PROTECTING TENANTS AND CONSUMERS: A REPORT OF MAYOR DALEY'S CONDOMINIUM CONVERSION TASK FORCE

PROTECTING TENANTS AND CONSUMERS: A REPORT OF MAYOR DALEY'S CONDOMINIUM CONVERSION TASK FORCE City of Chicago Richard M. Daley, Mayor

PROTECTING TENANTS AND CONSUMERS: A REPORT OF MAYOR DALEY'S CONDOMINIUM CONVERSION TASK FORCE Overview Over the past several years, Chicago experienced a significant increase in the development of new condominiums and the conversion of apartment buildings to condominiums. This condo boom contributed to accelerating homeownership rates in the City of Chicago, which increased from 43.8% to 49.9% between 2000 and 2007. 1 In many communities, condominium conversions increased stability, offered new opportunities for homeownership for many first time homebuyers, and increased investment and rising property values throughout the City. At that same time, the proliferation of condominium conversions raised several concerns. While providing access to homeownership for some, condominium conversions displaced existing tenants and depleted the City s existing rental housing stock at a rate exceeding new rental production. In addition, many new condo buyers unfortunately lacked knowledge of the rights, responsibilities, and governance of a condo association. The Condominium Conversion Task Force was originally convened during a period of rapidly appreciating housing values, exploding new residential development, and swelling homeownership levels, and was tasked with addressing the aforementioned concerns. The Task Force focused on four critical areas: 1) tracking condominium development, 2) protecting existing tenants in condominium conversions, 3) developing potential controls on condominium conversions, and 4) educating consumers. Since the Task Force first convened in November 2007, the real estate market has changed quite dramatically. The sharp downturn in the housing market has left the city with a growing stock of unsold and foreclosed condominium units. Undoubtedly, the current market conditions have impacted the recommendations of the Task Force. Still, the Task Force crafted policy recommendations that will serve residents and neighborhoods now and when the housing market begins to rebound. Process The Condominium Conversion Task Force was first convened in November 2007 at the request of Mayor Richard M. Daley to develop a reasonable, comprehensive condo conversion policy for the City of Chicago. Mayor Daley asked Alderman Ray Suarez, Chairman of the City Council Committee on Housing and Real Estate, to lead the task force, due to both his knowledge of housing issues and his staunch support of the City s affordable housing agenda. Members of the Task Force included community development practitioners, lawyers, developers, tenants, housing advocates, and city officials. Over an eighteen month period, the Task Force met 10 times to discuss critical challenges presented by rapid, widespread condo conversion and development. For each of the key issue areas, the Task Force sought out best practices, reviewed effective models, and attempted to arrive at consensus recommendations. A list of task force members and a calendar of meetings can be found in the Appendix. 1 American Community Survey, 2007 1 year estimates. <http://factfinder.census.gov/> 1

REPORT OUTLINE This report outlines the recommendations of the Condominium Task Force in the following four areas: I. Developing a Framework for Tracking Condominium Development Establish a Condominium Registration Program II. Protecting Existing Tenants in Condominium Conversions Increase tenant notice period from 120 days (4 months) to 270 days (9 months) Increase lease extension from 120 days (4 months) to 270 days (9 months) Require provision of relocation assistance to existing tenants in an amount equal to one month s rent at the highest rent charged III. Strengthening Disclosure Requirements for Condominium Development and Conversions Establish and require a standardized Disclosure Summary and enhanced Property Report IV. Enhancing Consumer Education and Outreach Target enhanced consumer education and outreach to existing tenants in apartments under conversion, prospective first buyers, and recent purchasers of condos Subsequent sections will describe the recommendations contained within each of these areas, as well as the contextual challenges motivating them. Individually, these recommendations, if enacted, will better protect and inform existing tenants facing condo conversion and new purchasers of condominium units. Collectively, they will help to improve the continued affordability and stability of Chicago s neighborhoods. 2

