Deconversion of Condominium Units: Addressing Multifamily Rental Needs in Tight Real Estate Market

Description

In the current real estate market, condominium deconversion offers developers and unit owners lucrative opportunities. Restrictions or prohibitions on leasing condominium units made it difficult for a non-occupying owner to generate income to pay the unit's ownership costs until the unit could be sold.

The low supply of new construction and large numbers of potential home buyers shut out of the housing market because of damaged credit or large student loans have created increased need. However, converting condominium buildings into rental properties can be more time-consuming and labor-intensive than acquiring an existing apartment building.

While investors can profit from a conversion, especially in developments where most units have failed to sell, owners who wish to stay can be at a loss. The legal process for deconversion is typically a combination of state law and the condominium's CC&Rs.

In Chicago, several large downtown properties that failed to sell have undergone deconversion into apartments, aided in part by Illinois state law that allows a condominium board to sell all units once 75 percent of owners agree to a sale.

A condo board contemplating such a sale should consider the issues when hold-out owners bring suit to stop the process. Boards act as fiduciaries for all owners and must avoid self-dealing, lack of full disclosure or candor or conspiratorial conduct with the deconverter, and act with good faith and loyalty to all condo owners.

Listen as our authoritative panel discusses deconversion of condominiums, the pros and cons for developers and owners, and how a board attempting this process must act to avoid liability.