Converting Values: Condo owners on wrong end of deconversions lament lack of legal protections

By Jonathan Bilyk | May 4, 2018


In Chicago's South Loop, the River City condominiums are slated to become the largest condo complex to convert to apartments.   Smerdis at English Wikipedia [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0 (https://creativecommons.org/licenses/by-sa/3.0)], from Wikimedia Commons

Dan Pepper would prefer not to head to court over the value of the condominium he would prefer not to leave.

But as a Chicago real estate firm and his condo association push forward toward completing what would be the largest condos-to-apartments conversion in Chicago to date, transforming the South Loop’s River City complex to rentals, Pepper said he and other owners may be left with no other option under Illinois law.

“I understand what the law says,” said Pepper. “But it also appears there’s no cop on the beat to make sure the little guy doesn’t get creamed here.”

Across the city of Chicago and the suburbs, condo owners are being presented with a choice. As the demand for apartments has built in recent years, so, too, have the number of real estate firms and developers seeking to acquire and cash in on the region’s existing stock of multifamily dwellings locked up in condo buildings.


James Arrigo   Rathje & Woodward

For many condo owners, the chance to unload their units onto willing buyers paying cash seems to have proven welcome, particularly if condo owners find themselves “underwater” – meaning, they owe more on their mortgages than the units may now be worth on the market.

However, those, like Pepper, who may not wish to either rent the units they now own, or find somewhere else to live, have found the process more unsettling.

While market forces have driven the move to convert condo buildings to apartments, the conversions have been enabled by a provision tucked within the Illinois state law governing condo properties.

Known as Section 15, the provision grants condo association boards the power to sell all units included in the association at once, provided the sale receives at least 75 percent of votes at an election called on the question by the association.

In River City, for instance, published reports indicate about 79 percent of votes were cast last December in favor of selling all 448 units in the complex for $100 million to Marc Realty Capital.

However, such elections involve more than a simple poll of individual owners. Rather, the vote in such elections is weighted based on interest held within the association, which is determined by various factors, including the number of condo units an owner may hold within the association, and the size of those units.

In recent history, this has meant corporations and other investors can, and often do, gain outsized shares within the association.

James Arrigo, a lawyer with the firm of Rathje Woodward in suburban Wheaton, whose practice specializes in condo association and real estate law, noted the depressed housing prices amid the Great Recession, in particular, offered real estate companies and investors opportunities to claim the drivers seat in a number of condo buildings.

And, after banking a large enough share, a number of the corporate investors have moved in recent years to leverage that interest to launch the process of converting condo buildings to apartments. But in that process, individual condo unit owners can get caught in the mix, Arrigo said.

“If you’re part of the minority, once the vote goes through, you’re along for the ride,” said Arrigo. “Owners can be compelled to take a bath, if that’s what the other members decide.”

CIVIL PROCESS, CIVIL REMEDIES

While Section 15 spells out how the conversions can occur, the provision doesn’t spell out any penalties for violating its requirements, or give any government agency authority to oversee and enforce it.

This, said Arrigo, leaves it to condo owners and their associations to hash out their differences, and do so in court, if necessary.

“It’s a civil process,” said Arrigo. “And it involves civil remedies.”

And such scenarios are playing out in court. In northwest suburban Palatine, for instance, a group of 32 individual condo owners in the Woods at Countryside development filed suit in April against their condo association, accusing the association, which is still under the control of the developer of the condo buildings, of securing a deal with a new buyer that would leave them with 40-50 percent than what they believe their units would be worth on the open market.

In that case, court documents indicate the developer, which still owns the majority of the units, invoked Section 15 and secured 76 percent of the vote in the special association election to approve the bulk sale. But the plaintiffs have accused the board of ignoring its fiduciary duty to all owners, solely for the benefit of the developer pushing the sale.

Arrigo noted such suits could come with risk for condo association boards, as any association member could have standing to bring such litigation, and the association’s insurance policies may not cover board members found liable for a breach, meaning they could be personally liable for damages, including the plaintiffs’ attorney fees.

But he said to succeed, those bringing the suits must be willing to see it through to the end, if they wish to recover their legal expenses.

