Why a Chicago developer may be coveting your condo
Crain's Chicago Business
Alby Gallun
13 June 2015

How hot is the Chicago apartment market? So hot that developer John McLinden tried to buy all 492 condominiums in a Gold Coast high-rise so he could convert them to apartments.

“I thought it was a long, long shot,” says McLinden, managing partner of Chicago-based Centrum Partners.

It was. Unsatisfied with his price—$141 million, according to Centrum—the condo board at 1660 N. LaSalle St. rejected the offer within days, deciding not even to ask residents to vote on it.

But the attempt illustrates how the local housing market has been flipped on its head. Instead of converting apartments to condos—an established strategy you would expect at this stage in the market's recovery—a group of developer-arbitrageurs is going the other way as Chicago apartment prices keep climbing.

Some already have pulled it off in smaller buildings. Last August, Chicago-based Laramar Group paid $7 million for all 24 condos in a vintage Lincoln Park building, and the firm has more deals in the works, President Jeff Elowe says.

But a few developers with the money and patience, like McLinden, are thinking bigger and chasing high-rises with hundreds of units.

“Big-time players are looking at prices and saying, 'I think we could buy this building lock, stock and barrel and make money by running it as an apartment building,'” says Chicago attorney David Sugar, a partner at Arnstein & Lehr and chairman of the firm's condo law group.

“Hopefully, condo boards will figure out that they can make 50 percent more selling to these apartment idiots chasing a bubble,” says David Ruttenberg, principal at Marc Realty Residential, a Chicago-based apartment landlord. “Hopefully, I'm the fool they call.”

While “de-converting” condos may be the newest way to profit from the boom, de-conversions are still rare. The biggest obstacle: dealing with dozens, or in Centrum's case hundreds, of sellers who each have a different opinion of what their condos are worth. Some are so attached they won't sell for any price.

Under state law, a developer can buy all the condos in a building if the owners of 75 percent of the units vote to approve a sale. When that happens, the dissenting owners are compelled to sell, with disputes over price and other terms handled by an arbitrator.

Marc Realty Residential, for instance, tried to buy a 108-unit building in East Lakeview for about $200,000 a unit, or $21.6 million overall. But it came up short in a vote last fall after owners of 26 percent of the units voted against the deal, says Ruttenberg, who estimates that the units were worth about $140,000 each as condos.

Because apartments have a higher value in the current market, Ruttenberg might make another run at the building. “We're very patient,” he says.

Indeed, patience is key: After buying 31 unsold units from the developer of a stalled 38-unit Rogers Park condo project in 2012, Marc Realty Residential just closed on the last of the remaining seven units six months ago.

It may be the real estate equivalent of herding cats, but there is a payoff. Elowe of Laramar estimates that the 24-unit building his firm bought in Lincoln Park, at 2215-2221 N. Clifton Ave., could fetch as much as $10 million if it were sold today, 43 percent more than Laramar paid last August.

“It's a higher and better use as a traditional multifamily building than as a condo building,” he says. “That location is about as good as it gets.”

The de-converting trend started after the condo bust, as developers snatched up unsold condos in failed projects in bulk deals and rented them out. What's new today is that developers are seeking longtime condo buildings, trying to buy out lots of individual owners, not a bank or developer.

For his part, McLinden is pursuing two other condo buildings that could be good de-conversion candidates, declining to identify them. He's targeting properties that need major capital improvements. He's betting that condo owners will be more willing to sell if they are about to be hit with a big assessment.

“There are a lot of people who just won't pay,” he says.

Editor's note: The story has been updated to reflect the price offered by Centrum Partners for 1660 N. LaSalle St.


Deconverting condos feeds renters’ growing demand
Chicago Tribune
By: Gail MarksJarvis
24 June 2016

Larry Kanarek stands June 23, 2016, outside the condo building at 915-925 W. Schubert Ave. that he worked to get sold and deconverted into rental apartments. (Anthony Souffle / Chicago Tribune)

Stand just about anywhere in the Loop and look up. What do you see?


They reach into the sky throughout the city's core and are constructing upscale, high-rise apartments to meet the demand of millennials and empty nesters with urban tastes and plump paychecks.

Demand for rentals is fueling another type of development, too, but this one doesn't involve cranes. From Lincoln Park to the South Loop, developers are trying to convert older condo projects into apartment buildings for people who want rents a little cheaper than those in the glitzy new high-rises.

