Raccoons and Real Estate: Tales from the Front Lines

Chicago’s real estate market has experienced a dramatic rise in residential and commercial deconversions in the last two years. As our previous blog post which outlined the process for deconversions mentioned, since 2017 the Chicago real estate market has been leading the country in the deconversion of residential and commercial properties. Recently, the Argianas team completed an appraisal for the contemplated deconversion of an entire multi-unit office condominium development that is an interesting example of the complexities of this process.

Contemplated Office Condominium Deconversion – The Project Specs

the property

The subject office condominium development completed its first phase more than forty years ago, with development phases over the years resulting in numerous free-standing buildings with a variety of both small and large units. Development throughout the area was ongoing, resulting in office product oversupply.

Over the years, some of the buildings had fallen into disrepair, with deferred maintenance including electrical, plumbing, foundation, roof, and animal control issues (raccoons had taken up residence in some of the vacant buildings).

the players

The individual condo units were owned by various unit owners, with management-related issues structured under the development’s ownership association. “This is common for condominium developments built in stages,” explained Alexander Argianas, Vice President of Argianas & Associates , “In this instance, no single owner controlled a large percentage so that added to the complexities.” Multiple owners meant multiple opinions, concerns and intentions. Some owners, several of whom were reaching retirement age, embraced the contemplated deconversion (all unit owners encouraged to sell their units to a single buyer for operations of all the buildings/all the units as a single income-producing real estate asset). Others who saw the population growth and investment in the area were less in favor, wanting to continue their businesses while hoping the values of their individual units would increase.

Medical Office Condo Deconversion – The Process

This particular appraisal project provided our team with several appraisal challenges. A primary issue was determination of highest and best use of each unit versus the HBU of all buildings/all units assumed as a single economic unit owned by a single ownership entity; however, the varying physical state of each of the buildings/ the units reflected inconsistencies and unit-owner disagreement.

“At the top of the list of problems were engineering concerns associated with disrepair, with the remaining economic life of buildings and units at risk due to foundation problems, roofing issues, and raccoon infestation,” explained Alexander. “Significant capital investment was warranted to improve the marketability of some of the complex’s units.”

Our team gained an in-depth understanding of the client’s needs before deciding the best course of action, which we set forth in scope of work phases. First, we valued the entire complex assuming all the buildings/units as a single economic unit.  Secondly, we determined the individual values of each condominium unit. Thirdly, we compared the price levels for the individual units with the value of the entire complex assumed as a single economic unit.

phase I

The first phase was to appraise the complex subject to the hypothetical condition that all condominium units have already been merged into a single economic unit ownership structure.  “When you have a condominium complex multiple owners and associations, the best starting point is to see what the development is worth as a single economic unit,” explained Alexander. “It’s a starting point to give the owners baseline information for their decision-making needs as to whether contemplated deconversion is in their best interests.”

phase II

An engineer was then sent to the complex to identify all physical property issues and suggested solutions (determination of physically curable vs. incurable obsolescence coupled with consideration as to whether the costs to cure were economically feasible).  “As part of our research, we determined whether the property’s value as a vacant development site exceeded its value as improved,” explained Alexander.

phase III

The final phase was determining the individual value of each individual condominium unit. Each unit was valued on a stand-alone basis, with deductions for deferred maintenance.  “This is where deconversion planning gets truly complicated and requires valuation professionals,” explained Alexander. “Unit owners with larger percentage of ownership in the condo association have greater voting power, than that of an owner who owns only one single unit. This is regardless of whether a respective unit is in disrepair or in excellent condition.”

Office Condominium Deconversion – The Final Recommendation

Our final recommendation to the condo associations and owners was to proceed with deconversion of the entire complex, but with a portion of the complex to be demolished to make way for redevelopment. At the same time, a substantial portion of the complex was recommended for updating.

“At the end of the day, deconversion was not just the best thing for the owners – it was also the best thing for the overall multi-building condominium campus,” explained Alexander. “The opportunity to turn this property into income producing real estate proved to be the highest and best use. With an abutting busy road, it would make the perfect location for retail.”

Consider Retaining Us for Contemplated Condominium Deconversion Decision-Making

With heightened interest in Chicago condo deconversions, savvy real estate appraisers provide critical, non-bias analysis for go/no-go decision making.  To understand the basics of deconversions, read our “Understanding Chicago’s Condo Deconversion Process” blog.  If you are considering deconversion for your commercial or residential property, or have any questions, do not hesitate to give us a call at 630.390.0113 or complete this form. To receive more real estate appraisal resources, be sure to join our mailing list to receive our e-newsletter.