I. DEVELOPING A FRAMEWORK FOR TRACKING CONDOMINIUM DEVELOPMENT Tracking System Currently, the City does not have a procedure in place to track condo conversions. There are no policies that require a developer to notify the City of the intent to develop condominiums (new or conversion). Without a system in place, it is difficult to capture all conversions and virtually impossible to implement comprehensive policy changes. The municipal code requires developers to prepare and distribute to prospective purchasers a property report; however, the code does not require this report to be filed with the City. Implementing a tracking system for all condominium developments would serve to inform the City of all planned condominium conversions, including those that do not require building permits. Recommendation (s): Establish a Condominium Registration Program The Condominium Task Force recommends the establishment of a Condominium Registration Program. Creating a system through which condo developments (new or converted) can be easily tracked by the City will provide real time information on the size and scope of condominium development in the City. Tying the registry to the enforcement of important regulatory requirements will ensure that developers are properly licensed. The Department of Business Affairs and Consumer Protection (BACP) would have responsibility for administering a condominium registration program. For all condo developments (new and converted) developed after the effective date of the ordinance requiring the registration, developers would be required to register with the City and pay a per unit administrative fee. Developers would also need a valid Residential Real Estate Developer License in order to submit the condo registration. Registration would need to be filed 250 days prior to filing the condo declaration with the Cook County Recorder of Deeds and must include: o o For conversions: An affidavit listing all rental tenants by unit and the date that their tenant notice was delivered; For both new and converted buildings: A Disclosure Summary (described in further detail in subsequent sections) Enforcement would be tied to the unit closing, with a certification required in order to receive Real Estate Transfer Tax stamps. If the condo registration is not properly filed, or if other requirements (tenant notice, disclosure summary) are not met, BACP will issue a per unit financial penalty that must be paid prior to the issuance of transfer tax stamps. The developer would be cited for violating the requirements and would have a choice to delay the closing until compliance, pay a fine, or request a hearing. If a hearing is requested, the developer would have to post a compliance bond to ensure payment of any fine imposed as a result of the hearing. The hearing results would determine whether or not the City would cash in the bond. 3

II. PROTECTION OF EXISTING TENANTS IN CONDOMINIUM CONVERSIONS Notice and Lease Extension Requirements The City of Chicago currently requires a tenant notice period of 120 days for a condominium conversion. Tenants are permitted lease extensions through the end of this 120 day notice period. This period is extended to 180 days for tenants who are over 65, deaf, blind, or unable to walk without assistance. While this notice and lease extension period exceeds the length of many other cities, it often does not allow existing tenants sufficient time to relocate smoothly. Recommendation(s): Increase tenant notice period from 120 days (4 months) to 270 days (9 months) ; Increase lease extension from 120 days (4 months) to 270 days (9 months) Increasing the length of the notice period and required lease extension will ensure that existing tenants receive ample notice of the landlord s intent to convert. Developers will also be required to deliver a Tenant Notice of Conversion form to tenants in all units converting from residential apartments to condo. The notice will outline tenant rights, the specified amount of relocation assistance (described below), and the estimated cost of the unit when it is offered for sale. Proof of Tenant Notice must be submitted to the City as part of the Condo Registration Program. Relocation Assistance At present, the City of Chicago does not require that landlords offer displaced rental tenants any form of relocation assistance. Relocation, however, can have deleterious effects on long standing tenants and imposes significant financial costs on displaced tenants. Recommendation (s): Require provision of relocation assistance to existing tenants in an amount equal to one month s rent at the highest rent charged to individual tenants or $1,500, whichever is greater Requiring landlords to provide relocation assistance to existing tenants will partially compensate displaced tenants for the financial burden of relocating. Relocation assistance will not supplant the required reimbursement of a tenant s security deposit. By stipulating that relocation assistance be the greater of $1,500 orone month s rent at the highest rent charged to the tenant, it will provide an incentive for the landlord to keep rent stable during the extension period. The City will require that relocation assistance be paid out at the same time the landlord provides the notice of intent to convert to the tenant. Enforcement of relocation assistance will be two fold: Tenants will have a private cause of action and can sue for damages, penalties, and attorneys fees. 4

BACP will spot audit the relocation assistance information included on the Tenant Notice of Conversion form. 5

