(from a TIC)
Adding value to your property with a lot of paperwork and patience can be rewarding but complicated.
Condo Conversion in SF: Lucrative if You’re Eligible, Tread Carefully
Condominiums are exempted from the City’s stringent rent control regulations and, to a lesser extent, its eviction control regulations. Because of this, the City limits the number of pre-1979 buildings that can go condo. It’s a confusing and convoluted process that can be equally as frustrating but rewarding too.
San Francisco is an expensive place to live and has been ever since Gold Rush days where the City went from having just 800 residents to more than 35,000 residents over the span of just a few short years. While some reasons for why housing prices have always been high here — the scarcity of land and climate for example — human-made public policy decisions have created a distorted patchwork of building, zoning and rental regulations that are byzantine, confounding and, incomplete.
Because a house and a condominium are exempted from the Rent Ordinance’s rent-control and eviction-control sections, and because most condominiums should be excepted from California’s new rent regulations, converting (or subdividing) pre-1979-built apartment units into individually owned condominiums can be controversial and is, therefore, highly regulated.
The pre-2013 condo conversion system was somewhat predictable. Your building would fall into one of 2 categories:
The 2-unit bypass system with two, unrelated, owner-occupiers, or,
The Lottery System governed 2-unit buildings with a tenant-occupied unit all the way up to 6-unit buildings.
Provided that certain eligibility requirements were satisfied (i.e., a proper owner-to-renter ratio, no Ellis Act evictions for 10 years prior to applying or protected tenant evictions), a building could enter the annual lottery draw. Buildings that weren’t picked would get more and more tickets every year with buildings with a smaller number of units getting more tickets each time. It could, for example, take as little as 4 years for a 6-unit building to convert (on a fluke) but 6-12 year waits were common.
And Now, Let’s Shake It Up (Again)
The Lottery Was Out. The ECP Was In. Two-Unit Bypasses Stayed the Same and are the only way to convert until 2024 or 2025
As if all that lottery stuff wasn’t confusing enough, after a bunch of hand ringing and deliberations after another housing crisis de jour was declared in 2013, the Board of Supervisors enacted sweeping changes that suspended the lottery until 2024 and setup an ‘expedited’ 7-year long schedule that would allow an unlimited number of previously eligible buildings (up to 6 units) to convert according to the schedule pictured below. The changes also governed so-called tenant buy-out agreements setting up a procedure by which tenants could be paid money to leave a unit through no-fault of their own. Buy-out amounts have been averaging twenty thousand to forty thousand dollars per tenant. Contrary to early fears, buyouts have not been deemed to have any impact on conversion eligibility criteria.
As of this writing (January 2020), the two-unit automatic bypass system is the only way a conversion can be done until 2024 as the final ECP conversion application deadline was on January 24, 2020.* When the lottery does return in 2024 or 2025, only for 3- and 4-unit buildings; 5- and 6-unit buildings would no longer be considered eligible.
But course, there’s a wrinkle.
Because tenant’s rights groups sued the DPW in federal court, the DPW stopped accepting new ECP applications from the last pool of eligible ECP buildings that had tenants in some of the units before the 2020 deadline, citing the lawsuit as reason as the reason for rejecting conversion applications. But this impasse leaves a number of would-be applicants in limbo because no one has figured out how otherwise-valid applications will be handled pending the outcome of the lawsuit and whether the application deadline would be adjusted or not to accommodate. In lawyer terms, the question is if the January 2020 deadline will be tolled during the pendency of the suit.
Check out the DPW’s update here.
So, Really Just How Much More Do Condominiums Sell For Compared to TIC units?
Condominium sales make up the bulk of the sales in San Francisco during a given year outselling TICs by a factor of nearly 10 to 1 in 2019 (2,530 units vs. 263 units sold, per the MLS). Take a look at the difference in median sale prices below.
Median Sale Prices for Condominiums and Tenancy in Common Units for San Francisco
Live Data from the MLS Updated Monthly
Finally, Time to Convert now, right?
Once you’ve been deemed as eligible (congrats btw) the conversion process will wind its way through various city departments. It will remain vital that you keep in touch with any lenders, attorneys, surveyors, DPW staff, contractors and your title officer throughout this process as mistakes here can be dear.
