As plugged-in people knew to expect, Supervisors Farrell and Wiener introduced Condo Conversion Lottery Bypass legislation yesterday which would allow eligible TIC owners to condo convert for a one-time fee of $20,000 per unit.
As proposed, collected fees would fund below market rate housing development and existing tenants in TIC units would be eligible for lifetime leases should their unit be condo converted by way of the bypass.
TIC Lottery Bypass Legislation Will Be Introduced Next Week [SocketSite]
Condo Lottery Bypass Legislation Coming, Mayoral Support Unclear [SocketSite]
Condominium Conversion 2012 Lottery Deadline And Odds (Against) [SocketSite]

71 thoughts on “$20K To Condo Convert From TIC As Proposed”
  1. way, way too cheap.
    Using the 20% ‘immediate’ appreciation value from the prior thread on this topic, and a (conservative) post-converstion value of 500K, I get 100K as the more reasonable fee.
    The owners might cry that the city is eating up all of their ‘windfall’, but they are getting a condo where none existed before while the citizens of SF are losing what was once a rent-controlled unit….

  2. btw, after you condo convert, the unit is still fully covered by the rent control ordinance. It is only after you sell it that the unit falls outside of rent control.

  3. I don’t know about “20% immediate appreciation”, but $50K would have been a more reasonable fee. This legislation is a good thing by the way. As a resident of D5, it’s glad to have a supervisor who has some common sense. Weiner has done a nice job IMO — especially compared to the other wackos who make up the BOS.

  4. The text of the proposed legislation isn’t up yet on the BOS website, so it shard to see the details. As far as tenants to, 37.9 (Evictions), section 9, reads:
    A landlord shall not endeavor to recover possession of a rental unit unless….
    …(9) The landlord seeks to recover possession in good faith in order to sell the unit in accordance with a condominium conversion approved under the San Francisco subdivision ordinance and does so without ulterior reasons and with honest intent
    So it seems that tenants of post-condo-converted units, while they may still fall under rent control, get different eviction-control treatment.

  5. I’m confused, I thought TIC’s were bought by occupiers of the unit and not to rent out and become landlords at a discounted price.

  6. It seems that the fee need to be related to the assessed value of the property. For some 50k is cheap, for others 10k is about right. Maybe 10% of the taxed value?

  7. Interesting. The flat rate is easier to forecast and will provide the city of a nice windfall if it’s ever passed. I’m sure some of the funds will get funneled towards the central subway project.A fee based on tax value is too slippery and add’s more complexity. Additionally, I think the tax value of TIC’s are probably based on the whole building and not the individual units.

  8. The increase in value of a unit is around 20% according to one of the bankers I spoke to who does fractional tic lending. Thus, $20,000 is a fair price for a tic unit that would sell for $100K.
    Otherwise, it is a complete windfall for the owners and is basically ridiculous. Every tic in town will be converted and the building ellised within a year.
    Hopefully, these two supervisors will be told how much the tenants approve of this at the next election.

  9. Do TIC lending agreements even allow for rentals? The two that I looked at strictly forbade it. Or is this “the tenants will all be evicted” just a strawman attack from the SF Tenants Union?

  10. If it really is an automatic 20% increase in value….which again I question, then there will be a corresponding 20% increase in property tax. At that point, I’m not sure what the incentive would be to convert in the first place. Again, the devil is in the details, but I am curious how this will impact the property tax rolls (i.e. – does the prop value get adjusted after the conversion).

  11. “Every tic in town will be converted and the building ellised within a year.”
    This makes zero sense. You can’t/don’t need to Ellis owner occupied units!
    I also question the assumed 20% increase in value of tic to condo. I think 10-20%, with 15% as average is more accurate.
    And, There will still be all the DPW fees, not to mention the construction costs involved with converting. This adds $10-30k added cost per unit (depending on extend of construction.)
    I think the $20k per unit is somewhat pricy. I bet you maybe only 20% of all lottery participants go for this scheme.

