One proven multifamily real estate strategy is converting rental apartments into condominium units. This conversion process applies to any building where tenants reside in separate units, such as co-op buildings with tenant shareholders or attached row or townhouses. In urban environments like Chicago, condo conversions can extend to buildings initially zoned for commercial purposes. These structures are rezoned and rehabilitated to serve residential needs.
Condo deconversion has been a growing trend. This involves selling a building to a third party responsible for converting condos into apartments. The guidelines for these transactions are outlined in Section 15 of the Illinois Condominium Property Act, and they are organized as bulk transactions that require approval through a vote by the unit owners within the building’s governing association.
For a Section 15 sale to go through, the association must garner at least 75 percent approval from the owners of units. At the end of the deconversion process, the building is no longer operated by singular condo owners, as the purchaser owns it.
There are two pathways by which deconversions come to fruition. One is through an unsolicited offer by a purchaser or developer, and the other involves an association seeking an offer. Unsolicited offers typically come in the form of a letter of intent, which provides the general terms governing a potential purchase. Notably, this does not represent a binding offer or contract and is not an actual purchase agreement. This allows the association to vote on the proposal and reach a workable agreement.
Since 2017, Chicago has been at the forefront of large-scale deconversion projects, including the $60 million Century Tower condo apartment in the Loop and the $112 million property at 1400 N. Lake Shore Drive. Reasons for reconversions include increased home prices for single-person households and declining levels of homeownership among those of retirement age.
At the same time, higher interest rates and increasingly strict mortgage lending standards have made purchasing homes or condos more challenging for families seeking to enter the real estate market. This has increased the demand for rental units, particularly those located close to transportation and shopping amenities.
In historically significant areas like Chicago, many older buildings require extensive, expensive, and time-consuming repairs. When condo associations lack the necessary financial resources, they may face special municipal assessments related to deferred maintenance and essential capital improvements. Investors participating in deconversions can assist in covering these often substantial expenses imposed by local authorities.
For instance, a condominium dealing with a $140,000 special assessment may discover that accepting an attractive sales proposal is a practical choice. This enables them to offset the financial strain of maintenance and renovations, eliminating the need for the association to impose additional special assessments or secure substantial loans.
Given market fluctuations, unit owners may also find it challenging to sell their properties profitably, and deconversion can help recoup losses on unit sales. Investors and developers must carefully consider whether the major upkeep and repair needs of historic condo buildings make them viable deconversion candidates. One potential drawback of reconversions is that, for unit owners, it represents a loss of long-term investment gains for the short-term profit of a sale.
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