

Multi-million-dollar and modest residences alike work to win compliance and avoid $500/day fines. (Loop North News, June 2015)

If after a sober assessment of the financial state of the association an owner still wants to vote “no” on a deconversion sale, then they should insure that the association board is working to protect the best interest of all owners, not simply those who want to sell.

Like most real estate transactions, the potential buyer in a Section 15 condominium deconversion will likely have the ability to cancel the transaction, even after a favorable association vote. There’s also earnest money that the investment group must forfeit to the association, should the investor group exercise their right to cancel.

With this in mind, owners who don’t favor the sale should lobby fellow owners and the association for the highest possible earnest money amount prior to the first vote on deconversion. An investor-dominated association board has a great deal of leeway as to how association money is spent on exploring a Section 15 deconversion. Legal, engineering and accounting fees paid for by owner will total tens of thousands of dollars, regardless of the final status of the sale.

In concept, the earnest money required of the investment group should cover these and other tangible and intangible costs, should they exercise the right to cancel.  However, as evidenced by the cancellation of ESG Kullen’s initial deal at 1400 North Lake Shore Drive, the earnest money amount is often a relatively paltry sum that likely won’t come close to covering the costs born by the association.

As reported in Crains, ESG Kullen exercised their right to cancel the 1400 North Lake Shore transaction after an initial affirmative owner vote to sell. As a result ESG Kullen forfeited a paltry $50,000 in earnest money. As I pointed out in this blog post on earnest money and other owner protections, that amount is less than 1/10 of 1% on a deal potentially worth $110 million.

The de minimis threshold of a small amount of earnest money makes it too easy for the buyer to walk away from a deal, for almost any reason, after a hard-won association vote in favor of a Section 15 sale. An aggressive buyer knows that once a pro-sale vote is secured, it’s increasingly likely that a second or third vote will also go their way even if the terms of the deal are worse for owners.

This makes it essential that at the earliest possible point of discussion a reasonable and substantial amount of earnest money be required by owners who occupy their units as a demonstration of good faith from both the potential buyer and an association board dominated by absentee owners/investors.

Very Few Large Section 15 Condominium Deconversion Sales Fail

While it’s not yet clear what the outcome will be for ESG Kullen’s offer to purchase the 2 East Oak Street building, history suggests that a deal will ultimately be struck. There are substantial fixed costs required to investigate, evaluate, price and present large real estate transactions like this. Investment groups are beholden to other investors and banks who provide the capital needed to execute these transactions and to profitably manage the property as a rental building.   To put an offer on the table to a condominium association and not be very certain of the outcome would cost tens of thousands of dollars and lost confidence on the part of outside investors.

If you have any questions about a possible Section 15 sale for your condominium building, please feel free to reach out to my firm, Brown, Udell, Pomerantz and Delrahim, Ltd., or contact me directly at gudell@bupdlaw.com

The Chicago condominium deconversion boom might have come off the boil, but it is still a hot market and the demand for rental units continues at a high level. I have written several articles about the changes to the Illinois condominium deconversion market brought about by last year’s revision to Section 15 of the Illinois Condominium Property Act. I have also discussed how several high-profile deconversions, including River City and 1400 North Lakeshore Drive, have struggled to reach the finish line.

The vast majority of available content written about Section 15 deconversions is from the perspective of how the year-old law impacts buyers attempting to convert a condominium into rental units. This shouldn’t be a surprise as (1) most of the deconversion articles are written by attorneys like me who focus on real estate law and (2) our clients tend to be the investors because (3) that’s where the money is.

I say this with tongue-in-cheek, but there truly is a dearth of constructive information for individual owners who are being forced to sell as a result of a Section 15 sale. With this in mind – and with the caveat that what follows is not legal advice – this is the first of several posts on what an individual owner might consider to protect her or his interests in a forced condo deconversion sale.

After backing out of a deal approved by 85.8% of owners in December of 2018, Crain’s reports that the ESG Kullen deal for 1400 North Lake Shore Drive is back on again as of January 28, 2019. The revived offer won 91.7% of the owner vote , an increase of 6% from the original, pre-cancellation vote.