  12. Apparently some TIC owners are paying 7%+ interest rates because TICs don’t qualify for refinancing at present rates of around 4% simply because of the TIC status. Seems to me that’s one advantage of the proposed legislation. What do you guys think?

  13. All these people spouting off about “a complete windfall” for TIC owners are barking mad. Most TIC owners bought their units to be homes, not investments (an investment that takes 10+ years and thousands of dollars of further investment sounds like a hideous idea to me). Let us not forget that the units have to be eligible to convert in the first place, which is easier said than done.

  14. @grumpy
    Most TICs are owner occupied. There is no law preventing them from being rented, but many TIC agreements do prevent it.
    Most TICs are owner occupied. Compared to the few number of tenants this will affect, versus the large number of owners it will benefit, I don’t think the supporters in the BOS have anything to worry about, they will probably actually benefit.
    The few supervisors that would have to worry about tenant reactions are probably already against it as they would be representing districts with higher than average renter percentages.

  15. @Armand, I believe you are correct. When I was looking at TICs a few years ago the rates for fractional loans were about 3 points higher than comparable loans for condos or homes, and there were NO 30 year fixed loans available, all of them were adjustable rate loans.

  16. We own a 3 unit building, and in a year we would be eligible for this program (assuming 1 of our tenants cooperated with us, which we would obviously ‘incentivize’ them to do). At $60k for the building it seems about right. I honestly don’t know if we would do it at that price, which I think is the intent of the authors of the proposal.
    Nevertheless, for those who bought TICs to live in, this seems like a fantastic deal. Get rid of the shared loan, or fractional loan at higher rate, and get a bump in value.
    Wiener is my sup, and I will call his office to express my support. Other supporters should do likewise.

  17. It is absurd to call this a “windfall” for the owners. The current regulations are absurd — repealing them just makes sense. Did the City compensate property owners when they implemented these regulations? Obviously not. Does the City compensate or tax property owners when it change zoning laws? No. The idea that somehow owners should have to pay up just because the City rationalizes its regulations it is absurd.
    @around1905, the idea that the “citizens” of San Francisco are losing something is absurd. Certain individuals who have benefited from rent control might be losing something, but not the citizenry as a whole. Unless someone can explain why those specific individuals are entitled to receive a subsidy (aka “windfall”) from their landlord, then there is really no basis for complaining.

  18. So now TIC owners will be held hostage by the city unless each individual owner can come up with a $20K ransom. Money which in turn will be used for affordable housing. Has there been an amendment to the US Constitution that gives everyone the right to live in SF, whether they can afford it or not?

  19. agree with hipster, brad, and rabbits.
    the TIC owners ALREADY OWN their units. it’s the additional appreciated value, not the current value which is being taxed by this fee.
    converting creates a one time appreciation of say 20% (using the percent sited above by tipster which seems high to me) so a unit currently worth $500K is now worth $600K. the city gets 20% of this $100K appreciation UP FRONT.
    ( what other city fee is 20%? the real estate transfer fee is about 0.5% on $500K. permit fees for no plan remodeling are about 1% for $50K to $200K, when a plan is needed. )
    to this $20K bypass price add other city fees (inspection, R3, recording, possible application fee; about $12000/building), plus surveyor fees (at least $5000/building), plus legal fees (?), plus title and lender fees(?), the “cost” is now more like $40K/unit.
    this assumes the inspection finds NO NEEDED REPAIRS.
    $100K or even $50K would be cost prohibitive when adding all these costs for units worth $500K or less (or even higher priced units if there is a less then 20% value increase).
    furthermore, these are the very middle class homeowners that people say the city is hostile too.
    at $20K, a half million dollar home mortgage holder pockets 60% of the appreciation plus a lower interest rate post refinancing, the city gets at least 20%(more in other fees) plus a higher tax basis when any unit is SOLD.
    as these are EXISTING TICs, there is no new Ellis acting, and i’d expect Ellis Acted buildings would be ineligible – just as they are for the lottery until 10 years have past.
    the current lottery charges $250 per entry. i can’t find a good set of stats on success likely because this lottery includes such a diverse group … multiple entries by TIC owners/sharing a building, single entries by owners of 3 units buildings, weighted entries based on years of entry…but it hasn’t taken anyone 80 years to win (80yr x $250/yr = $20K, dismissing effects of inflation or investment).
    the proposed fee seems high to about right to me depending on the units’ current worth. for owners of $250k-$400k TICs the value is more on future resale or free market rental then any in pocket appreciation.

