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San Francisco Condo Conversion, Illegal Units, Rent Control and More

Condo conversion in San Francisco can be [Controversial. Lucrative. Difficult. Rewarding.] because it’s a very special place with some very special regulations that regulate Rent Control and Property Rights.

Land is scarce, housing is scarce because building anew, remodeling or even demolishing a building everyone that agrees deserves to be torn down is heavily regulated and can take an incredibly long time. For developers trying to redevelop our Fair City this means carrying costs with no income. For landlords who want to sell or upgrade it means entering the market with a handicap. Combine this public policy morass, court cases from Santa Monica regarding the Ellis Act, the passage of Prop 13 that capped property taxes for California landowners, San Francisco’s 1979 Rent Ordinance, the push to legalize illegal in-law units, regulations that disqualify buildings with tenant-buyouts from converting into the more flexible condominium, recent influences from the sharing economy like airbnb and/or VRBO, with gentrification fears you’ll begin to get the appropriate context of how complicated and nuanced property values really can be in San Francisco. 

Because San Francisco’s market is fragmented, ever-changing with ever scarcer and scarcer properties, you will  see why it’s better to be prepared because the market will challenge, frustrate and confound you. 

We’ll be here to encourage you, just remember, the information here is just that — information. While Kevin is an attorney the information is no substitute for consulting for contacting one who works 100% as an attorney as things change constantly and we have references to those men and women here too. San Francisco is a place where nuance and detail can be determinative so it’s worth understanding. 

Rent Control

You may be asking yourself why we’re exploring renting in San Francisco when you’re about to purchase. Well, renting can impact the potential price of the property drastically. A vacant space, for example, may fetch anywhere from $30,000-$50,000 more then an occupied space. So, how did this come to pass?

Well, let’s get back to the story.

An intersection of renter’s rights’ activism, court cases from Santa Monica and the passage of Prop 13 that capped property taxes for California landowners, San Francisco enacted its Rent Control Law effective June 13, 1979 that not only regulates rental rate increases a landlord may charge tenants, but the law also limited  circumstances under which a landlord can evict an otherwise current-on-rent tenant. This area is important if you’re thinking about buying investment properties with tenants in place already or considering starting what’s called a “just cause” eviction.

Why is there Rent Control

Starting in 1981 after numbers of long-term  tenants were put out after their apartments and SRO units mainly in the Tenderloin/Lower Nob Hill were converted into condominiums and the threat of the Manhattanization of San Francisco was looming, the powers that be began tinkering with laws covering condo conversions. Why condos? Through another complicated set of facts, condominiums (and most single family houses) are exempt from rent control restrictions. (Most condos built after June 13, 1979 are exempt from both rent control and eviction control). 

The Old Conversion System

In balancing the desire to allow property owners to own property (in the form of a condo) while also protecting tenants’ rights, the powers that be devised a condo conversion lottery, which limited conversions of eligible buildings each year to just 200. And the system was done by a complicated,  time-weighted lottery. The law was confusing as it was dependent on the number units in a building, whether or not there were evictions in the past, what the zoning is, what year it was built. Two-unit buildings were presumptively excluded from the system lottery system — except they would be within the system’s ambit if one of the units was rented while other buildings that are comprised of 100% owners — are presumptively eligible for the condo lottery (unless they’re not of course).

Indeed, only 3-unit to 6-unit buildings were be eligible to enter the lottery only after X number of years so long as: (1) there was a certain ratios of owners versus tenants; (2) the building had a ‘clean’ eviction history; (3) at least one of the owner-occupiers lived at the property for a requisite amount of time (usually 3 years). And, after all of this eligibility stuff, came the actual weighted lottery itself where chance played a huge factor in whether conversion was going to take place, e.g. — some six unit buildings converted within 4 years of entering while others still hadn’t after 7 years. This was deemed to be untenable and in 2013 and 2014 it was put on hold in favor of the ‘expedited’ system you’ll see below until 2013 at which point 5- and 6-unit buildings will permanently be barred from converting into condominium buildings at all.

