Inside Chicago’s condo deconversion wars

Margerita Humolli had few qualms about KSN, her condo board’s longtime legal counsel — until she learned that the Chicago law firm has turned at least 70 condo buildings into apartments, leaving her in no doubt that its interests were at odds with her own.

“Seventy deconversions?! I had no idea about that,” she wrote in an email as she considered a $96 million offer from Strategic Properties of North America to convert her 47-story Loop building into rentals, a deal she opposes. “That’s insane. I don’t think anyone knows that.”

The three-month tussle over 200 North Dearborn Street is but a small chapter of the tales surfacing throughout Chicago as a cratering condo market prompts investors to cash in on surging rents. Some apartment properties are valued at almost double identical buildings used as condos, and savvy owners can leverage approval votes into higher offers or even five-figure cash incentives.

No one dominates that world more than KSN’s Kelly Elmore, whose dozen deconversion deals in the past four years add up to $525 million in sales value, putting the firm well ahead of rivals.

Elmore, KSN, and Strategic Properties didn’t respond to multiple requests for comment. Competitors tend to pay Elmore’s practice backhanded compliments: “They make a shitload of money on these,” said Berton Ring, a scrappy tenants’ rights attorney who’s represented condo owners seeking to block deconversions.

While counseling condo boards, Elmore’s firm has drawn scrutiny by arranging deals with such landlords as Yitzy Klor’s Strategic Properties, among the most aggressive condo deconversion buyers in Illinois.

Critics say that KSN purports to be neutral, yet the firm skews toward buyers because, under state law, the lawyers can get big paydays by structuring contracts so that they perform all closing duties and get fees for the sale of each unit. Moreover, law firms can get buyers to offer some condo owners, though rarely all, five-figure bonus payments for voting in favor of a deconversion. The firm’s familiarity with the process makes Elmore a threat to those unwilling to sell because they can’t buy or rent nearby, particularly when cash incentives enter the mix, the critics say.

“There is huge money in large condo associations to be made,” said R. Kymn Harp, a commercial real estate lawyer at Robbins DiMonte. “It may color how they interpret the fiduciary obligation of the condo board to the unit owners.”

Elmore, who went to high school in Indianapolis, college at DePauw and earned a law degree from DePaul in 2004, isn’t shy about publicizing her record. The tidbit about 70 deconversions comes from KSN’s website, where Elmore discusses the circumstances of deconversions on a podcast. The most recent deal on the website closed in February at $56 million for eight condo buildings on a 427-unit complex in suburban Elk Grove. 

KSN has tracked down condo owners in jail, rehabilitation or outside the country to sign closing documents on deconversions — a tricky task because of privacy practices. “It is actually easier to get someone to sign their documents in jail than it is in rehab,” Elmore, named as one of the state’s most ethical and professional lawyers under 40 in 2017 and 2018, said on a KSN podcast in April.

“There is going to be a lot of anger at these meetings, and Kelly has probably been subjected to a lot,” said condo law attorney Howard Dakoff of the firm Levenfeld Pearlstein. “Do I think she has to have a certain amount of hardened exterior to do these and be subjected to the anger and vitriol that owners will express? Yes.”

KSN is among the few law firms with teams specializing in deconversions, deals that require a quasi-democratic process that can include hundreds of sellers and one buyer. That means they need a deft touch, since persuading condo communities where large chunks are owned by investors is a far cry from dealing with those with hundreds of owner-occupied units.

“Many buyers we deal with can be very hands-on in the deconversion sale,” Elmore said on the podcast. “There is not a huge, huge pool of buyers who necessarily do deconversion deals. But we’ve found there is definitely a specific subset of buyers who really like and enjoy purchasing these types of deals.”

She often tells condo owners who scoff at unsolicited offers to see how sweet the deal can get, telling condo boards to avoid voting on a letter of intent and instead consider an entire contract. Those who speak out against deconversion offers are sometimes the quickest to vote in favor once buyers raise the price, Elmore said.

“These meetings can start out very, very rocky,” said Elmore, who has taken to disabling comments on video conferences to avoid distractions.