  20. “Did the City compensate property owners when they implemented these regulations?”
    What is this “implementation” you cite? There was no “implementation” of any new regulations that adversely affected any TIC owner. Unless you’re talking about rent control, enacted 34 years ago. Anyone who bought since then knew just what they were facing; there was nothing new implemented that somehow screwed them.

  21. 20k seems about right. Most people in TICs are in them because they couldn’t afford to buy a condo. The fee has to be low enough to be attractive.

  22. People did not buy TICS because they could not afford a condo, people bought TICs because a certain class of buildings in the city could not be converted to Condos under the lottery system, and so the concept of a TIC was created so people could buy. You will note that TICs do not really exist outside of San Francisco, specifically because the condo conversion lottery is unique to SF. Limiting the demand for condos did not eliminator demand, and so TICs were a way of addressing that.
    In general a TIC is valued between 20% and 35% below a comparable condo. This is because in a TIC there is only one mortgage for the entire property, and each owner is on the note. Accordingly, everyone is liable. For a condo, each unit has its own note, so one deadbeat will not sink the entire property whereas with a TIC if someone stops paying for any reason, everyone is on the hook for that share of the payment.

  23. @helmut.
    google tic real estate and any expensive city name and you will find that TICs now exist in many places “outside of san francisco” – brooklyn, santa monica, toronto…
    i’d agree with you that the Residential TIC market blossomed in the bay area and that TIC buyers seek a certain type of building but not on what that class entails.
    TICs in history date back to the 1600’s for English farmland and the 1970’s as a commercial real estate tool. in all cases, the cost of entry vs. the perceived opportunity is the driver.
    my understanding is that the lottery system was instituted to stop too many TIC condo conversions and started after the city had eliminated developer conversions through other laws. the inability to covert a rental building to condominiums certainly created this market, but market prices relative to household income seems like the real driver to me. i don’t think the lack of open buildable lots in the city has helped either.
    those i know in TICs (only 3 families) wanted fewer neighbors then most condo projects, in specific neighborhoods, at a certain price. affordability was very high on their lists. they transitioned from renter to owner of an equivalent space.
    fractional TIC loans started in san francisco in about 2005 to eliminate the “deadbeat” risk but at even higher mortgage rate spreads. as i’m not a real estate professional or a banker, i don’t know how hard they are, post-2008, to get, and i don’t think there were ever more then a handful of lenders.

  24. Helmut,
    Many TIC units have fractional financing. But they are a bit constraining to the TIC partner: you can only do 75% financing or so, the mortgage cannot be fixed, the rate is roughly 1.5% higher than conventional mortgage. The reason is that the few banks that do this financing cannot resell your mortgage to the outside. They therefore need to have the funds in deposit on their books. Imagine that!
    When I read above that some people consider TIC owners to be people who cannot afford a condo, I was laughing out loud. A 25% down payment means people need to have quite a bit of cash laying around. Not your typical 90% financing house poor. I agree with you that these are buyers who want to have access to a certain class of buildings.

  25. Why are TIC valued 20-30% less then condos?
    Why would someone choose to buy a property that automatically had less value then a like property and was difficult to resell?

  26. Why are TIC valued 20-30% less then condos?
    Why would someone choose to buy a property that automatically had less value then a like property and was difficult to resell?

    Why would anyone buy something that costs less? Because it costs less!