…And Now the New Conversion System

So, all of this was changed in 2013— and radically.

(Big note: these conversion and eligibility rules do not apply to to newly-constructed condo buildings post-1979)

As of this writing (August 2015) there are two paths to conversion eligibility for existing buildings whose occupancy permit was issued before June 13, 1979:

  1. Automatic (lottery bypass) for 2 units occupied by 2 unrelated owners who live onsite for a year (provided there was no tenant buyout of a unit with more than 1 tenant on a lease and/or a unit with a protected client no matter how many there are) where one owner owns at least 25% or more interest in the title deed; and,
  2. For qualifying 3- to 6-unit buildings, there is now a set 7-year schedule with an unlimited number of eligible buildings converting each year.

One potential impact many people feared when the laws changed in 2013 was that owners of units who couldn’t convert their buildings under the new system would have been more willing to cash out by using the Ellis Act to turn the units into marketable TICs. Oh, and one more thing: if anyone sued to challenge the system there was a ‘poison pill’ that put all conversions on hold.

But wait, there’s more: 

In March 2015, the Board of Supervisors passed additional legislation that barred units where a tenant-buyout took place after October 31, 2014 (trick or treat!) from conversion if there was more than 1 person bought out or if any of the people being bought out were  considered ‘protected’ tenants.* In addition to that, buyouts have to be recorded and tenants being bought out got a longer rescission period thus adding more uncertainty to the process.

*It’s unclear whether the buy-out provisions apply to buildings where there are 2 units with 1 tenant in each or if the 1-tenant per unit language should be interpreted as 1-tenant per building. Yes, this is being litigated.  

Conversion in a Nutshell: Kind Of

What’s the impact of a prohibited eviction?

Any hopes of converting a building into condos will be dashed if it comes to pass that there was an eviction of a ‘protected’ tenant. It doesn’t matter if this eviction was done years ago by people you’ve never met. 

No More Than A 3-Month Gap is Allowed Between Owners

The condo conversion scheme requires a certain number owners to occupy a property for a certain amount of time before a building can become eligible. If the most senior owner sells their interest to another their ownership durations between the two owners can be tacked together, but the gap between those occupancies can be no longer than 3 months.

Who’s a Protected Tenant?

A tenant can be protected if they live in a property for 5 years or more and is disabled (as defined as the person being to collect S.S.I disability payments).

By Age. A tenant can be protected if the person is 60+ years old and a resident of the unit for 10 years or more.

By Disability. A tenant can be protected if the person has lived in the unit for 5 years and would otherwise qualify as being a disabled person who would be eligible to collect SSI disability payments or SSI terminal illness payments.

With Kids. Tenants with school-age children are entitled to certain protections.

For more see the Tenant’s Union site.

Tenants with Leases are Protected 

Many TIC units are rented out to tenants. After the first year of residency San Francisco automatically defaults to month-to-month tenancies. And, tenants who occupy a unit during the conversion from TIC must now be given the right to buy the unit from the owner (at a price the owner can set) and/or the right to a life-time lease (that right used to be only afforded to senior citizen tenants). 

For Each Unit That Converts Under the Expedited Schedule there will be an Impact Fee of $20,000 per unit

raffi-confused

Stumped?

We don’t blame you. But here are a few good men and women who can help sort it all out for you as they practice in this muddled and potentially confusing realm. Yes, they happen to be attorneys too.

Andy Sirkin

The guy who wrote the book on TICs and Condos (literally)

Lyssa Paul

She used to manage Andy’s office and is still influencing the City’ housing holicy

Barbara Herzig & Peggy Berlesse

Also experts in the field.

Remember all of this stuff is tricky and case specific. The information presented above is considered to be accurate but is only presented as general guidance. You may have to consult with the DPW, the Rent Board, the Planning Department and more, but talking to these attorneys is a good start. 

Kevin K. Ho, Esq. + Jonathan B McNarry
San Francisco Real Estate Experts
+1-415.297-7462 (Kevin)
+1-415.215.4393 (Jonathan)