Educate Yourself and Act Early For Maximum Impact

In the earliest stages of a Section 15 deconversion process, investor-controlled HOA boards are most likely to do what they can to curry favor from individual owners in order to secure the 75% of total votes needed to force a Section 15 sale. It’s at this early stage where a prepared group of individual owners can best protect themselves by securing concessions and protections.

For example, nearly every condominium deconversion deal has a cancellation clause whereby the investor seeking to purchase a condominium building for deconversion can back out of the deal even after a favorable 75% deconversion vote from owners is secured. Normally, there is earnest money that the investor group must forfeit if a deal is cancelled. For obvious and not-so-obvious reasons, it is in the individual unit owner’s best interest to lobby fellow owners and the board of directors to maximize the amount of earnest money required from the potential buyer.

First, it’s obvious that after a lengthy Section 15 deconversion process, the HOA will have spent a considerable amount of money on legal, accounting and other fees preparing for a possible sale. If the buyers pull out, the association should be compensated for both hard and soft (time, effort, etc.) costs. Earnest money offers some compensation for these costs.

A cynic might find a second less obvious reason for individual owners to push for the highest possible earnest money. The higher the amount of earnest money, the less likely it is that a potential Section 15 buyer will back out of a deal. (footnote: as an attorney I am paid to be a cynic.)

Condominium boards dominated by absentee owners might need to be cajoled/convinced/coerced into demanding more earnest money from a potential buyer.

If you track recent deconversion sales you’ll find that it’s not uncommon, especially with the market slowing, to have a Section 15 buyer back out of a deal after “winning” a contentious battle to garner 75% ownership approval for the sale. More often than you might expect, the investor group will come back to the condo owners with a second offer at a lower valuation.

Intuition suggests that if a Section 15 buyer backs out of a deal where they struggled to win 75% owner approval, they would be hard pressed to return with a lower offer and secure 75% approval a second time. To the contrary, it’s my (unscientific) observation that the lower valuation gets a higher percentage of ownership approval during the second round.

The River City Section 15 condominium deconversion process spanned over two years. The developer offers started at $81.4 million, according to Crain’s, and finally won 75.8% of buyer approval with an offer of the buyer’s offer topped $100 million. After the successful vote, the buyer exercised the right to cancel the agreement and came back with a lower offer of just over $90 million, citing hidden defects.  The downward revised offer received 77.9% owner approval, topping the number of votes received by the higher offer a few months earlier.

Individual Unit Owners Are Generally Averse to Risk and Uncertainty

Chalk it up to human nature and our innate desire to value certainty over uncertainty. Imagine yourself as a condominium owner who has endured months of HOA meetings and private discussions about the Section 15 sale of your building. After months of awkward elevator rides with others who don’t agree with your view, the Section 15 sale squeaks by with barely 75% of the HOA vote.

Having reconciled yourself to the fact that your unit will, despite your objections, be sold, you start looking forward to a new home and a new start. You might even try to make yourself feel a bit better by taking a short vacation, or by splurging on something nice for your anticipated new home.

Then it happens. The investor group buying the condo backs out of the deal because they’ve found “hidden defects” in the building that must be addressed. Suddenly, your life has been turned upside down. You’ve spent some money from the sale before it was in your pocket. You must cancel the deposit on the new condominium it took you months to find, and the thought of another six months of awkward elevator rides is almost too much to bear.

Despite the lower offer, this time you vote in favor of the deal if for no other reason than to have certainty in your life.

According to Crain’s, the earnest money forfeited when the 1400 North Lake Shore Drive investor group exercised its right to cancel the deal was $50,000. That’s less than 1/10 of 1% on a deal valued at $110 million.

Substantial earnest money doesn’t guarantee that a buyer won’t back out. However, it does demonstrate a buyer’s sincerity to closing a deal. Significant earnest money might also make a less-than-scrupulous buyer think twice about exercising a cancellation clause as a bargaining tool to reduce the final purchase price.