“For some associations, a large purchase price is going to be what gets the owners to vote yes,” she said. “On other deals we’ve had, buyers have had to get very creative with incentivizing owners to vote yes on their deals, whether it’s incentives upfront in the contract  or incentives to receive funds after closing.”

For owners, KSN and others, including Chuhak & Tecson, can be a godsend, devising deconversions that help them resolve underwater mortgages and long-underfunded maintenance and repairs. Deconversions have been especially frequent in buildings such as Humolli’s, which were originally built as apartments, then turned into condos for sale as the housing market overheated in the 2000s. Some of them never should have been transformed in the first place, because their values never recovered from the Great Recession.

“If you own a condo property that is rundown and you have owners that are all pissed off and it’s beyond repair, KSN might be your best friend,” said Matt King, who mounted an effort to reject a $33 million deconversion offer for his condo complex in the far northwest suburbs.

On the other hand, “KSN is not the friend of someone who wants to keep their house,” said King. He led a slate of candidates who won control of the condo board, which is in the process of dismissing KSN and hiring a new law firm.

Majority rules

It’s the tipping of the scales that has some condo owners upset. Law firms can structure contracts so that some residents get bonuses from buyers in exchange for voting to approve a deconversion.

That’s what happened at Humolli’s building, where voting yes from February through mid-March could have netted sellers an extra $20,000 on top of their unit’s value, according to the terms of a contract reviewed by The Real Deal. Yet the contract didn’t specify how long the voting period would last. It stayed open for months, and the incentive period ended only on May 12 after being extended multiple times.

KSN says it adheres to the law and doesn’t push owners to accept offers. Elmore and colleague Omar Malik said on the April podcast that they play it straight. 

“We don’t represent buyers,” Malik said. “Our role is not to swing people to vote one way or another. It is to negotiate the best possible contract, get that into the hands of the ownership and then answer any questions the board and owners have so they can make an informed voting decision and vote one way or another.”

However, muddying matters further, deconversion buyers often own multiple units, making them a member of the condo association and sometimes even giving them a seat on the condo’s board. That makes it unclear whether lawyers such as Elmore are working for the board or for owners who may include those unwilling to sell. She’s clear that it isn’t easy.

“Like the board, we represent the owners who don’t want to sell, and we also represent the owners who want to sell tomorrow and think this is the best deal they’ve ever seen,” she said on the podcast. “It is a difficult position to be in.”

Buyers must meet a high bar. The law stipulates that owners holding at least 85 percent of a building’s value must vote in favor of a deconversion sale to close. When the vote threshold is met, the deal closes, stripping ownership from anyone who objects to selling their home.

Tactical courtship

Strategic Properties, which has bought multiple deconversions, including Chicago’s priciest at $190 million, is no stranger to KSN. Elmore’s firm was the seller’s counsel on the deconversion of 1400 Lake Shore Drive in 2019, a $107 million purchase by Strategic Properties that was a record price at the time.

“The way these are being forced through, it’s fairly remarkable that KSN is on a huge percentage of these transactions,” said Harp, the Robbins DiMonte lawyer. “It’s because they’re willing to do what has to be done.”

Harp and lawyers such as Chuhak & Tecson’s David Bloomberg have called for deconversions to be made more transparent and to eliminate side deals and vote buying from the process. Bloomberg’s four-person condo association team has been on either the buyer’s or seller’s side of 40 deconversions.

Bloomberg led unit owners who sued a South Loop condo board that was being advised by KSN in a 2018 legal fight over the $90.5 million sale of the River City Property at 800 South Wells Street. The suit accused the board of lying about drawing out the voting period, allowing the buyer to “bribe” unit owners who had voted no into changing their minds. It was later settled and the sale closed in 2018 after almost three years. 

“There are a lot of inflection points in these deals where you might be tempted to cut a corner,” Bloomberg said. “If it’s at this level and there is this much potential for developers to insert themselves into the voting process behind the scenes, there should be a formal law ensuring certain data points are public knowledge. There should be nothing hidden.”