  27. @lol
    90% financing, if you know a mortgage guy giving out 10% down loans please let me know. a 25% dp on a TIC is still most likely less scratch than the normal 20% dp on a condo

  28. You can do 10-15% down on a TIC, so that’s not really a factor. The primary loan requires 20-25% equity depending on the price, and the lender, but allows for a 10-15% second loan, which is usually seller financed. The main problem is that interest rates are so much higher on fractional loans, that your payments are as high, if not higher, than they would be buying a 20-30% more expensive condo, but that only applies to traditional loans.
    If you go with a traditional loan you can get whatever loan is available to individuals, so if the building qualifies for FHA, then you could actually do 3.5% down, as long all parties qualify, so it really depends on each individual situation.
    There is some truth to the idea that a certain type of building is more available via TIC. Victorians and Edwardians are much more difficult to find as condos, so if that’s what you are looking for you may only have a TIC as an option.
    Personally I didn’t find it at all financially beneficial to go the TIC route, which is why I didn’t do it.

  29. I am the owner of a fractionally-financed TIC in Cow Hollow, and here are some answers to your questions from someone who actually knows what he is talking about:
    1) Why did I buy a TIC versus a condo?
    Yes, it was cheaper than a condominium by hundreds of thousands of dollars. At the time, that made a difference two me.
    The other reason was that I wanted to live in an older building and not some Soma skyscraper or tacky development from 1991.
    2) What sort of impact will this have on my financial situation?
    Less than you think.
    For $20k, converting is attractive, but if it were much higher, I would have to think twice. Remember that my building will probably win the lottery in the next 2-3 years, and then I pay no fee. In the mean time, I am living happily, and the building status wont change that.
    Furthermore, if I ever move out, I would be nuts to sell this place versus rent it at profit. I paid $700k for my home, and my monthly mortgage/hoa/tax comes in at about $3700. My home is a 2BR/2BA with parking on a nice block in Cow Hollow, and I could easily rent it for at least $4000/mo. In twenty-two years, it will be paid off and serve as a retirement boon.
    That’s the whole point of TIC’s. They rent for the same as a condo, and cost less. Even with a slightly higher mortgage, that won’t make up for a 20% price reduction.
    Yes, they have rent control risk, but you would have to be pretty stupid to allow a tenant in your unit who is going to stay around for more than a few years.
    3) If this proposal passes, will I get a ‘windfall’?
    Yes. And the upside potential of condo-conversion was an opportunity that I knowingly embraced when I bought the place. The chance of never converting was a risk I absorbed.
    And when I bought stocks last week, I knew that the upside potential of Federal Reserve stimulus might help me.
    All asset classes have hard-to-anticipate events that may or may not have a financial impact.
    So, get over it.
    All that YOU should care about as a San Francisco resident is that this will generate millions of dollars for a broke government.
    And if you really want to waste your brain cells worrying about other people getting a ‘windfall’, then why don’t you talk to all those pensioners and overpaid Muni drivers who are the real source of our budgetary woes?

  30. NewBuyer, I can’t help but laugh at your position that taxpayers ought to “get over” what may essentially amount to a needless government handout (since, by your own admission, the fee could be higher and still be an attractive option for TIC owners). Your apparent justification of “expect the unexpected” does not hold water.
    I do agree, however, that many pensioners and Muni drivers are also a drain on our coffers.

  31. With 2500 units queued up to convert, and assuming an average real estate appreciation of 100K-150K per unit after conversion at today’s prices, there is 250-350 million on the table.
    As a taxpayer in this city, I expect to see as much of this recovered for city operations and infrastructure as possible. This appreciation is being created out of thin air by the city, so I frankly think it rightfully belongs to the city’s taxpayers and financial stakeholders. The city is, be informed account, facing a challenging financial future and it is simply irresponsible to leave this money on the table.
    That said, I don’t expect the 20K fee to be increased — those opposed to the measure will always be opposed, regardless of the fee, and in order to cement support from the TIC community, a lower fee is better than a higher one. So I am afraid we are stuck with this giveaway in order to make this more politically viable.