You read that right. Condo buildings are being converted into apartment buildings, not the other way around. The housing market has come full circle. About a decade ago, developers were scrambling to turn out condos so they could profit from a mania of home buying. Then, easy financing and rapidly appreciating home values drove people in their 20s and 30s to rush and snap up their first condos whether they could afford them or not.

Now, after the housing bust, the allure of owning has faded, and getting a loan for a starter condo is tough, said Doug Imber, president of Essex Realty Group. So people — especially millennials — want to rent, or they must rent because they can't come up with a down payment. In condo buildings with sizable populations of renters, getting banks to approve a loan for a condo purchase is especially difficult.

The River City Condominiums in the 800 block of South Wells
(Abel Uribe / Chicago Tribune)

"Who's going to buy when you can't get a mortgage?" Imber said. "You need all cash, and that's not who buys a condo."

Enticed by the opportunity to get a steady flow of high rents, and with low-interest-rate loans available, developers and investors see an opportunity. They are scavenging the Chicago area looking for condo buildings with a lot of units occupied by renters. In a process called deconversion, they offer to buy every condo in the building at a price that presumably is higher than individual condo owners could get on their own.

Under Illinois law, if a developer convinces 75 percent of a building's owners to sell, unwilling owners can be forced to go along and must sell their units. Then the developer buys all the units, brings in the remodelers, spruces up the building, and attempts to rent the units at prices above what amateur landlords were getting for their individual units.

But it's not an easy process, said David Ruttenberg, a partner at Marc Realty Capital.

He thought condo owners at 458-unit River City Condominiums in the South Loop would go for a deal in which they were offered $225 a square foot, or a total of $83.1 million. The offer, he said, topped the $125 a square foot he figured they'd get if they tried to sell their own units. But the remnants of the housing bubble stood in the way. Ruttenberg estimates half of the condo owners had so much mortgage debt left to pay off they couldn't afford to sell.

Instead of getting 75 percent to approve the deal, only 60 percent voted for it, he said. The deal didn't go forward, but Ruttenberg says "we're still talking," while he looks at other buildings to deconvert.

He thinks that when interest rates increase, this cycle's round of deconversions will come to an end because they will be less profitable.

As investors push to get deals done now, the easiest to accomplish are those in smaller buildings filled with renters, Imber said.

That was the case with 915-925 W. Schubert Ave. in the Wrightwood Neighbors area near Lincoln Park, a 29-unit building recently sold to a partnership of Chicago-based Golub & Co. and Boston's Alcion Ventures for about $5.1 million, said Larry Kanarek, the building's former condominium association president.

Even though he owned 13 units, and owners were offered far more than they were getting when trying to sell on their own, Kanarek said it still took him six months to get 100 percent to approve the deal.

Ultimately, owners were looking at about $170,000 a unit, compared with recent sale prices in the building of $90,000 to $115,000, Imber said.

"Even if you have no intention to sell, when you think your condo is worth $100,000 and you are offered $170,000 you rethink it," he said.

Most of the units in the Schubert building are small studios, around 325 to 350 square feet, and all but three units were being rented out by the condo owners, Kanarek said. He figures that after all are remodeled, monthly rents will be raised to $1,200 or even $1,400 compared with the $850 or $900 a unit some condo owners had been charging.

Kanarek sought an investor who would buy the entire condo building when he decided after 33 years as a landlord that he wanted to retire. He purchased his first condo in the building in the 1980s and slowly added units. Over the years, he did everything from writing classified ads for available rental units to doing remodeling himself, he said.

Given soaring rents and rental demand in Chicago, he thought this was an opportune time to find a buyer who would deconvert the condo building to apartments, which was its original state when built around 100 years ago.

Kanarek isn't sure when the peak in the apartment market will come, but as he watched the level of apartment construction in the city he decided the time was right to make his exit.

Gail Lissner, vice president of Appraisal Research Counselors, has been watching the apartment market for a sign that it is getting overbuilt and sees no evidence of a peak. Even when a peak is reached, she said, the glut that may arrive by 2018 will be in the luxury new high-rise buildings that have been added in record numbers downtown, not the older, lower-priced units.

The number of deconversions is relatively small, and they serve a different market than the massive new apartment towers, she said.

Meanwhile, condo development isn't dead, but it is different.

Homebuilders are focused on relatively small condo buildings for the very high end, said Alan Lev, president of Belgravia Group. He and others are building mostly large three-bedroom units hovering around $1 million. The "sweet spot" now for new condos is over $600,000, he said.

But eventually, he noted, every cycle in the housing market turns, and when that happens he assumes more moderately priced condos will be built — and apartments will be converted back to condos.


