Big rehab on tap for Kennelly Square in Lincoln Park after Strategic Properties closes deal - News - Crain's Chicago Business: "After paying $78 million for a Lincoln Park condominium tower, a New Jersey real estate developer plans to spend another $10 million fixing it up.
Strategic Properties of North America completed its buyout May 31 of all the condos in Kennelly Square, a 268-unit high-rise at 1749 N. Wells St. At $78 million, it is the biggest in a wave of condo "deconversions" rolling through Chicago, propelled by the strong apartment market.
Strategic Properties and other developers have been buying up entire condo buildings and turning them back into apartments, believing they'll be worth more as rental properties, which have been en vogue with investors the past several years.
But the deals are especially complicated because a developer often must persuade dozens, if not hundreds, of condo owners to agree to a sale. Under state law, a sale of an entire condo building can go forward only if owners of at least 75 percent of the units vote to approve the deal. Strategic Properties barely crossed that threshold at Kennelly Square, with a 75.5 percent approval rate, said Michael Delrahim, a lawyer for the building's condo board."
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This is going on in many condos here in Chicago. According to what I have been told, investors are able to turn a profit doing this because the market for apartments is actually better than the market for relatively inexpensive condo units. They buy 75% of the units, offering above-market price to the unit owners, and then sell the whole thing, which becomes an apartment building. There is nothing wrong with increasing the supply of rental housing in Chicago, but it raises the issue of how people are going to enter the housing market if the supply of inexpensive condo units gets depleted by deconversions. We are seeing a strange cycle play itself out. During the housing boom from 1995 through 2006, they couldn't convert apartments into condos fast enough. But now there seems to be more money to be made in deconversions. And another factor with low-end condos is inadequate reserves and deferred maintenance that leads to special assessments. When owners are facing massive special assessments, they are more likely to look favorably on an offer to sell the unit. As the story says, "Strategic Properties also plans to fix problems with the building's exterior that motivated many condo owners to sell. The building leaks when it rains, and its condo board had floated a multi-million-dollar special assessment to fix the problem. Faced with paying the special assessment or selling out, many owners chose the latter...The deconversion trend is accelerating in Chicago, in part because many condo buildings find themselves, like Kennelly Square, facing big special assessments to cover major repairs, said Delrahim, the attorney. "There are still a large number of buildings that were built in the '70s and '80s that have deferred maintenance, and unit owners don't want to write the check," said Delrahim, managing partner at Chicago-based Brown Udell Pomerantz & Delrahim.."
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