  32. I love how everyone is focused on how much money this will generate for the city….because we don’t pay enough in taxes as it is? Shall we cue up the “what you get for your tax dollar in San Francisco vs. NYC” study again?
    I’m for eliminating TICs altogether and getting rid of this stupid idea, but I’m not thrilled with giving the board of supervisors more money to play with.

  33. Around1905,
    The way to deal with this is to do away with the lottery charge $200K for ten years, then drop it to $150K, inflation adjusted, for the next ten years, and so on. That would balance revenues for the city against the needs of the homeowners.
    Alternatively, just let the N highest bidders per unit convert.

  34. around1905,
    The city created the lower value for TIC owners out of thin air (actually out of hot air…).
    Now they’re asking for TIC owners to PAY to right the wrong?
    This is akin to a wise guy walking into a barber shop saying to the owner that his hoodlums will keep customers out and therefore lower his business value, unless of course the barber pays a fee.
    There is a name for that…
    Sure the city is broke and this money would be welcome. TIC owners would be silly not to jump on the extra value even if it means giving away part of THEIR unlocked equity.
    But let’s call it like it is: racketeering.

  35. practical question. if there is a 3 unit TIC, and only one or two of the units choose to convert, how does this work. I would think all units would have to convert for any one to convert. otherwise, who owns the sidewalk 🙂
    I will also throw my hands in and say this is too cheap.
    to me, 10% of assessed value would be more reasonable. There are some $1M+ tics out there and those owners will get this for a 2% charge (at $20K)

  36. spencer,
    What kind of service/work would be provided for this 20K tax? None. Simply filling the coffers, or more exactly filling the deficit. The city dug people into a hole and they’re charging 20K to get them out. Shameless.

  37. “Alternatively, just let the N highest bidders per unit convert.”
    This is the best idea yet. Let the market decide the conversion fee. It also addresses the problem of a fixed fee applying to properties if wildly varying value. The most expensive properties will convert first because their windfall will be greater and they’re willing to pay a higher fee.
    Keep the lottery so those with less expensive properties still have a chance. The pool of lottery applicants will drain quicker as owners opt to convert via fee, improving the odds for the remaining lottery applicants.

  38. lol: “The city created the lower value for TIC owners out of thin air (actually out of hot air…).”
    Technically what the city did was increase the value of condo’s by limiting the number of units that could be converted each year. State law controls the creation of TIC’s and the city has no real impact on the discounts that apply to that form of ownership (issues with financing, joint ownership, etc).

  39. Any added value is only materialized when the unit is sold, so why not increase the transfer tax for TIC’s instead and lower the $20k fee. I converted a TIC in 2009 and the cost for a two-unit building still exceeded $20K with surveys, fees, both city and legal, and thank goodness the building was newer and no prior tenants and no real repairs. I believe the $20K now is on top of the normal conversion cost. The inspector tried really hard, just had to change a couple of light switches, older buildings, ouch.

  40. I don’t understand something: who is the City to get involved here? It is a private transaction (converting to/from TIC). It is none of the City’s business.
    Why is the City charging any fees at all? And why is the City blocking such conversions in the first place??
    Isn’t America the “Land of the Free”? I should be able to buy a house and make 5 condos out of it if I want to. The City should not have any say in what I do with my own property.

  41. ^You can’t even do that in Houston – “but a house and make 5 condos out of it”. So…whether or not you think that that should be the case, this isn’t some kind of SF-only issue.

  42. The auction idea is brilliant. It has innumerable amusing variations, too.
    For example, folks could bid a percentage of the property value. This could even be combined with grumpy’s idea of making it all payable when the property is sold, so that nobody has to come up with cash up-front.
    Alternatively, it could be run like a T-bill auction, where the city finances its deficit with TIC conversion bids.