Politics as Part of the Section 15 Condominium Deconversion Process

If you’re skeptical about a Section 15 deconversion sale of your building, the time to educate fellow owners about the possibility of and cost for a deal gone bad is now. How an investor-controlled board responds to lobbying efforts to increase the earnest money required can suggest how the board might react if a deal is cancelled and the buyer comes back with a second, lower offer.

Investors owning multiple units for rental purposes don’t have to consider the anxiety of moving and all the costs associated with it. They don’t need to value the time and effort invested in looking into a new home. They never have to worry about cancelling cable, changing a driver’s licenses, signing up with ComED and the dozens and dozens of other tasks associated with moving.

If you paint a picture of the human cost to individual unit owners if a buyer reneges on a deal, you’ll have increased the probability of a buyer having to put more earnest money on the table. Even if an investor-controlled board doesn’t push for more earnest money, you will have revealed to owners how the board neither understands, nor values the unique costs to owners who occupy their units.

Every Section 15 Condominium Deconversion situation is different

Needless to say, every Section 15 deconversion is different and often the financial interests of the individual unit owner and rental investor in multiple units coincide. Whatever the situation, both parties have rights and it’s important that you understand yours.

If you have interest in, or need information on a Section 15 condo deconversion sale, you can contact me at gudell@bupdlaw.com

If I had a nickel for every condominium deconversion that struggled to reach the finish line in 2018 I would have, well, a pocket full of nickels!  The Chicago condominium deconversion market seems to be suffering from a spate of high profile deals that are on again and off again.

The latest case in point is the mega-deal at 1400 North Lake Shore Drive, a condominium deconversion that I wrote about in August of 2018. After nearly a year of rancor amongst absentee and primary residence owners of the 391 unit building, a deal was thought to have been struck for $111 million this past summer. Crains reported last week that the deal had hit another snag as the investor could not find an equity partner and had, at least temporarily, backed out of the deal.

Like many Chicago condominium buildings that appeal to potential investors for a possible Section 15 deconversion, 1400 North Lake Shore Drive has a large percentage of absentee owners with over 70% of the units currently being rental.   With such a large percentage of owners viewing their units as income producers, it’s not surprising that the Condominium Association Board of Directors, dominated by investors, would favor a sale.

Even with such a high percentage of units already being rental property, reaching the 75% threshold required to force recalcitrant owners into a deconversion can be a daunting task.

As detailed by Alby Galun in his July 2018 article, No deal is good enough for these condo refuseniks, a handful of unit owners can stymie a condominium deconversion deal.  The article detailed how one owner who purchased her unit in 2017 was lobbying others to vote no because, as she indicated, “they (the developer) could never offer us enough money to (allow me to) afford something comparable.” Perfectly within her rights, the owner had no obligation to vote yes to the deconversion, despite the fact that based upon the offer by the investors, she stood to reap a 55% profit after just one  year of ownership.

At least for this owner, a windfall profit wasn’t initially enough to motivate her to vote for the deconversion.

The difficulty in reaching a 75% vote required by law to force a sale, highlights the challenges developers face in the wake of 2018 amendments to Section 15 of the Illinois Condominium Property Act.  Changes written into the  law offer new protections to insure that unit owners opposed to a Section 15 condominium  deconversion are notunduly disadvantaged, should the 75% threshold be met over their objections.

At Brown, Udell, Pomerantz and Delrahim we’ve represented several investors who have made successful offers to deconvert condominium properties into rentals. While each client and situation is different, the challenge of structuring an offer that will appeal to over 75% of the unit owners remains the same.

Here are a few incentives that we have found successful when helping an investor structure a compelling Section 15 deconversion offer.

Offer the opportunity for valuation claims to all owners

One of the new owner protections in the 2018 amendments to Section 15 is the right of owners voting “no” to receive “an amount equivalent to the value of his interest (determined by a fair appraisal), less any unpaid assessments or charges owed by the owner.” On its face, this creates an incentive for owners to vote “no” when it’s likely a deal will go through.

