Last year when Mayor Newsom released his proposed budget for San Francisco a proposal to allow owners of tenancies in common (TICs) to bypass the city’s condo conversion lottery for a fee had fallen by the wayside.
This year, however, the proposal is in.

Currently, about 1,800 tenancies in common, where a group of people own a building together rather than their individual units, have applied for the city’s 200 slots a year for condo conversion, said Greg Wagner, Newsom’s budget director.

Charging homeowners $4,000 to $20,000 to forgo the lottery would raise a projected $8 million that would be spent on affordable housing, Wagner said. Similar efforts have failed amid concern that they would increase renter evictions.

As we wrote a year-ago: Condo Conversion For A Fee? Yes Please (But Not Just Once).
Condo Conversion (And TIC Lottery Bypass) For A Fee? Nope. [SocketSite]
Newsom’s budget foresees layoffs, program cuts [SFGate]
Condo Conversion For A Fee? Yes Please (But Not Just Once) [SocketSite]

Comments from “Plugged-In” Readers

  1. Posted by rr

    it would depend on whether or not the lottery would continue in its current form, but assuming it did the smart money might be to pass on the opportunity to convert via fee and stay in the now significantly smaller lottery pool.
    Also, this would not only help raise city funds, it would help TIC owners stuck in fractionalized loans they will never be able to get out of. I believe only one lender is doing new loans, but the requirements have gone sky high (i hear 25% down, at least, with excellent credit), cutting the pool of potential buyers down significantly. If the same requirements must be met for refis, it’s even worse. If I only had to pay $10k to move from a 7.5% ARM to a 5% 30 year fixed, I’d save almost $900/month in mortgage payments and repay the condo conversion costs in no time.

  2. Posted by rr

    sorry, I meant to say I’d save $900/mo on a hypothetical $500,000 mortgage.

  3. Posted by anon$random

    the criteria to qualify for a fractional loan has changed very little, if at all, since the downturn. there has not been one foreclosure on a fractional tic loan san francisco…thats what happens when loans are propertly underwritten.
    agree with everything else RR says. this proposal makes waaayyy too much sense for the Board of Morons to approve it. way too many political points to score here.

  4. Posted by mikel

    TIC’s will be the new wave of foreclosures in SF. Seems like everyone I know who has done a TIC is currently in litigation, has been in litigation, or trying to sell. I’ve yet to meet someone who’s been in a TIC (for more than 2 years) that is not regrettting it. Although lottery doesn’t apply to 2 unit TIC’s, I know 3 people in 2 unit TIC’s where the other owner can’t even keep up with mortgage payments. So improvements and condo convert legal fee’s, etc. are completely out of question.

  5. Posted by rr

    anon$random-
    when did the downturn start, in your mind? Most frac loans are 5-year ARMS, which means that a big bunch of TICs from 2007/08 have yet to reset, but will. If I recall, one only needed 10% down to qualify in 2008, but it’s higher now.

  6. Posted by Agent415

    LOL at the fine anecdotal evidence above. Jesus dude, you couldn’t at least put an “IMO” at the end of your first sentence?
    I know plenty of TIC owners, literally ten of the top of my head, who are more than happy with their situation.
    Anyway, on the proposal. Like everyone else before me said, it simply makes way too much sense for this City to allow. Also, I am curious if current condo owners, particularly in older buildings, would quietly object to this in some fashion.

  7. Posted by anon$random

    when did the downturn start…2007? seems so long ago now. i believe you used to be able to do an owner-carry for the 2nd 10% with 10% down…there are two competitive banks for fractionals right now, Sterling and NCB..Bank of Marin will probably be back sooner than later. Fractional loans are not going away…and Mikel, how come there hasnt been a foreclosure on a fractional tic yet?
    even if the fractionals did reset today the rates would not go up as they are tied to the LIBOR + poionts…the libor is at 4.28 this week.

  8. Posted by spencer

    I agree that this makes ssnse, but I think bypassing the lottery is worth much more than 20k. I would support if the bypass fee were more like 50k to 75k per unit. TIC owners knew what they were getting into, so I think the price to get out should be much higher. This would also lead to higher revenues for affordable housing.

  9. Posted by Dolores Guerrero

    @spencer, of course this is all a hypothetical since there is no way this will get approved. However, the fee needs to be set at a level where people will actually take advantage of it. I don’t think that 50K-75K is affordable for most TIC owners. Most TIC owners are not extremely wealthy people who have that kind of money laying around and I don’t know if there is any kind of home equity loans available to finance such an expense. Owners of 3 – 4 unit properties who want to convert the entire building are also not likely to have that much money to spend. I would think somewhere in the $15 – $20K range makes it high enough to be worthwhile from the city’s point of view, but not too high so that only a handful of eligible converters can pay the fee.
    It’s unfortunate as others have said that the BoS will never let this happen.

