(from a TIC)
Adding value to your property with a lot of paperwork and patience can be rewarding but complicated.
Going Condo in San Francisco
Condo Conversion in SF: Lucrative if You’re Eligible But It’s Complicated, So Tread Carefully
Why Do It?
Condominiums are usually exempted from the City’s stringent rent control regulations and, to a lesser extent, its eviction control regulations. Because of this, the City limited the number of pre-1979 built buildings that can go condo (about 80 percent of the residential inventory in San Francisco). When a building can go condo, it can be a confusing, convoluted and long process that can be a series frustrating with hoops and checklists involving lawyers, inspectors, city employees, title folks, surveyors, contractors and more.
The reward is a new subdivision map entry that gives each owner their own title deed which should, in theory, boost market value and flexiblity.
Condos Are Usually Valued More than TICs
Owning a Condo Means More Financial Freedom and Freedom from Most of the Rent Ordinance, Which is Why It’s Limited
There is a lot of history on why San Francisco has pretty much had a housing crisis in one form or another ever since gold was discovered outside of Sacramento in 1848. Suffice to say the tension between property owners and tenants, historic preservation, seismic requirements, NIMBYs, and YIMBY's have led to a lot of public policy, regulations and laws that reflect these competing interests and goals.
One of the consequences of this tension focuses around condominiums (a home ownership mode that came into fashion on the East Coast and Florida spreading west to us after WWII) and the 1979 Rent Ordinance that San Francisco voters enacted. Specifically, condominiums are, for large part, are exempted from the rent control provisions that limit annual increases to about 1-2% maximum while also limiting the number of valid reasons a tenant can be displaced from their rental unit as well.
Because of that, the City acted to limit the number of subdivision applications (technically you are taking the one parcel a multi-unit comprises and slicing it up into various condominiums) it would approve each year.
One more element adds to the mix. A few good attorneys started adapting a particular legal concept of joint ownership — the tenancy in common — to San Francisco to create TIC units whereby people would be purchasing an undivided ownership interest in a building but would also be signing a contract with the other owners delimiting the space and rights they had in a given building, i.e., a TIC agreement.
Let’s assume that a home is most people's largest asset and most people usually want to see that value rise in any way they can. Part of market value is determined by a willing and able buying class. Because most homes are so expensive most people will need to get a mortgage. Most banks the world over will know what a single-family house is and will also know what a condominium is, but they won't know what a TIC unit is.
The last part we've talked about. Home ownership gives you the freedom to refinance your mortgage, to get a home equity line of credit, to will the property to someone, to gift it, etc. Having those rights impinged in any way will lower a home's value.
How San Francisco Converted Its Multi-Units to Condos (and still does in part)
The pre-2013 condo conversion system in San Francisco was somewhat predictable even though it may have taken a decade or more to get through it. As you’ll see later, the 2-unit bypass system is still in force today, but the lottery system is not for the time being.
Your building would have fallen into one of 2 categories:
The 2-unit bypass system with two, unrelated, owner-occupiers who lived onsite for at least a year with at least a 25% ownership stake in the property assuming the building had a ’clean’ eviction history, or,
The Lottery System governed 2-unit buildings with a tenant-occupied unit and buildings with up to as many 6 units.
There were other requirements of course: How long owners lived onsite; A proper owner-to-renter ratio (more owners, and, in some cases, no more than one rental unit); no Ellis Act evictions for 10 years prior to applying; and no protected tenant no-fault evictions among more technical requirements related to health and safety.
If all that was satisfied, then building could enter the annual lottery draw, which limited the number of units going condo to just 200 per year.
Buildings that weren’t picked one year would get more and more lottery 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 far more common. When the condo lottery comes back only 4-unit buildings and under can convert.
Whenver the condo lottery comes back to San Francisco, only 4-unit buildings and under can convert.
The Lottery Went Away to Rest...
The Lottery Was Out. The ECP Was In. Two-Unit Bypasses Stayed the Same and are the only way to convert until 2024, 2025 or 2026
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 at least 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 (February 2023), 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, 2025, or 2026 only for 3- and 4-unit buildings; 5- and 6-unit buildings would no longer be considered eligible.
Gee, This is Complicated?
Yes it is. So this is where we tell you it’s time to talk to the experts. Among more folks who do this type of work (see below for more), Andy Sirkin and his firm have been at the forefront of these types of questions and issues. See what he says about the complicated topic below.
So, 2024? 2025? 2026?
When the condo lottery was suspended in 2013, the powers that be at the time said that they would bring it back but only after studying the effects that condo conversion under the ECP system (which is now over and done with, right?) and the number of rent controlled units in San Francisco. What’s linked below shows you what the city is thinking. Keep in mind that the Pandemic ushered in some new provisions impacting eviction control rights across the state. How that plays into the mix is anyone’s guess now. Also unknown is the passage of SB 9 and San Francisco’s recent plan it submitted to the State of California saying it would add some 80,000 units of housing to the market by 2030.
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 (Budget for more)
- Supplemental per unit fee (≈$20,000 for ECP units)
- Application Fees (≈$9,000)
- Survey Costs (≈$5,000)
- Lawyer’s Fees (≈$5,000)
- Contractor costs for any upgrade work you have to do to comply with DBI physical inspection (varies)
- Fees to PG&E to have new power meters installed
- Fees to electrician to bring building up to code
- 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
Barbara Herzig & Peggy Berlesse
Also experts in the field.
- 414 Gough St., Ste. 5,
- San Francisco, CA 94103
- [email protected]
- (415) 861-8800
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.
Some potentially relevant links and pages to consider
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