A few months back I wrote about the flood of condo de-conversions in the city of Chicago and how recent changes to Section 15 of the Illinois Condominium Property Act in 2018 could make it more challenging for developers to reach the 75% owner threshold required to trigger de-conversion.
It was only a matter of time before the saga of a high-profile condominium teetering on the brink of de-conversion hit the news. The alternative story lines were completely predictable.
Version A: A small band of besieged unit owners valiantly try to keep their homes as greedy developers and large investors attempt to force them out.
Version B: A few selfish holdout owners, looking to get a better deal, hold “building x” hostage as the vast majority of ownership vote for condo de-conversion.
As you might expect, the reality often falls somewhere in the middle. This truism was amply demonstrated by the de-conversion fight over 1400 N Lake Shore Drive.
The History of 1400 North Lakeshore Drive
In the 1890’s, Lake Shore Drive north of the Water Tower was still not fully developed. The most active part of the City was South of what is today the Loop and the northerly stretch along the lake was what might be considered today a suburban community. One of the largest, most opulent homes along North Lake Shore Drive was the Franklin McVeagh residence at 1400 North Lake Shore Drive. Situated opposite the Potter Palmer residence, the McVeagh home was designed in a Romanesque style with rock faced masonry.
In the 1920’s McVeagh leased the home to Lady Lucile Duff-Gordon for the sum of $1,000 a month. Lady Duff-Gordon used the home for her fashion salon, Lucile Ltd, for several years. The location was perfectly positioned to serve the wealthy Chicagoan’s living close by.
As Chicago grew and moved north, the wealthiest Chicagoans along Lake Shore Drive saw the value of the land beneath their homes increase dramatically. In what might be described as the “Gold Coast” version of block busting, once one millionaire sold to developers building multi-unit or commercial structures, others followed suit.
1400 North Lake Shore Drive was one of the first “tear downs” along the boulevard, as a hotel sponsored by the Wrigley family was built at that location. The 21-story concrete reinforced building was designed by architects Hooper & Janusch in the Art Deco style and completed in 1927.
With little economic activity during the Great Depression, the hotel was soon transformed into a co-operatively owned building which it remained until it’s conversion into rental apartments in the 1950’s. As the advertisement for Murphy Beds suggests below, as a co-op, it was a very prestigious address.
Fast forward to 2006 and the height of the condo building boom in Chicago, a real estate developer purchases 1400 North Lake Shore Drive, converting its apartments into condominiums. The vintage high rise seemed the perfect opportunity to leverage the copious amounts of debt financing available at the time into quick profit. Then the real estate crash of 2008 struck.
With a large inventory of unsold units and creditors wanting their money, the developer liquidated its position in the property. In the process several investors picked up multiple units and turned them into rental properties.
As I’ve described previously, with the Chicago real estate recovery has come a new wave of multi-family construction. Today, the buildings rising from the City’s streets are rentals as a seemingly insatiable desire for rental units fuels the wave of condo de-conversions.
The Ups and Downs at 1400 North Lake Shore Drive
Crain’s has done an admirable job reporting on the saga of 1400 North Lake Shore Drive. In June it highlighted that the 1400 North Lake Shore Drive homeowners’ association had begun shopping the building for possible sale. With a reported 79% of units being rental, it seemed a ripe candidate to join the de-conversion boom.
By July, with an offer of $111 million from New York property investment firm ESG Kullen going down to defeat by a mere 0.4% of ownership, a new story appeared in Crain’s. Titled “No deal is good enough for these condo refuseniks”, the article detailed the difficulty de-conversion efforts might have reaching the 75% threshold and how a handful of owners, dubbed refuseniks, who could nix a de-conversion deal.
In the article one “refusenik” owner who had purchased her unit in 2017 for $223,500 was interviewed. The reporter noted that under the ESG Kullen de-conversion offer, the owner would have received a bit over $345,000, a paper gain of 55% in a year. What was the owner’s reason for voting “no” to the de-conversion offer?
“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.”
There’s no doubt that those who were against the de-conversion were under pressure by the majority ownership who wanted to cash out. And it’s undoubtedly true that finding a Lake Shore Drive unit at a price below $400,000 could be challenging. Yet, after reading the story, understanding the quick profit some owners would reap, and how close the failed de-conversion vote was, one had to wonder if second thoughts were not bouncing about in the “refuseniks” heads.
Evidently, a bit more politicking occurred in the past few weeks as Crain’s reported yesterday that a new de-conversion vote had been held and approved by the homeowners’ association. This time, with the same offer on the table, de-conversion was approved by over 85% of the ownership shares.
When the “refusenik” owner previously interviewed was asked why she had reversed her vote from “no” to “yes” she is quoted by Crain’s as saying, “I wasn’t going to cut off my nose to spite my face.” The owner suggested she was concerned that if she did not vote in the affirmative, she would not be eligible to receive compensation for $25,000 in improvements she had made to the unit.
While condo de-conversions are at their core just business transactions, non-monetary elements can play a large role in the decision-making process of owners. Just as important, there can be financial advantages for “refuseniks” who hold out for the best deal, separating their interests from that of other owners.
In a follow-up post I will discuss a few ways that we at Brown, Udell, Pomerantz and Delrahim, Ltd., have counseled our investor clients to achieve the 75% owner threshold required by the State of Illinois for successful condo de-conversions. It’s an interesting subject that will continue to earn coverage in the news as more and more condominiums look towards de-conversion as a way to maximize property values.
