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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. Because this intersection of housing policy, law, real estate and social issues is ever-changing, you must also consult attorneys who practice in this field every day before proceeding as things will and do change with little notice. And 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. 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. 

Because a condominium unit in San Francisco is usually exempt from all or some of the Rent Ordinance and because San Francisco is (and has been) a boom town with a housing crisis de jour, converting (or subdividing) apartment units into individually owned condominiums can be controversial and is, therefore, highly regulated.

The complex and seemingly contradictory material you’re about to read is emblematic of San Francisco’s real estate market and housing crisis. Land and housing are scarce because building anew and remodeling — even demolishing a building that everyone agrees deserves to be torn down — is heavily regulated and can take an incredibly long time. When a developer of a simple 2- to 3-unit project must wait 3 years before getting permits or when a developer of 60 units must wait more than ten years (all without income but with mounting fees and carrying costs) while more people stream to fill the area while long-term families and working-class folks struggle just to have a place to sleep at night, it’s no wonder that condo conversion sits right up there in terms of issues rife with potential conflict. What’s worse is that it’s only going to get worse: no suitable redevelopment plan has emerged to replace the California-sprawl urban/suburban growth model that ran out of room to build in the Bay Area in the 1990s.  

1979 Matters.

Any San Francisco residential unit built where its Final Certificate of Occupancy was issued after June 13, 1979, is presumptively a condominium. A condominium is a universally known commodity that can be lent upon. A condominium will have its own legal title deed (that is connected with a homeowner’s association which in and of itself can be as formal or informal as can be). What’s more, in San Francisco, these units are exempted from the City’s progressive Rent Ordinance which sets up rent control (i.e., limitations on annual rent increases) and eviction control (i.e., limiting the reasons on displacing tenants from a given apartment). It’s an incredibly pro-tenant framework.

The Rent Ordinance wouldn’t matter much if there were plenty of post-1979 units to go around. But alas, of the 300,000+ residential dwelling units in San Francisco (including houses, apartments and condos), nearly 80 percent of them fall within the ambit of the Rent Ordinance meaning that they were first built before 1979.

PROS ABOUT CONDOS

  • More Condos Means:
  • Home ownership promoted
  • It means better building safety (after all a unit is either post-1979 construction or had to be upgraded to prevailing building code regulations at conversion time
  • Wider buyer pool because more lenders will lend

CONS ABOUT CONDOS

  • Greater displacement from gentrification 
  • Fewer rental units 
  • Fewer rent-control units

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.

Some Background

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. The Current ECP System and Its Schedule

After a bunch of hand ringing and deliberations, the Board of Supervisors enacted sweeping changes in 2013 that suspended the lottery in favor for an ‘expedited’ schedule. The lottery is suspended until 2023 or 2024 and when (if) it does return 5- and 6-unit buildings that would have been otherwise eligible to convert under the old system will no longer be allowed to convert.

Condominiums can happen in a few ways:

  1. From new construction
  2. From existing buildings that undergo a legal subdivision (conversion)
  3. From existing parcels with more than one structure on it or another that gets built later than the other(s)

We’re going to focus on the second category here as it’s the most confusing, potentially contentious but also the most contextual. There are three general categories of condo conversion:

  • The 2-Unit [lottery] bypass
  • The ECP for units otherwise eligible for the (suspended) Condo Lottery, i.e., 3- to 6-unit Buildings and 2-unit Buildings with 1 Rented + 1 Owner-Occupied
  • 2-, 3- and 4-unit buildings otherwise not covered may be allowed to enter a resumed lottery in 2023 or 2024 provided other requirements (owner-to-tenant ratio, duration of ownership, eviction history)  

One impact folks feared was that owners of buildings that would have otherwise been eligible to condo convert may now be more willing to get out of the rental business and feel empowered to use the Ellis Act more freely to clear a building of its tenants thus turning the units into tenancy-in-common units for sale that, even sold at a relatively low price per unit, still adds up to more than what the building would be worth as an investment property.

The ECP schedule asks a bunch of questions regarding owners, tenants, years of residence and then sets out a schedule of when a building can convert.

Conversion in a Nutshell: Kind Of

And Now For the Actual Conversion (Subdivision)

Once you’ve been deemed as eligible (congrats btw) the conversion process will wind its way through various city departments. Conversion times have picked up from nearly taking a year previously to now taking anywhere from 3 to 6 months thanks to staffing changes at the City. 

Step 1. Eligible Applicant Owners Decide to Convert and Apply:

  • 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

 

Step 2.1. The Lawyers 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), 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. 

 

Step 2.2. Other Professionals You Hire  

  • The lawyer you hire will may also recommend a surveyor to map the site and an accountant/CPA to create HOA budget documents and reserve studies (depending if the building is big enough 
  • Contractors and Professional Tradespeople (see below) 

 

Step 3. Enter the Department of Building Inspection (DBI)(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 
  • Owners fix violations if any, execute updates; inspector(s) re-inspect and ultimately sign-off
  • Issues Certificate of Final Completion & Occupancy

 

Step 3.1 Enter the Department of Public Works (DPW)(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 

Step 4. The Documents At Recorded

  • Mylar maps filed, CC&Rs filed, notarized, Lending issues resolved (payoffs, reconveyances of previous mortgage(s)), cross deeds recorded
  • Owners prepay property taxes
  • Title Company collects, coordinates & records CC&R documents, maps, exhibits
  • New titles issued. 
  • Done!
  • NOTE: Any Group or TIC Loan must be Refinanced and Close too and each new condo owner can ‘take out’ a new loan based on the now-increased equity they hold.

 

What Will You Be Paying?

  • Supplemental fee ($20,000/per unit)*
  • Application Fees ($900±0)
  • Surveyor Costs ($5000)
  • Lawyer’s Fees ($3000±)
  • Prepaymant of Property Taxes based on a new assessment for 1 year in Advance

 

*Subject to change, discounts may apply

For more, read here: https://www.andysirkin.com/Index.cfm?Page=15&Hit=1

2017 UPDATE:

Buy-Out Agreements And You

Buy-Outs do not affect ECP or Bypass conversion: According to attorneys in the know who reached out to us, for buildings that are applying for condo conversion under the Expedited Conversion Program or the 2-Unit Bypass, any prior tenant buy-out history of a given building, whether registered with the Rent Board or not, is now considered irrelevant. While the Subdivision Code arguably could allow DPW to include buyout history as a condition of conversion of two unit owner-occupied properties (or other units in the ECP pool), the DPW’s actual practice has ignored considering building buyout history as a factor in evaluating two-unit and ECP conversion applications.

Some Q+As

Unwilling Tenant? No Buyout? What’s the impact of a prohibited tenant 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. 

The Owner-Occupancy Requirement is Taken Seriously: 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.

Before, During and After Conversion, Apartment Tenants with Leases are Essentially Protected Ones Who May Get a Life Estate… 

A tenant rents out an apartment and that converts into a condo while they live there gets a special set of rights with respect to that unit. (Remember, after the first year of residency San Francisco automatically defaults to month-to-month tenancies). 

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 lifetime lease — essentially a life estate that may also pass along to a tenant’s spouse if the tenant dies (this 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. 

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