To eliminate this perverse incentive to vote “no”, an investor might consider pre-emptively offering the right to valuation claims to all owners who vote in favor of the Section 15 sale, as part of the deal.  In most instances, the value owners will receive in agreeing to the deconversion will be substantially more than the current market value of selling an individual unit.  This allows the unit owner to vote yes, and not waive their rights to the appraisal.  It allows the unit owner to reserve their rights under the law without having to vote no.  If such is the case, there’s little downside risk to the investor making such an offer to unit owners.

Consider an “Owner’s Bonus” if 100% of unit owners attend the initial closing

If a condominium association votes to deconvert a building consistent with Section 15 of the Illinois Condominium Act, all owners are required to, “execute and deliver such instruments and to perform all acts as in manner and form (that) may be necessary to effect such sale.” However, there’s always the possibility that one or two owners will balk at delivering the sale documents, requiring additional legal resources and possible delay to closing the deal.

By offering a financial incentive if all unit owners deliver and execute the sale documents at the appointed time, this can eliminate short delays that could otherwise turn into long, drawn out headaches.

Offer to pay closing costs for all unit owners  who vote in favor of the deconversion

Another way to incentivize owners to vote for a deconversion is by offering closing costs (transfer taxes, closing fees, title insurance premium, etc.) for all unit owners voting in favor of the sale.  This carrot and stick approach might not be appropriate for all situations and investors, but it is a potentially effective tool in helping to reach the 75% threshold.  This way, if unit owners vote no, and the sale is approved, the no votes will miss out on the stipend.  This incents the unit owner’s to vote yes and closing costs and transfer taxes can be several thousand dollars.

Consider granting of lease-back right to unit owners who want to stay in their units

One of the most understandable reasons that an owner might vote against deconversion is that they simply don’t want to move.  For many, money isn’t everything and even the prospect of increasing maintenance and other fees might not convince an owner to sell.  Often it is an owner that has lived in a unit for many years, or is at the point in life when moving might prove a hardship, that votes no.

In such cases, an investor can grant an owner sale and lease-back rights, allowing them to stay in their unit even after the sale. As an incentive, the offered rental rate could be below market and locked in for multiple years.  The investor is looking to rent units anyway and this is a way to lock in tenant’s, without paying any brokerage commissions and obtain yes votes for the Section 15 sale.

Create a fund to satisfy relocation costs, underwater mortgages and valuation claims for objecting unit owners

Upside down properties, especially those purchased under lenient lending conditions before the 2008 financial crash, created a class of owners who owe more on their mortgage than the market value of their condo.  In some instances even with a favorable deconversion offer the proceeds of a Section 15 sale might not cover the mortgage balance.  When you’ve got a building with many owners in such a situation, there is a strong incentive not to sell so as not to trigger a mortgage default.

By creating a set-aside for underwater mortgages, relocation costs and valuation claims as part of the offer to owners, an investor can eliminate some compelling, rational reasons for an owner to vote “no”.

Every Condo Deconversion situation is different

Needless to say, every Section 15 deconversion is different and depending upon the investor, the tools used to put forth the most compelling offer to owners will likewise vary.

If you have interest or need information on a Section 15 sale, you contact me at: Glenn L. Udell c/o BUPD, Ltd., 225 W. Illinois Street, Suite #300, Chicago, Illinois 60654, Telephone 312-475-9900 or by e-mail at gudell@bupdlaw.com.

If you’ve ever taken the Chicago Architecture Foundation boat tour, which I highly recommend, you’ll learn a great deal about the iconic buildings that line the three branches of the Chicago River. As the tour meanders down the South Branch of the Chicago River, you’ll come across River City, an 80’s concrete structure designed by the acclaimed Bertrand Goldberg who is best known for the Marina City, the twin corncob building rising from East Branch of the Chicago River in River North.

It’s a mid-century modern community of over 400 condominium units that has been in the news recently, not because of its unique architectural style or the renaissance of the Mid-Century modern aesthetic, but rather because it is likely converting from a condominium building to a rental property. With an Association vote having been scheduled for the last week in December, there is great anticipation for the results of this high-profile de-conversion effort.