Transparency III. STRENGTHENING DISCLOSURE REQUIREMENTS FOR CONDOMINIUM DEVELOPMENT AND CONVERSIONS When a new condominium is developed and when rental housing units are converted to condominiums, developers are required under the municipal code to prepare and distribute to prospective purchasers a property report. Property reports contain essential information, such as how a unit is taxed after conversion, restrictions on use and occupancy, a survey of the development, the sales contract, the budget and a forecast of estimated assessments, an engineer s report, which includes the age of the property and its major components, any new construction on the property, a master title report, and other necessary information. This report, however, does not need to be filed with the city and is often not accessible to a wide range of target audiences (first time homebuyers, existing tenants, Limited English Proficiency households). In some instances, unscrupulous developers may use technical language to deliberately mislead uninformed prospective purchasers. Recommendation: Establish and Require a Standardized Disclosure Summary and Enhanced Property Report Requiring that a Disclosure Summary be filed and made publicly available for all condo units, both new and converted, regardless of the number of units, will help ensure that new purchasers are properly informed about the financial requirements of occupancy, as well as the physical condition of their building. The Disclosure Summary should be an easy to understand document that summarizes information outlined in the property report. A standardized Property Report will still be required. The Disclosure Summary must be prepared before the first unit is offered for sale and must be available to prospective purchasers upon request. It must be distributed at open houses and made available with any marketing materials. The Disclosure Summary must also be filed prior to offering the first unit for sale. Upon receiving the Disclosure Summary, BACP will share the information with the Department of Buildings (DOB) and the Department of Zoning and Land Use Planning (DZLUP). DOB and DZLUP will then determine if the work described in the summary requires permits or any other approvals from their respective departments and check to see if the developer has applied for these. In addition, DOB and DZLUP will use the information in the Disclosure Summary to check to see if the property had any outstanding building and zoning code violations Additionally, a Property Report will be required for every condo, regardless of the number of units (currently only required for condos of 7+ units). The Property Report will be required to include the following: 1. An Architect/engineer report for all units (not just converted units) 2. A City license and State registration numbers for all contractors and subcontractors to the condo development 3. The names and addresses of all LLC members and managers, major shareholders of closely held corporations, or principals of other legal entities 6

In order to help enforce the enhanced Property Report and Disclosure Summary requirements, the Task Force recommends that the municipal code be amended to give purchasers a private cause of action for misrepresentations and omissions in the Property Report and Disclosure Summary, allowing them to sue for damages, penalties, and attorneys fees. 7

IV. ENHANCING CONSUMER EDUCATION AND OUTREACH Consumer Education One of the most effective ways to deter irresponsible developers, decrease the incidence of mortgage fraud, and reduce the number of foreclosures is to educate condominium buyers of their rights and responsibilities. In the wave of new condominium developments and conversions that ensued over the past several years, many Chicagoans were, for the first time, able to realize homeownership. Unfortunately, many of these first time buyers had little knowledge of the rights, responsibilities, and governance of a condo association. Additionally, many existing tenants were uninformed of their rights to sufficient notice period, lease extensions, and security deposit reimbursement. In order to ensure that the City s residents benefit from the proliferation of condominium development, it is critical to enhance the level of consumer education among tenants and purchasers. Recommendation(s): Target existing tenants in apartments under conversion regarding their rights and require that a standardized document listing tenant rights in the event of condominium conversion be attached to all leases The Department of Community Development (DCD) will build upon their partnership with the Metropolitan Tenant Organization (MTO) and the Lawyers Committee for Better Housing (LCBH) to conduct outreach regarding tenant rights during a condo conversion. BACP will develop, in conjunction with local non profit organizations, an online training course for tenants in apartments undergoing conversions. DCD and BACP will work together to develop a summary of tenant rights in the event of a condominium conversion, which the City will require be attached to all residential leases, similar to how the City requires that the Residential Landlord Tenant Ordinance (RLTO) be attached to all residential leases. Providing this information up front with all leases will help ensure that all renters are educated about their rights if their landlord decides to convert the building to a condominium at any point during their lease. Target prospective purchasers of condos regarding the quality of new units The new Disclosure Summary would educate prospective purchasers about the quality of their new condo units (whether new construction or converted). BACP will develop, in conjunction with local nonprofit organizations, an online training course for prospective condo buyers. Target recent purchasers of condos regarding condo association rights and responsibilities BACP will develop literature targeting condo associations and will partner with local non profit organizations to distribute literature. In conjunction with local non profit organizations, BACP will develop an online training course for condo associations. BACP will work with 311 to route condo associations in need of education to City supported non profit organizations. Enhance City consumer education initiatives via citywide workshops 8