This big Lakeview condo complex is poised to go rental
Crain's Chicago Business
Alby Gallun
17 October 2016

The Barry Quadrangle

A big North Side condominium complex has gone up for sale, another prospect for developers that convert condos into apartments.

The board of Barry Quadrangle, a 116-unit property at Barry Avenue and Dayton Street, has hired CBRE to sell it, joining the condo deconversion trend that's gaining momentum throughout the city.

The board put the vintage Lakeview complex on the market after receiving an unsolicited $28 million offer for the property from a developer, according to a June email that condo board President Sylvia Franke sent to owners in the building.

“The initial offer was rejected as too low, but this led to homeowner interest in investigating the sale of the property as a whole and our hiring CBRE to market the property. That is where we are now,” Franke wrote today in an email to Crain's.

One person familiar with the complex said the board is seeking as much as $40 million, or $345,000 a unit, for the property. Franke did not respond to a follow-up email to confirm that figure.

Trend reversal
Historically, developers have profited by converting apartment buildings into condos, but Chicago apartment values have jumped so much the past few years that the trend has reversed. With developers willing to pay up for entire condo buildings, many condo owners have been happy to cash out.

In possibly the biggest deconversion so far in the city, Strategic Properties of North America, an investor with offices in Chicago and New Jersey, is buying a 133-unit condo building at 2625 N. Clark St.

Built around 1916, Barry Quadrangle is about a block from the Belmont CTA train station and a block from the intersection of Halsted and Clark streets. The property, which includes two buildings on the south side of Barry Avenue and two on the north, was converted from apartments to condos in 1979, according to CBRE marketing flier.


Why are more developers drawn to condo deconversions?
Chuck Sudo
21 December 2016

Condos in Chicago during our current recovery are usually of interest to high-income buyers or families. But with an aging inventory of older condos in North Side neighborhoods, more investors and developers are enticing condo owners with deconversion offers.

Last week, Strategic Properties of North America agreed to buy Bel Harbour, a 207-unit condominium building at 420 West Belmont Ave, and Strategic intends to deconvert the building into condos. This would be the second condo deconversion Strategic is undertaking in Chicago. It previously paid $35M for Clark Place, a 133-unit condo tower at 2625 North Clark St in Lincoln Park and successfully deconverted the condos into rentals. If Bel Harbour's condo owners approve of the plan, it would be the largest condo deconversion in Chicago.

In neighborhoods like Lakeview and Lincoln Park, the real estate fundamentals make sense to pursue condo deconversions. New multifamily development in these markets has lagged, especially when compared to all the cranes in the air in the downtown core and central neighborhoods like River North and the South Loop. And Chicago has added affluent renters at a faster rate than their homebuying counterparts; high-income Chicago renters increased 36% between 2014 and 2015, versus a 9% increase in high-income new homeowners. Condo deconversions would also allow new owners to capitalize on growing rent spreads. Rents in remodeled former condos can increase $300 to $400/month. At Bel Harbour, 45.4% of the total condos are rented out.

But the process to deconvert condos to rentals is not for the faint of heart. Under Illinois law, 75% of condo owners in a building must approve a deconversion. And while apartment activity has led to Chicago's multifamily resurgence, many condo owners who bought their units prior to the 2008 real estate collapse are still struggling to recover. They either have too much mortgage debt to sell or they intend to hold on to their units in case the market shifts back in favor of condos. For those owners renting out their condos, those tenants will have to vacate the units once a condo board approves of a deconversion.

Take the case of River City. Marc Realty offered to buy the condos in the building for $83.1M, but only 58% of owners supported the plan.

Marc Realty principal David Ruttenberg said his firm's offer of $225/SF was much higher than what he felt owners would get for their units on the market, but the River City experience hasn't deterred him from seeking other deconversion opportunities across the city.


Strategic Properties of North America completes large condo de-conversion in Chicago
Staff writer
22 December 2016

Strategic Properties of North America, a client of law firm Taft, recently completed its acquisition of the 133-unit residential building at 2625 N. Clark St. in Chicago.

The former rental property was converted to a condominium building in 2005. Strategic Properties of North America has now de-converted that condo building back into rentals, to take advantage of the strong demand for apartment projects in Chicago.

Strategic Properties spent $35 million to buy out the owners of the condo building. That sales price came out to about $263,000 for every condo unit. The company now plans to spend about $6 million renovating and updating the building, including adding common-area elements such as a gym and other community rooms.

Taft’s Kathryn Kovitz Arnold, chair of the law firm’s condominium and real estate groups, led the de-conversion effort.

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