Condo Developers Speculative Fever and The Real Estate Recession of 2008

Condominium construction in the City of Chicago boomed in the early 2000’s as easy lending rules and lax borrowing requirements fueled speculative construction and purchases. This construction boom not only added new units to a market poised for a fall, it exerted downward pressure on existing condominium properties, like River City.

When the bubble burst in 2008, and the pool of buyers for condominium properties dried up, the least attractive condo properties were soon faced with large numbers of owner rented units, short sales and foreclosures. In addition, the crash of the economy led to mounting assessment delinquencies which in turn put pressure on the finances of an Association, often leading to in adequate reserves to fund deferred maintenance and repair.

In another common scenario during the 2008-2013 market crash, developments with unsold bulk condominiums sold those units in bulk to a single purchaser who in turn rented the units. It is no surprise that residential unit owners who co-exist in a condominium building with investors and their tenants do not get along, because in various scenarios, their interests are not aligned. As a result, many of these bulk unit condominium unit owners have sought to take control and ownership of the other units in the building they do not currently own. In most cases, once all the units are acquired through a bulk sale by a single owner pursuant to Section 15 of the Illinois Property Condominium Act (the “Act”), the single owner de-converts the building pursuant to Section 16 of the Act by removing the units from the Act. The process below outlines the bulk sale procedures pursuant to Section 15 of the Act.

Section 15 of the Illinois Condominium Property Act

a) Unless a greater percentage is provided for in the declaration or bylaws, not less than 75% of the unit owners, where the property contains 4 or more units may, by affirmative vote at a meeting of unit owners called for such purpose, elect to sell the property. Such action shall be binding upon all unit owners, and it shall be 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 of the board 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 value of his interest, as determined by a fair appraisal, less the amount of any unpaid assessments or charges due and owing from such unit owner.

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, in which case, the prospective purchaser of the property shall designate an expert in appraisal or property value to represent him, and both of these experts shall mutually designate a third expert in appraisal or property valuation. The three (3) experts shall constitute a panel to determine by vote of at least two (2) of the members of the panel, the value of that unit owner’s interest in the property.

How Does One Trigger a Sale Pursuant to Section 15 of the Act?

In order to trigger a sale pursuant to Section 15 of the Act, a proposed purchase contract from a ready, willing and able buyer should be tendered to the condominium’s board of directors (which is also the acting arm for the condominium association). The contract must indicate the proposed purchase price, earnest money amount, closing date, pro-rations and all other usual and customary terms that would be included in a real estate purchase agreement.

With the offer submitted to the condominium board, the board has an obligation to present the proposed offer to all unit owner’s in the building. This is often done by the board noticing a special meeting of the board and unit owners. Section 15 of the Act allows a unit owner who did not approve the sale a period of 20 days after the Section 15 approval to lodge a written objection with the condominium board. In that event, the objecting owner has the right to receive an amount equal to the value of the objecting owner’s interest as determined by a fair appraisal.

In order for the sale to be approved, 75% of the unit owners, or such greater number of unit owners prescribed by the condominium instruments, must approve the sale. Since often times the bulk purchaser in owns 75% or more of the voting interest at the time of the Section 15 sale vote, a vote in favor of the sale can be a rather perfunctory task.

Often times however, the percentages are close to 75% and other unit owner’s may need to be lobbied to trigger the Section 15 sale. Provided the sale is approved, the unit owners have no choice than to move forward with the sale and by law, can be ordered by a court of competent jurisdiction to be divested of their interest.

Proposed Changes to Section 15 of the Illinois Condominium Act

Recently passed legislation offers additional protections for those unit owners who object, in a timely manner, to the Section 15 forced sale of their units. Specifically, the new law taking effect on January 1, 2018 stipulates that an objecting unit owner is entitled to receive the greater of the value of the owner’s interest and the amount required to satisfy any underwater mortgage on the unit. In addition, relocation costs must be paid to the objecting unit owner.

