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The Road Ahead A Look at the 2012 Legislative Session

The recession and accompanying housing crisis have impacted different parts of the nation in varying ways, with places like New York City looking downright hearty compared to foundering markets like Florida and California. The Chicago area real estate market is recouping losses at a pace somewhere between those two extremes but foreclosures in the Windy City are up, and both unit owners and lenders are feeling pinched. The situation has led political leaders and housing special interest groups to work on legislation to deal with the particular problems wrought by the crisis.

A slower economy has resulted in excess inventory of unsold condos in and around Chicago. Many residential developments in the area have gone into default, leading investors to snap up unsold units. Another offshoot of the economy’s impact on the housing market has been the number of condo units being rented out, which sometimes can begin to slowly change the character of a community.

Because of these changes, many condo buildings are considering restrictions to renting units, and some associations want to put a ceiling on the number of rentals allowed in the community. Consequently, the question of whether an association can or should limit the number of rental units in a building has become quite controversial.

The number of units owned by banks also is becoming problematic. To put the issue into perspective, in April of this year there were 40,000 foreclosures in Cook County. As a result, the upcoming state legislative session will likely see proposals for banks to pay assessments on properties in foreclosure, as well as proposals for requiring scheduling of foreclosure sales, which often can take more than a year to happen.

Equitable Rulings Sought

Foreclosures and the sometimes vacant buildings resulting from them have become eyesores for Chicagoans, prompting city officials to act to clean up the mess. With foreclosures on condominium properties often taking 16 months or more and foreclosing lenders not paying assessments during the period of foreclosure, other residents in multi-family buildings have had to pick up heavier tabs due to this loophole allowed to banks during foreclosure. But legislators at the state level are working to close the loophole.

Organizations such as CAI are advocating for their co-op/condo constituents to make lenders who are foreclosing on a property pay their fair share, as any unit owner would be expected to do. While most homeowners associations can evict a unit owner for nonpayment of maintenance fees, associations currently have no such option if the owner is a lender who is foreclosing on the property. Conversely, lenders who are foreclosing on a property maintain they shouldn’t have to pay maintenance fees because they don’t own the property.

CAI is working with state legislators to remedy the situation. Legislation to fix the problem could be addressed in the upcoming state legislative session, says attorney Mark Pearlstein, a partner with the Chicago-based law firm Leventhal Pearlstein LLC, and who also is chairman of the legislative action committee of the Illinois chapter of CAI.

“We would like to have in place a provision that ensures payment of six months of assessments by the [foreclosing] bank when the unit is sold,” Pearlstein says.

While this legislation seems fairly cut-and-dried to homeowners associations and condo/co-op owners, other legislative issues are more controversial. Because the layout of many condos means they do not effectively block smoke from moving from one apartment to another through the heating/air conditioning system, some communities have passed their own laws restricting smoking.

Some associations require an air purifier unit to be placed in a smoker’s apartment, which sometimes works and sometimes doesn’t. Other communities require that smokers create an isolated environment in a closed-up room in an apartment, in which to smoke. Some require that smoking be done on balconies.

To a smoker, such restrictions could seem heavy-handed, but to a resident with breathing problems or sensitivity to dust, smoke or odors, these restrictions are an absolute necessity. State legislators have recognized this need, and a bill in the state legislature during the last session would have allowed condos to prohibit smoking. That bill didn’t pass, but a similar anti-smoking bill is expected to be introduced during the upcoming 2012 legislative session.

“Smoking has become a hot button issue in Chicago. It’s a health care issue whose time has come,” Pearlstein says.

One Chicago-area 22-unit high-end luxury residential building recently banned smoking altogether, Pearlstein says. But he cautions that such a move should be done carefully. “You need to change the declaration of bylaws,” Pearlstein says.