In west suburban Naperville, condo owner Jeffrey Grimm is also fighting his condo association’s attempt to force him to sell his unit in the Huntington Residences. Last June, the Huntington condo association voted 340-5 to authorize the sale, under Section 15, of all properties to Chicago-based Rockwell Partners, to convert the unit into apartments, according to documents filed in DuPage County Circuit Court.

However, Grimm was among those opposing the measure, and, earlier this year, the Huntington association sued him, accusing him of breaching his contract for not cooperating with the process, by refusing to supply requested owner information for his unit and not engaging with the association in the appraisal process for his unit.

Grimm’s attorney, Damon Fisch, of Naperville, said Grimm intends to fight the lawsuit in DuPage County Circuit Court, asserting the association is controlled by Rockwell.

QUESTION OF VALUE

While Section 15 spells out a process for resolving a disagreement over a condo’s appraised value – essentially, bringing in an independent appraiser to judge between the dueling appraisals submitted by the buyer and the compelled seller – Fisch said he and his client differ from the association and the prospective buyer in their interpretation of what exactly the law requires to be appraised.

While the appraisal filed in court by the Huntington association valued the condo unit as if it were being sold to an individual buyer as a condo, Fisch said they believe the law should be read to require an appraisal of the unit’s value within the association. To do that, Fisch said, he has requested an appraisal of the property in its entirety, to determine what the value of Grimm’s interest in the property may be.

“In this context, the term ‘property’ means all land, all structures, easements, everything,” Fisch said. “If you don’t give an appraisal of the entire property, we believe you’ve already started wrong.”

An attorney who court records indicate has represented the Huntington Association and published reports indicate represents the River City condo association in Chicago, did not respond to questions from The Cook County Record.

Fisch likened conversions under Section 15 to eminent domain actions taken by cities and other units of government. In both instances, he said, buyers seem to have the force of law on their side, as they seek to compel what may be unwilling sellers to surrender their property at a certain price, or face legal and financial consequences.

“This is about how you value the property,” said Fisch. “Rockwell’s valuing the entire building as an apartment building. We’re saying: Why should they be able to value my client’s property at the cheapest possible valuation?”

Concerns over the Section 15 process have sparked reforms of the provision in recent months and years, though Arrigo said, despite comparisons by some to the takings process under eminent domain, no one has legal challenges to Section 15 conversions have been limited to specific cases over specific conversions.

 In 2017, Illinois lawmakers approved a measure guaranteeing owners removed from their units would receive payment for “relocation costs,” in addition to the greater of either the fair appraised value of the unit, or the balance of the mortgage or other debt owners may owe.

Further reforms are pending in the Illinois General Assembly, where legislation, if enacted, would require associations to win the votes of at least 85 percent of association member votes in condominium buildings containing at least seven units or more. A proposed amendment to the bill, which is also awaiting vote in the Illinois state Senate, however, would keep the threshold at 75 percent for condominium properties in which fewer than a quarter of the condo units are occupied by their owners.

However, as Pepper sees it, such reforms won’t mean much, if the law continues to leave interpretation of its provisions largely to the associations seeking to complete the conversions and bulk sales.

Pepper said he, like Grimm in Naperville, has refused to cooperate with the River City association’s efforts to complete the sale of his unit. And like Grimm, he has rejected the appraisal the association secured of his unit, saying he believes the appraisals are based, not on an open market, but on an environment artificially depressed by years of talk and “threat” of imminent, compulsory bulk sale. He said the offer he has received wouldn’t allow him to convert the compulsory sale of his current unit to the purchase of a comparable unit anywhere else in Chicago.

“I need to get what I had,” Pepper said. “If you’re going to move me out, at least give me something comparable.

Pepper said he and other holdout owners are working with an attorney and may yet bring legal action over the conversion. But he said he’s not relishing the potential fight ahead, noting he may need to pay his own attorney to sue the board whose legal fees are paid, in part, by the association fees he has paid.

“I don’t want to leave,” he said. “For people like me, this whole business is just an ugly, ugly thing.”

 

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