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.
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