A Hot Rental Market in Chicago Drives Condo De-Conversion in Chicago

Nearly a decade after the recession, there’s been a shift in the demand for housing from purchases to rentals. River City is one of many condominiums undergoing a potential conversion to rental units. With the Association vote scheduled as this blog post is written, time will tell if the developer’s offer has reached the 75% threshold. Any transaction that has not consummated prior to January 1, 2018 will be subject to the amendment to Section 15 of the Act.

BUPD, Ltd., has represented several owners involved with Section 15 bulk sales and Section 16 de-conversions in the Chicago and greater Chicagoland real estate market. Condominium unit owners and lenders must be aware of these sections of the Act.

In a Section 15 De-conversion, Separate Counsel is Required

It should also be noted that counsel for the proposed Section 15 purchaser should not also act as counsel for the condominium board with respect to the same transaction. As such, practitioners should be aware to have two separate law firms involved.

If you have interest or need information on a Section 15 sale, you contact me at: Glenn L. Udell c/o BUPD, Ltd., 225 W. Illinois Street, Suite #300, Chicago, Illinois 60654, Telephone 312-475-9900 or by e-mail at gudell@bupdlaw.com.

2 condo boards sell buildings for de-conversion to rentals, ChicagoBusiness.com

Condo busted? Going rental? Here’s how to deconvert.

Condo-to-apartment de-conversion in Lakeview ready to welcome first renters

This could be the biggest condos-to-apartments switch in the city, ChicagoBusiness.com Alby Gallun

All properties located in the City of Chicago (Cook County) are scheduled to be reassessed by the Cook County Assessor for the Triennial Reassessment, with an effective Lien Date of 01/01/18. Every three years the Cook County Assessor’s office makes this determination for all properties in Cook County. One-third of the county is reassessed each year. With this in mind, now is the time to plan and strategize for the forthcoming Reassessment.

Illinois Has the Second Highest Property Taxes in the Nation

According to an April, 2017 USA Today article, Illinois has the second highest effective property taxes in the nation.

How Your Property Taxes Are Calculated

It’s not always clear to property owners how the assessed value of their real estate impacts the amount of property taxes paid.

Each year Cook County effectively determines how much property tax revenue will be needed from property owners.

Once the County Board and tax levying bodies estimates the overall budget and county’s needs, the Cook County Assessor’s office determines how much each individual property owner will pay in taxes. The calculation of the assessed value of your property is a percentage of it’s fair market value, multiplied by the State Equalizer and Municipal Tax Rate.

Reducing Your Property Tax Assessment

So, how does a property owner go about securing a reduction in Assessed Value? A property tax complaint must be filed with either the Cook County Assessor or Board of Review’s office, and provide the proper evidence that warrants a reduction in Assessed Value.

NOTE: there is a strict 30-day deadline by which a property owner must file an appeal. The appeal process begins the moment the assessment notices are mailed to property owners – not the date the notice of assessment is received. Failure to meet the deadline will forfeit the property owner’s right to an appeal.

Brown, Udell, Pomerantz and Delrahim Concentrates in Cook County Property Tax Appeals

BUPD Ltd can help insure that the analysis of your property tax matters is complete, fair and equitable. BUPD, Ltd., offers a no-risk service where fees and costs are entirely contingent upon our securing a tax reduction.

BUPD, Ltd., property tax appeal staff has been involved in real property real estate tax matters for over 30 years, both in and out of Cook County, and has a comprehensive understanding of the assessment and municipal taxing process. We have extensive experience in securing fair and equitable property valuations.

BUPD Ltd. is a general practice law firm concentrating in commercial civil litigation, real estate/bank litigation and real estate and corporate business structuring, financing and transactional matters. BUPD is able to contest and challenge your real property real estate tax matters. BUPD is also capable of securing retroactive property tax relief (Certificates of Error) for previous tax years where applicable, as well as applying for and submitting applications for the various tax incentives on your behalf, where appropriate. The Firm’s has over 30 years of experience and is able to assist you at all levels, not only at the Assessor’s Office but also at the Cook County Board of Review, the Property Tax Appeal Board and before the Circuit Courts in Specific Objection proceedings.

Should you have any questions or wish to discuss your specific property tax matter(s), please feel free to contact me at GUdell@bupdlaw.com.