Understanding the Deconversion Process

Condominium deconversions are on the rise as the real estate market tries to self-correct after so many buildings “went condo” during the early 2000’s real estate boom. Since 2017, the Chicago real estate market has been leading the country in the deconversion of residential and commercial properties.

“Deconversion is a real estate trend that is here to stay. We’re reading story after story about large scale deconversion projects. Chicago is reporting resident deals like the $112 million-dollar 1400 N. Lake Shore Drive property and the $60 million-dollar condominium to apartment deconversion of Century Tower in the Loop,” said Alexander Argianas, Vice President of Argianas & Associates. “We are also seeing deconversions of commercial properties like the Fletcher Drive Medical Center, a 40,000 square-foot medical office condominium, in Elgin.”

Answers to your chicago deconversion questions

What is a deconversion?

According to the Illinois Department of Financial and Professional Regulation, Division of Real Estate, “Deconversion is the process of selling the entire condominium property to a third party who will turn the condominium units into rental apartments”.

How does the deconversion process work?

The law (765 ILCS 605/ Condominium Property Act) states that a Home Owner’s Association (HOA) must take a vote. To force a sale, the percentage of votes needed varies from state to state. In Illinois, 75 percent of the owners must vote “yes” to sell.

When’s the “right” time to consider a deconversion?

There isn’t one hard and fast rule. If you are the owner of a residential or commercial condominium, consider the following:

• The age of the building, especially if it was built in the 1970’s or earlier
• The need for expensive modernization and/or capital improvements
• The excess of condo inventory surrounding your building or the lack of rental inventory
• The realization that units are either not selling or not selling at a price that will garner a return on investment

Will the buyer make individual offers to each condo owner?

No, a developer will not make multiple individual offers for units in the development. A developer will want sole decision making for the association and by extension the development. A deconversion is often a bulk sale meaning that the buyer will pay one price for the entire building as a single economic unit.

 How does an association determine the price for the building?

The association will want to hire an experienced appraiser to determine the value of the building. “The fact that you can’t add up all 100 condos and say that they are all valued at one price to get a simple answer of value is what always trips people up. It’s not as simple as pulling listings and recent sales of single condos sold. That is a logical fallacy when discussing deconversions. There’s a lot more that goes into determining the value of the entire development and the value of the individual units that make up the whole, it’s the whole picture, not a magnifying glass,” explained Alexander.

 Why isn’t each unit valued at the same price?

Deconversions are complex appraisal projects because each unit may vary in size, location in the building, overall condition, value, and voting percentage on the association. “For example, you may have a top floor unit with a view of the lake that was probably given a higher price and voting rights on the association by the original developer than a bottom floor unit that has a view of a dumpster in an alley,” explained Alexander. “Let’s take it even further and say that the owner of the unit on the lower flower has recently put in a new kitchen and bathroom and the unit on the top floor has all the original fixtures. As an appraiser, you have to consider everything from floor to ceiling to the view when determining the value. Real estate is not static.”

 How does the deconversion appraisal process work?

Deconversion appraisal work can very quickly become messy and contentious. With so many moving parts, a slow multi-phase approach ensures clients are well aware of the benefits and drawbacks of a full deconversion.

The appraisal of a condo deconversion is a three-phase process. It is at the end of phase one when the association will have enough information to decide if moving forward is in the best interests of the individual owners the association represents. During each phase the appraiser will:

•  Phase I – Determine the “As-Is” value of the full development subject to a hypothetical condition. If the whole complex was offered for sale, without the barrier of delisting or association and offered on the open market — what would an eager/willing party pay to purchase the entire development?

•  Phase II – Determine what each unit is worth by performing individual appraisals of all units in the development.

•  Phase III – Standardization of values based on the percentage of development association ownership. After arriving at a value of a bulk sale and knowing individually what each individual unit would sell for assuming individual sales, what an investor would pay for the entire complex, applying a percentage to each condo considering the condition and the percentage of ownership.

What’s the next step?

Before contacting a real estate broker, the first call should be to a real estate appraiser. The appraiser’s role is to offer an objective, impartial and unbiased opinion about the value of the subject property. It’s imperative to have a 360-degree analysis for you and any other intended user to fully understand every aspect of the market, the land and the property especially during the deconversion process.

If you are considering deconversion for your commercial or residential property, or have any questions about the process, do not hesitate to give us a call at 630.390.0113. To receive more real estate appraisal resources, be sure to join our mailing list to receive our e-newsletter.