$60 million condos-to-apartments deal closes
Golub has pulled off a $60 million condominium deconversion in the Loop, the biggest deal of its kind in Chicago, but not for long.
A joint venture between the Chicago developer and USAA Real Estate has acquired Century Tower, a 292-unit art deco high-rise at 182 W. Lake St. The venture is turning the 88-year-old condo building back into rental apartments, a type of deal that’s especially complicated but has become popular with developers amid the strong Chicago multifamily market.
Golub and USAA plan a multimillion-dollar renovation of the Loop property, sprucing up the kitchens and bathrooms in its apartments and building out an amenity floor with a fitness center and game room on its second level, said Collin McKenna, vice president of acquisitions at Golub. The developers are wagering that Century Tower will be worth more as an apartment building than it will as condos.
With investors paying up for apartments, more developers are making the same bet, reversing the condo conversion trend that began in the 1970s and took off again during condo boom of the mid-2000s. Back then, developers could buy apartment buildings and profit by selling them off for more money as condos. But the housing market has flipped since the recession, allowing developers to profit now by doing the opposite.
“Right now, the signs are that (the trend) is not slowing down,” said Kelly Elmore, principal at Kovitz Shifrin Nesbit, the local law firm that represented Century Tower’s condo association in the sale.
The firm has worked on 21 completed condo deconversions over the past year and a half and has another 18 in the works, she said. Several are bigger than Century Tower, exceeding 800 units, Elmore said.
Indeed, while Century Tower is the biggest completed Chicago deconversion, it could soon be eclipsed by two more.
Last month, the condo association at Kennelly Square, a 268-unit tower in Lincoln Park, voted to sell the property for as much as $78 million to Strategic Properties of North America, a New Jersey developer. And in December, condo owners at River City, a 448-unit complex in the South Loop, approved a $100 million sale to Marc Realty Capital. Both transactions have yet to close.
The Century Tower sale marks the end of one era and the beginning of a new one for the high-rise, which was built in 1930 and is listed on the National Register of Historic Places. It opened as an office building but was converted to apartments in 2001 and condos in 2006, at the tail end of the condo bubble.
ALL OWNERS HAVE A SAY
Condo deconversions are hard to pull off because every unit owner has a say in a bulk sale. Under Illinois 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. The debate over whether to sell can become acrimonious, and not all parties go along with a sale willingly.
The sale at Century Tower passed with a 75.6 percent vote, with 16.2 percent voting “no” and the rest not voting, Elmore said. She said the deal was her most difficult “by far,” including last-minute lawsuits against some uncooperative condo owners who refused to sign closing documents and a brief court dispute with the owner of a ground-floor retail space occupied by a sushi restaurant.
Complicating matters further were some outstanding building code violations involving the building’s elevators, a potential deal breaker. City inspectors came out at the last minute to approve the required fixes but found more four more violations, Elmore said. All but one were resolved; the board credited Golub to account for it, she said.
Though every deconversion has its dissenters, many condo owners like them because an apartment developer will often pay more for their units than they would receive in a traditional condo sale. McKenna, the Golub executive, estimated that the price differential can range from 20 to 50 percent.
The $60 million price for Century Tower, which was disclosed in court documents, amounts to about $205,000 a unit, but individual prices paid varied by unit type and condition.
Century Tower was a good deconversion candidate because investors owned and rented out about threequarters of its condos. Because they don’t live in their units and view them purely as an investment, investors typically are more open to a sale than owners who occupy theirs.
Investor-heavy buildings are also attractive to developers because many renters are happy to keep living in the building, providing an immediate source of revenue for a new owner. About 25 to 30 renters in Century Tower are staying put and leasing their units from Golub, McKenna said.
Century Tower is Golub’s third deconversion and the firm continues to scout for more, said Golub President and CEO Michael Newman. The firm has been plenty busy with other deals, too, recently completing two big apartment projects in the South Loop and Streeterville and teaming up with CIM Group, a Los Angeles developer, to redevelop the Tribune Tower property on North Michigan Avenue.
“We’re absolutely looking for” more deconversions “if we can make sense of it,” Newman said. “It’s a lot of work. It’s got to be the right kind of transaction.”