BACP and ward workshops will be made available upon Aldermanic request. Additionally, BACP will lead an interdepartmental effort to develop literature for the three audiences outlined above, as well as a strategic community and media outreach plan. CONCLUSION For Chicago to remain a world class city to live, work and raise a family, the City of Chicago must take comprehensive action to preserve the continued stability and affordability of its neighborhoods. While fluctuations in the housing market have altered existing challenges and presented new ones, there remains a serious need for the City to ensure that its residents are well informed and well protected in the face of neighborhood change. The rapid growth in new condominium development and conversions over the past several years offered new opportunities for homeownership for many first time homebuyers, added stability to many neighborhoods, and contributed to further investment and rising property values throughout the City. At the same, the rise in condominium conversions displaced existing tenants and drained the City s existing rental housing stock. The City must encourage responsibility and transparency among developers, lenders, and purchasers, so that as the housing market recovers in Chicago, its neighborhoods and residents benefit. The Condominium Task Force focused on four critical areas: 1) tracking condominium development, 2) protecting existing tenants in condominium conversions, 3) developing potential controls on condominium conversions, and 4) educating consumers. In response to the myriad challenges facing Chicago s neighborhoods, the Task Force has crafted the following recommendations: Recommendations Establish a Condominium Registration Program Increase tenant notice period from 120 days (4 months) to 270 days (9 months) Increase lease extension from 120 days (4 months) to 270 days (9 months) Require provision of relocation assistance to existing tenants in an amount equal to one month s rent at the highest rent charged Establish and Require a Disclosure Summary and Enhanced Property Report Enhance Targeted Consumer Education and Outreach Enacting these recommendations will create a framework for tracking new condominium development, enhance protections for existing tenants in condominium conversions, increase transparency with new 9

disclosure requirements for condo developments and conversion, and expand targeted consumer education and outreach to existing tenants and first time condo purchasers. Chicago is a city defined by its neighborhoods. Taking these critical steps will help improve the affordability and stability of these vibrant neighborhoods. 10

APPENDIX LIST OF CONDOMINIUM CONVERSION TASK FORCE MEMBERS Alderman Ray Suarez, Chair (31 st Ward) Alderman Carrie Austin (34 th Ward) Alderman Helen Shiller (46 th Ward) Brian Bernardoni, Chicago Association of Realtors Nick Brunick, Applegate & Thorne Thomsen, P.C. Kathy Clark, Lawyers Committee for Better Housing Dave Dubin, Dubin Residential Adam Gross, Business & Professional People for the Public Interest Gené Moreno, Chicago Rehab Network Mark Pearlstein, Levenfeld Pearlstein LLC Delia Ramirez, Humboldt Park Social Services Paul Roldan, Hispanic Housing Development Corporation Caleb Sjoblom, Rogers Park Community Development Corporation Elizabeth Todd, Metropolitan Tenants Organization Bob Webster, Community Investment Corporation Joe Williams, Granite Development Karry Young, Karry Young Development Commissioner Rich Monocchio, Department of Buildings Commissioner Norma Reyes, Department of Business Affairs and Consumer Protection First Deputy Commissioner Ellen Sahli, Department of Community Development Commissioner Patti Scudiero, Department of Zoning and Land Use Planning LIST OF CONDOMINIUM CONVERSION TASK FORCE MEETING DATES November 8, 2007 December 20, 2007 January 29, 2008 March 4, 2008 March 25, 2008 April 29, 2008 September 15, 2008 September 29, 2008 April 29, 2009 May 19, 2009 11