Eligible Applicant Owners:
- Apply for building inspection; Hire Licensed Surveyor, Lawyer & Title Company
- Hire an expert and local lawyer assists owners in gathering & checking docs like the 3R report, surveyor maps, and assembles conversion application packet to submit to the DPW (Department of Public Works)
- Hire an expert and local title company to handle the ‘official’ paperwork, pull preliminary title reports and to record future HOA documents, maps, and to handle existing and future mortgage loans, document recording and proper title assignment and vesting.
The Lawyer Will Create Your Future Condo and HOA Documents
- The lawyer you hire will either recommend a title company and/or work with a title officer to prepare the applicable and future condo/home association governing documents, e.g., Conditions, Covenants and Restrictions (CC&Rs) for certain, and, perhaps, Bylaws, Articles of Incorporation. It’s important that you (read these as they will impact who gets what rights, which parts of a property are owned by whom). Usually these documents are boilerplate but be attentive as it’s not always one-size-fits all and it can be an area of negotiation with your neighbors.
Enter the Department of Building Inspection (DBI)
(Their part may take 6 weeks to ?)
- The DBI will send out inspectors who will look at a property’s permit history, its electrical, plumbing and overall construction and compliance with applicable building codes
- Onsite inspections should start within 6-weeks turnaround from application (actual time will vary)
- The DBI would like to see separate power meters and boxes for each unit plus a common meter for the building’s common areas, ideally 2 water meters, updated energy efficiency and water conservation compliance along with other ‘health and safety’ regulations that could involve windows, insulation, smoke detectors, etc.
- Owners fix violations if any, execute updates; inspector(s) re-inspect and ultimately sign-off
- Ultimately, the DBI issues a Certificate of Final Completion & Occupancy
Enter the Department of Public Works (DPW)
(Their work should take 2-4 weeks)
- DPW staff will review inquires to the City’s Human Rights Committee, Rent Board regarding eviction history, zoning issues, and sidewalk conditions.
- DPW processes all of the approvals its receives
- Issues Tentative Approval, which needs the Occupancy Certificate from DBI and Preliminary Map approval (if selling a unit, it can be marketed as a condo to-be now)
- Towards the end of the process, the DPW will review draft survey and condo maps and once the documents are satisfactory it will request the surveyor prepare a Mylar map that will be the recorded public map of the subdivision
(What you’re likely to see)
The HOA and you are going to end up with…
- Initial budgets and, potentially, reserve study required by state law. Study examines the useful remaining life of building components so advance budgeting can be done
- Building insurance policies and individual policies need to be prepared
- New loan documents, deeds of trust, legal descriptions will be prepared/handled by lender and title/escrow officer
- Previous loan payoff documents prepared, signings coordinated
- Recording of these various documents to be handled by escrow/title company
The Title People
(Remember a lot of this stuff will be public record)
The title company
- Will file and record Mylar maps of the property along with new legal descriptions, CC&Rs (notarized) and other documents showing that any pre-existing loans getting paid off (reconveyances). Remember that any group loan or fractional loans get closed out with the conversion
- The title company may also handle property tax pre-payment (or should at least be made aware that these have been paid)
- Then you’re done!
What Will You Be Paying.
- Supplemental per unit fee (≈$20,000 for ECP units)
- Application Fees (≈$9,000)
- Survey Costs (≈$5,000)
- Lawyer’s Fees (≈$5,000)
- Title Fees (≈$1,000)
- Prepay Property Taxes for 1 year in Advance at time of recording
We see a lot of HOAs and HOA documents and many of our clients have indeed converted successfully from TICs to condos. That said, it’s a complicated road that may be full of surprises. Your situation will be unique and, as such, remember that in reading the material above. The best course of action is to speak with an attorney who does these conversions regularly. We’ve listed a few below that our clients have used or that we’ve otherwise interacted with.
The guy who wrote the book on TICs and Condos (literally)
- 388 Market Street, Suite 1300, San Francisco, CA 94111
- [email protected]
- +1-415-738-8545 (US)
- +33-1-76-66-02-02 (France)
She used to manage Andy’s office and is still influencing the City’s housing policy
- The Flood Building 870 Market St, Suite 1105 San Francisco, CA 94102
- [email protected] 415-738-8638
Also experts in the field.
You Have Questions, We Have Answers
Going from TIC to condo is just one way to add value to a property in San Francisco, ping us for more ideas, questions or thoughts.