  10. Posted by Brian

    $50k-$75k just to bypass the lottery is a back-breaker for most TIC owners. Don’t forget all of the other expenses on top of that once you’re in the game. It’s not unusual for a lot of these old buildings to require 6 figures worth of work to be able to pass all of the inspections (on top of the already hefty fees the city charges).
    This would make development substantially easier in the city, and because of that specifically, it’ll never see the light of day. I’m all for it though, and yes, I would be tempted to convert my building at the lower price, but not at the higher (as I don’t have an extra $50k laying around, but could stretch to do $20k if necessary).

  11. Posted by kathleen

    4K per unit is great idea.
    I never did understand condo conversion created renter eviction argument.
    The tenants are tossed, or more likely, bought off when the units are sold as TIC’s, so that “damage” is done before condo conversion.
    Let owners have their own APNs and get out of
    stranger’s financial pockets.
    “I’ve always depended on the FICO’s of others”
    TIC street car of condo desire. It is perverse what the city is doing to the one class of people it claims it wants to retain, educated young families.
    Geting Ellised is not the worse thing that can happen to a renter. It happened to me. One year later I was a homeowner and a landlord.

  12. Posted by curmudgeon

    Kathleen, the argument is that if you allow more TIC’s to go condo, then you incent the creation of more TIC’s, and you therefore decrease the overall rental stock.
    I pretty much buy the argument, although I don’t buy that it would be a socially detrimental thing. But most of the Board of Supervisors (and certainly the SF Tenants Union) buy it hook, line and sinker.

  13. Posted by EH

    Hah, Gavin must not be getting the campaign support he was counting on. A mayor’s work is never done.

  14. Posted by Spencer

    I know several TIC owners that would be willing to pay $50K to bypass the conversion process. It shouldn’t be priced at a point where all TIC owners can afford to pay the extra fee. If that were the case, they would all convert, which would not be OK with the people arguing anti-eviction. However, even if a few people were willing to pay a premium, this would ease the lottery process for others and lubricate the process. It’s better to price high and adjust down in a few years if there are no takers, but I bet there will be a few.
    It doesn’t seem fair to make conversion accessible to all as everyone knew the rules going in.

  15. Posted by Dolores Guerrero

    People who bought 2 – 4 unit buildings before Prop I in 1994 knew what the rules were too – landlord occupied buildings of 4 units or less were exempt from rent control. The BoS went back on their bargain they made to landlords at the time rent control was initially instituted.
    The rules that you signed up to can always be changed – unfortunately those rules since rent control was instituted have all been changed to favor the tenants. So I’m not a big believer in “everyone knew the rules going in” unless both sides are willing to live with the original agreement. That is not the case.

  16. Posted by xavier9

    This is a common-sense approach by the Mayor and I applaud him for bringing it forward, despite it’s limited chances. More social services cuts or helping middle-class residents improve their homes? Fire more teachers or permanently improve tax revenue by converting TICs to higher-value condos? Seems like a no-brainer to me.
    I am a happy owner of a TIC (since 2007). At the time I purchased it, my first home, it was the only way I could afford something I wanted to call home. My timing was off, I know, whatever. After 19 years in San Francisco, I wanted my own walls. I chose my TIC because of the quality existing neighborhood and because the unit/building itself is gorgeous and well-maintained. I paid less than I would have paid for a condo and that is balanced out with higher interest payments to the bank.
    I would love to convert to condo to take advantage of the better rates and better re-saleability. Either way I will stay. The fractional loans are expensive, but there is no risk of “being in a stranger’s pocket.” Converting to a condo would provide the City with immediate benefits of fee income. When a sale takes place, the City would benefit from increased assessed values. Hell, they could add the “improvement” to the current assessment for all I care. So $8M this year in fees, followed by $1 M per year in increased property values (total guesstimate).

  17. Posted by kathleen

    If preventing TICs from condo converison could stop, postpone or otherwise waylay TIC purchases, it would have happened by now.
    With a backlog of 1900 TIC owners in lottery, TIC sales are still happening.
    The effective TIC conversion to condominum via lottery odds is effectively no chance.
    There are still plenty of TIC buyers out there, and there are still plenty of TIC owners
    owners combined on one jumbo loan.
    These jumbo loan folks will get the best relief, as many are on interest only payments. Allowign buyout to condo give the city cash, and allows different partners with different economic agendas to handle their debt to their best advantage.
    Its about freedom. Just another word for….