Keeping Up Appearances

Once the foreclosure process starts on a property, that property can become stuck in a gray area where no clear ownership leads to neglect of the property. Whether or not the neglect is intentional, the effect is the same: unkempt properties that can devalue neighboring properties already hit hard by the housing crisis. The cost to all city residents can add up fast. In 2010, the Chicago Department of Buildings had to demolish or board up more than 500 buildings, costing the city $13.7 million. Additionally, Chicago’s Department of Streets and Sanitation had to perform maintenance on 1,963 vacant buildings and tear down 345 empty garages, at a cost of $1.8 million.

Because of the spreading blight created by empty, foreclosed buildings, in July Chicago’s City Council passed the Vacant Buildings Ordinance. The ordinance was introduced by Alderman Pat Dowell and is meant to compel mortgage lenders with a stake in vacant foreclosed properties to ensure that maintenance is done to keep the structures from falling into disrepair. The new law defines any entity that holds the mortgage on a property as the property owner. Mayor Rahm Emanuel applauded the new law for “requiring banks to be good neighbors.”

Existing Chicago laws require property owners to board up empty buildings, and to see that someone cuts the grass and shovels snow from sidewalks around the building. Thanks to the new law, lenders now must ensure that they take care of the same maintenance requirements expected of an individual property owner.

“When vacant buildings are left to deteriorate, local property values tumble and criminality gains an entry into the neighborhood,” Dowell says. “This legislation will hold banks responsible for the upkeep of vacant properties, keeping them secure and keeping neighborhoods intact.”

The ordinance created a more detailed legal definition of a “mortgagee,” defining it as a bank or other entity that holds a mortgage on a property. The ordinance also defines a mortgagee as a property owner that is required to handle routine maintenance. Now, banks are responsible for such actions as boarding up entrances, responding to complaints about a building and other routine maintenance tasks.

“With this ordinance, Chicago is leading the way in protecting residents, neighborhoods and communities from the devastating impact of foreclosures,” Emanuel says.

Tightened Rules, Tightened Purse Strings

Discussed for many years in the state legislature, new rules requiring licensing of property managers were approved by legislators in 2010 and became law on October 1, 2011. Governed under the Illinois Department of Financial and Professional Regulation (IDFPR), which oversees licensing requirements for more than 60 kinds of professions, the manager licensing requirement will undoubtedly bring about more government involvement in multi-family dwellings. For example, complaints about a property manager’s performance now can be made to the state, based in part upon this new law.

After the new law was passed in July 2010, the IDFPR created a five-member board of directors, which includes five real estate industry pros and two board members, who aren’t involved in the business. From November 2010 through May of this year, the board worked to draft a set of rules for the new licensing requirement. Now, any property manager currently working in the industry has one year (from Oct. 1) to get his or her state-approved license. Prospective property managers not yet working in the industry have up to three years to complete the process.

Not yet part of the rules, one potential legislative consideration could mandate that every condo association of 10+ units pay $50 per building and $1 per unit annually to the state, to help finance the property manager licensing requirement.

Angela Falzone, a consultant of Chicago-based Association Advocates, Inc., which provides residential property consulting and project management services, was a member of the manager licensing board. Some of the issues surrounding the new law have yet to be worked out, and there are some modifications to the new law that will likely be considered in the upcoming 2012 legislative session, she says.

“We couldn’t figure out how to police [the new financial contribution requirement]. We questioned why self-managed associations would have to pay the fee,” Falzone says.

Unsettled

Some industry pros say that other actions, such as those taken by government-backed lenders Fannie Mae and Freddie Mac, are working against a full recovery of market value of residential real estate in the Chicago area. New rules and requirements mandated by these two lending giants have tightened their purses, and are adversely affecting would-be condo buyers, new residential developments and multi-family communities. FHA-qualified loans for buying homes are now more important than ever for homebuyers to obtain but are also harder than ever to get, compounding the stresses put on many families due to the economy. No legislation regarding this issue is planned at the state level yet, though.

Pearlstein believes the financing question won’t be solved by any one state or city. “It’s a sensitive issue, with buildings being declined FHA approval. Any legislative correction on that will have to be done on a national level,” he says.

Jonathan Barnes is a freelance writer and a frequent contributor to The Chicagoland Cooperator.

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