Nov 02, 2017

Illinois condominium deconversions: Keeping an eye on House Bill 2401

Our firm continues to engage a steady volume of condominium deconversion transactions as the spread between prices offered to condominium associations for the bulk purchase of their building and those which are acceptable to the individual owners of the units continues to be small. In most cases, these deconversion transactions result in a purchase price which makes sense to the purchasing developer as the value-add characteristics of many of these buildings, and the resulting rents that the units can achieve once the building is deconverted result in a desirable net operating income for the purchaser.

On the flip side, that same purchase price being offered to all unit owners, split according to their ownership interest in the common elements of the building, results in a price which exceeds that which most owners would be able to attain in the open market. This price congruence usually results in an association being able to obtain the necessary consent of at least 75 percent of the unit owners in the building pursuant to Section 15 of the Illinois Condominium Property Act (the Act) (765 ILCS 605 et seq.).

However, there is currently legislation pending in Illinois which, if passed, will make it more difficult to obtain the minimum requisite vote of ownership to proceed with such a deconversion transaction. Among other proposed legislative changes therein, part of House Bill 2401 seeks to increase the percentage of consenting owner votes necessary to compel those non-consenting owners to sell their units (a forced sale) pursuant to Section 15 of the Act. In short, the bill proposes the four tiers of voting requirements:

  • An affirmative vote of the majority of the unit owners if the property contains two units;
  • An affirmative vote of not less than 66 2/3 percent if the property contains three units;
  • An affirmative vote of not less than 75 percent if the property contains at least four but not more than six units; or
  • An affirmative vote of not less than 85 percent if the property contains seven or more units (provided; however, that if less than 25 percent of the units are owner occupied, then the 75 percent requirement still applies).

Given the ongoing strength of the multi-family rental markets, particularly in Chicago, it should be of no surprise that it is often the larger condominium buildings which are particularly attractive to developers as the value-add and re-purposing options available to these developers often increase in many respects with the size of the building. It is these larger buildings (seven or more units) which, if House Bill 2401 is passed, will be more difficult to meet the requirements necessary to properly complete the deconversion of a building.

House Bill 2401 was originally filed on Feb. 2, 2017, and was re-referred to the Rules Committee on Sept. 28, 2017, so, until such legislation is passed and signed, it is still pending; however, as developers and condominium associations alike continue to contemplate their options for potential future deconversion transactions, this law, if passed, could make things more difficult for larger buildings. Our firm continues to monitor the status of House Bill 2401 and will adjust the guidance we provide to our deconversion clients as necessary if such legislation is passed.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: K. Shaylan Baldwin, Principal

This alert originally appeared in the Fall 2017 Real Estate Focus newsletter.