  18. Posted by lol

    I am almost certain any new “freedom” (freedom to pay to acquire more freedom, actually) will be counter-balanced by even more restrictions on rentals or permits. Ultimately these counter-measures will overwhelm any benefit from the original measure, like the convoluted mess we have right now.
    About resetting the property tax home valuation: is a TIC sale resetting the whole building’s tax basis or just the unit sold? What happens when it becomes a condo?

  19. Posted by A.T.

    It’s not as easy as just setting the “right” price for such a fee. A new “fee” in California requires strict fact-finding and the fee is supposed to approximate the cost of the service for which the fee is assessed. I’m not entirely sure whether this type of fee would fall under the general rules, but this whole process (like most things in California) is very complicated.

  20. Posted by Rillion

    “People who bought 2 – 4 unit buildings before Prop I in 1994 knew what the rules were too – landlord occupied buildings of 4 units or less were exempt from rent control. The BoS went back on their bargain they made to landlords at the time rent control was initially instituted.”
    Interesting, did not realize that the BoS were the ones to blame when a Prop passes. Here I thought the voters had something to do with passing Prop I. Those darn BoS, always there fault and never the fault of the people!

  21. Posted by hangemhi

    i know of many all cash TIC buyers so they can afford just about any fee. the trick is that you need every unit in a building to be able to afford it.
    either way, almost any fee will be returned in value. $50k fee on a $500k TIC that becomes a $600k condo is a no brainer. obviously you have to sell to realize that gain – and that will complicate this further too because some owners who know they will be selling in the near future will want to push this through while others will have zero motivation.
    so the fee will have to be $20k at most if it’s to spur any decent level of conversions.

  22. Posted by lol

    I am not sure if a 500K TIC would become a 600K condo with a 50K fee. The new possibility would create a pretty efficient marketplace. The conversion fee would be quickly factored in as any TIC downside would be quickly ironed off.
    More TIC conversions would create more fluidity which is good for everyone in the TIC market. Existing condos would suffer a little (more competition) and future condos would benefit (more market). Prices could balance in between. Therefore for your example, we could see 525K TIC and 575K condo, provided there are no expenses for the conversion.
    If only it could be that simple, though: the TIC market is almost the bottom of the barrel and therefore has more demand from desperate entry-level buyers, I think TIC buyer would bid up and overpay with the expectation that the condo conversion is a done deal (then again, this is SF: everyone overpays!). I have a friend who paid almost condo price 2 years ago for a unit that had just won the conversion lottery. That instant equity did not pan out as expected as you all may guess. One of the TIC/condo partners sold with no profit over 4 years.

  23. Posted by rr

    The increase in equity is a red herring in my opinion. The real reason to convert is to move from an atypical, boutique housing arrangement to a normal, widely used one, with the safety and stability therein. For example, with a frac loan, HELOCs are impossible because there is no frac HELOC. You also can only get an arm, the interest rate is higher and the loan more crazy (such as stipulations allowing the lender to unilaterally Ellis a building during a foreclosure proceeding). Protecting renters is a good thing, but shouldn’t we also support entry level buyers who want a decent, simple place to live?

  24. Posted by A.T.

    A key benefit of condo conversion is that the place, when sold, is then (essentially) exempt from the rent control ordinance.

  25. Posted by EBGuy

    the trick is that you need every unit in a building to be able to afford it.
    I’m assuming the fee would be paid after conversion — at which point the owner will be able to take out a condo loan and access some of that ‘instant equity’.

  26. Posted by mikey woodz

    A.T
    When sold as a TIC it is also exempt from rent control, either way condo or TIC it falls under rent control when it has tenants and can go to market if vacant

  27. Posted by A.T.

    mikey woodz, that’s not right. TICs (if built before 1978) are under the rent control ordinance. Condos and SFRs are not as a result of a 1996 state law.

  28. Posted by mikey woodz

    Really? so if you buy a condo or SFR you can rent it out and then raise the rent whenever youd like basically? I havent actually ever looked into this, I just figured anything prior 78 was under rent control. Can you also evict tenants as well?

  29. Posted by xavier9

    A.T. is 100% correct

  30. Posted by Cy

    If you buy a 2-unit, built pre-1978, and convert to condo, and then rent it out, you’re subject to rent control. If you sell the condo, the subsequent owner is not.

  31. Posted by badlydrawnbear

    You know, if the planning commission would vote to approve replacing long vacant lots, such as the Haight Calla Foods or that abandoned church with new housing stock this wouldn’t be nearly as controversial.

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