Financial Triage for Aging Condos: Can This Condo Be Saved?
Mason, Marcy, Journal of Property Management
Back in the 1980s, when the condominium market became saturated in Chicago, some converted properties took a downward turn. Buildings located in less desirable neighborhoods were hit the hardest. Unit values dipped, and condo owners' real estate investments suffered.
Such was the case for 720 Gordon Terrace, a 268unit, high-rise apartment complex that had been converted in 1977, 11 years after it debuted as a rental property on the city's north side. In terms of marketability, the building had been struck twice. First, by the decline of its Buena Park neighborhood and second by the hesitancy of unit owners to reinvest money into the building for capital improvements. As a result, maintenance was deferred, and by the early 1990s, when Buena Park was beginning to revitalize, the property had sunk into a state of such disrepair that one appraiser fingered the building as ripe for deconversion.
Of course, such a fate would have been disastrous to the families who owned the units. If a developer came in and gobbled up some owners' units cheaply, other owners might have been compromised or actually have lost their units. Therefore, 720 Gordon Terrace's management had only one recourse: It had to reverse the trend of the building's dwindling unit values, which meant the property had to undergo a major renovation.
Since 1990, more than $1.5 million has been spent on upgrading the building. As a result, unit values have soared by as much as 38 percent, and assessments have actually declined in the 1996-1997 budget. Major capital expenditures included: refurbishing exterior concrete walls and window caulking, concrete pool deck concrete garage floor restoration, replacemenst chillers and rebuilding of boilers, and refurbishment of the party room. However, none of this would have been possible without an ingenious approach to cutting expenses and finding new revenue sources while keeping the confidence of existing owners and gaining market appeal for new buyers.
As always, finding the money to finance the renovation project was the tricky part. The building's reserve funds were so low they couldn't possibly have paid off the formidable capital expenditures that the building required. Likewise, the building's managing agent, Sudler and Company, found that a special assessment was out of the question. The majority of unit owners were financially strapped or living on fixed incomes. They weren't positioned to borrow any money.
"They were stuck in a `Catch-22,"' says David Gantt, 720 Gordon Terrace's property manager. "The neighborhood was coming up enough to make deconversion a real threat, but the unit resale values were going down. Until we could get the building turned around and unit values to increase, the owners couldn't borrow against their homes to fund redevelopment or to take advantage of declining interest rates to refinance existing debt."
Instead, Gantt, a former commercial property man/ ager who was hired in 1993 to resolve 720's perplexing dilemma, had to find a way for the building to borrow the money. To do that, he first needed to improve its financial picture.
Gantt began by combining reports from Eugene Stunnard at Appraisal Research Counselors and engineers Klein Hoffman to develop a longrange financial plan based on the future needs of the association. The plan set a capital expenditure timetable for making improvements and restorations to the deteriorating property that would meet the needs of the market and the requirements of the infrastructure.
Short-term and long-term financing needs were partially met by the creation of a "voluntary special assessment" option for unit owners, which allowed them to buy down their assessments by "lending" the association money. The money was paid back in discounted assessment charges. The unit owners received a 10-percent return on their investment, while the association received financing at lower than bank rates. …