  43. Rillion: Technically what the city did was increase the value of condo’s by limiting the number of units that could be converted each year.
    That’s one way of putting it. But this doesn’t fly if you consider ppsf of SFHs vs condos, which are very similar. But when you look at ppsf between houses and TICs you do understand the impact of creating an hybrid form of ownership.
    The rule in 99% of RE in the US is that you can buy a place, make a mortgage with any bank, be responsible financially and legally of your place.
    But for experimental social engineering reasons, SF created this monster system that created tons of grief and destroyed value. For what benefit? Renters who are going to sub-lease their underpriced pad on airbnb, lol!

  44. A big caveat to a possible bidding system:
    Depending on the year, there will be more or less owners willing to bid. Which means that some years will be expensive (like possibly today), others will be dirt cheap, especially when RE is itself cheap. Differences in treatment depending on the year can create all sorts of issues. See prop 13 that divides owners into 2 casts.

  45. I like the auctioning the bypass idea, it’s much better than a fixed fee. I like the idea of paying it on sale.
    I also like the idea of just allowing conversions, as the whole premise of not allowing conversions has just created the existing mess.
    It’s true that TICs have existed for a very long time, but not in the way they are done in San Francisco. Traditionally it was a group of people who knew each other fairly well, and when they wanted to sell, they would sell the whole building.
    The existing situation is a combination of rent-control and anti-development practices which caused the city to prevent the conversion of existing buildings into condos, thus artificially restricting the supply and forcing people to find alternative means of ownership.
    Anything that turns the tide of a centrally managed real estate market is a good thing in my opinion.

  46. Maybe if the conversion auction could have a minimum bid then it would tend to smooth out the differences between the expensive/cheap years. And combine that with around1905’s proposal to bid a percentage rather than a fixed value.

  47. It’s really not a good thing. What are the next crop of middle class supposed to buy? It replaces the middle class housing with upper class housing and builds a small number of underclass housing units as a token goodwill gesture for pulling hundreds of rent controlled and middle class owned housing units off the market and converting them into condos.
    Make no mistake, the voters will see this as anything but a good thing. I suspect the voters will express their displeasure with this. But the lottery is really a giveaway. The city should be getting money from that by turning it into a bidding process. The whole building can bid on a per unit basis and you just pick the N largest number of units and round to the nearest building.
    And the whole argument about this taking away from the TIC owners is nonsense. You bought a TIC. Someone chopped up a larger building without going through the hurdles of condo conversion and you got it cheaper as a result. No one took anything away from you: if you wanted a condo, you could have paid more and got one.

  48. lol – A TIC is instrisicly less valuable then a condo, the # limits on converting TIC’s to condos did not cause that portion of the value difference (its the extra costs/hassles associated with a TIC that causes the initial difference in value).
    If there was no restrictions on converting TIC’s to condos the prices of the two would equalize at a level where the sole difference in price would be the result of the increased costs of the TIC ownership.
    Now if there was never a TIC to Condo conversion limit, or it disappeared overnight, then I do believe there would be a significant increase in the number of buildings ellis’d and converted to condos along with all/most of the TIC’s converting as well. My belief is that this would result in the price of condos falling as there was an increased supply of condos. So while some of the lower value of TIC’s is related to their cost, I believe the limits on converting them into condos has increased the value of the condos.

  49. As for SFR’s, I doubt SF sees more then 2000 SFR’s built each year, so again their supply is limited. Meanwhile while there are costs associated with creating TIC’s out of rental units but there is no # limit per year. I still believe that if there were no limits on converting TIC’s to condos, you would see a lot more condos coming on to the market as they were ellis’d -> TIC’d -> condo’d. This would lower the $psf of both condo’s and SFR’s.

  50. This will hugely lower the amount of rent-controlled apartment stock in San Francisco. Most San Franciscans are renters, so I expect that this would fail at the ballot.

  51. Let’s unpack NoeValleyJim’s “This will hurt renters” argument. I’m not convinced . . .
    It would not give landlords any more leverage to buy out tenants, because buildings with more than one eviction not for cause (such as an owner-move in) would remain ineligible for conversion.
    It would not result in injury to any tenant occupying a unit at the time of the building’s conversion, since that tenant would receive a lifetime lease.
    It *would* make it rational for unrelated owners of small buildings to permit one another to rent their units. Currently many TICs have agreements in place that prevent the renting of units–banks that provide fractional financing demand this. Once these units are converted to condominiums, they can be rented without creating serious financial risks to owners of other units in the building (or creditors). Thus, converting TICs to condos should *increase* the supply of units that can be rented. (And if I were a Supervisor, I would make it an explicit requirement of conversion that the condo HOAs not prevent rentals.) Of course, many of these newly converted units will be owner occupied. But they *can* be rented, and they will be from time to time if rents are high enough.
    Here’s another way to think about the problem: which is the greater barrier to bringing a potential rental unit to market in response to price signals (rising rents): An owner-occupant, or a rent-controlled tenant at below-market rent? I’d say the latter, because bringing that unit to market requires the entrepreneur to strike a deal with two parties (the owner of the building, and the tenant), whereas bringing the former unit to market only requires a deal with one.

  52. If I actually wanted to sell today, my TIC’s value has probably decreased ~10-15% since purchased in 2007. I’m basing that on an appraisal done in the last couple of months and the comps I’ve seen recently.
    There’s no windfall for me, after paying the conversion costs and sales commissions, I might break even:
    700k purchase minus 10% decreased value =
    630k current value * 1.2 (20% increase) =
    756k converted value minus
    50k conversion fees (5 unit, older building)=
    706k minus 60k sales costs (8% total) =
    I will ante up though, I want to stay here and need a fixed rate loan.

  53. There’s no windfall for me
    Huh? Of course there is a windfall.
    You bought the TIC knowing the rules, and now you want the rules to change.
    By your own estimate, your property is worth $630K, and if this rule change goes into effect, it would be worth $126K more. If it does not go into effect, then you will not get the $126K.
    Therefore the value of this rule change to you is $126K. If you can pay $20K for it, you’ve received a windfall of over $100K.
    It doesn’t matter that you happened to buy at the peak, or if you found out the house had bad plumbing and needed to spend a lot to repair it, etc.

  54. But Robert,
    I’ll be paying out 50k real money to see that 126k paper gain. 16k bypass fee plus 35k for regular conversion fees, legal, mapping, etc. and the “code” repairs we expect the building inspector to require.
    These aren’t repairs we’d make otherwise, we keep our building & systems in safe working condition, but it was built in 1908.
    If I want to actually get the money back, I’ll have to sell & that costs me too. So I still say: No windfall.
    BTW, the city’s already seen their windfall from our purchase. Property taxes on our building were 16k before we purchased. Last year we paid 45k. So I figure the city’s already made 150k extra from just our building.

  55. I’ll be paying out 50k real money to see that 126k paper gain. 16k bypass fee plus 35k for regular conversion fees, legal, mapping, etc. and the “code” repairs we expect the building inspector to require.
    OK, that’s a good point. You made two good points, actually. First, there are other transaction costs to convert, so the selling gain to you is not 126K, but 100K or what have you.
    Second, it’s a paper gain, and you don’t know for sure that you will get that gain, so you should discount it somehow, based on your risk tolerance. Let’s say you discount it down to 80K.
    So now, you are still getting an 80K benefit, which means you should be willing to pay up to 80K in order to condo convert. But they are selling you the right for 20K, so a 60K windfall. That is 60K that you did nothing to earn except happen to be at the right place and right time when they changed the rules.
    Moreover, if the rest of the market shares your views, then the price of the TIC should increase by 60K, which means that no one except the incumbent TIC owners benefits. Everyone who follows you pays full price, as the price of TICs now goes up.
    I’m not saying that everyone can count on the above numbers, as they were your numbers. Nevertheless, I’m pretty sure that 20K is far too low, and that’s why those who are not incumbents will oppose the plan. The rest of the city does not want the price of TiCs to increase and they do not want to see incumbents rewarded by a change in the rules.

  56. BTW, the city’s already seen their windfall from our purchase. Property taxes on our building were 16k before we purchased. Last year we paid 45k. So I figure the city’s already made 150k extra from just our building.
    OK, so you don’t like paying property taxes of 45K on a unit that you say is worth 630K. I.e. less than 1%, one of the lowest rates in the nation.
    Obviously no one likes to pay taxes, but there are two things to keep in mind. First, the reason why your property is worth 630K and not, say, 63K, is because it is in San Francisco rather than Montana.
    The value of your property is a function of the income earning power of your neighbors, together with all the building restrictions and tax breaks (mortgage interest deduction) that drives up prices.
    But for the most part, it is the income earning power of your neighbors.
    That is why land taxes are considered economically efficient. For example, if you tax a business, they can threaten to move somewhere else, or supply fewer goods. But as land does nothing to begin with, the land owner can’t threaten to withhold any services as a result of being taxed, as they provide no services.
    So when you tax land, all that happens is that the price of land falls — land gets cheaper the more you tax it, but you do not get “less land” the more you tax it. Go to a place with high property taxes, and you will see that houses cost less. The combination of mortgage payment + property tax is basically the same. One of the reasons why housing is so expensive in CA is because the property taxes are so low.
    So taxing land is a great thing to do, economically. If the tax rate was 4% instead of 1%, then your property would have cost less to buy, but you would pay more in taxes, so it’s a wash. Similarly, if the tax rate was 0, your property would have been more expensive to buy, but you would not pay the tax.
    In either case, on average, you are not paying anything more when you pay property taxes, except that you don’t see that as you have to cut the check. If it makes you feel better, just say to yourself “If I wouldn’t have written this check to the city, I would be writing it to the bank” and then decide which do you think is more deserving of the money

  57. nice theory/rationalizing Robert.
    You could also see the high taxes in lower value areas as a way to raise the necessary dough to fund a working city. If median homes are worth 100K and the tax rate is 1.13%, then you cannot maintain a decent level of government. Therefore you have to have a higher rate.
    Also, I agree low rates allow higher prices. But higher prices also exist in the context of certain level of wealth. In a county where the median wage is 1.5 or 2 X minimal wage, you cannot have homes at the same price as SF which is roughly at 5 times minimal wage. Many people in SF could even support more property taxes, like prop 13 beneficiaries…

  58. lol,
    I am not saying that house prices across regions would be the same if the tax rates were the same. I might not have been clear. But house prices in the same area will fall when land taxes go up by the amount of the discounted tax burden, so that you should be indifferent between paying high and low property taxes.
    As with Kathy, what people want are changes in the rules to benefit them. I.e. buy when taxes are high, so the house price is low, and then have the taxes cut, so that house prices increase, and then sell for a gain. That is really Prop 13 in a nut shell. As house prices go up, the effective tax rate falls.
    The point about differences in income is really key. That is why we need to tax land, so that it is harder to free-load and just buy space, watching it appreciate as higher income people move into the area.
    Your gain should be a function of how much you improve the structure, and not due to increasing land prices.
    Really the best tax is 100% of the gain of the land value, and 0% taxes on the structure.
    That would completely discourage people from speculating on land, and incentivize them to save by improving the structure. Probably the best way to do that is to require some on-going tax — e.g. 4% per year. When you dispose of the property, you pay 100% of the gain in land values, but credits are applied to the taxes you already paid. If the land declines in value, you get positive tax credits for the difference.
    That would also severely limit housing bubbles, or completely eliminate them. People should invest in capital and things that produce something rather than trying to squat on land and make money off of their neighbors’ rising productivity.

  59. Really good analysis of the effects of Prop 13. Almost the entire gain to it went to land holders at the point of its passage, everyone else has been effected negatively. I wonder how much of California’s economic problems today are due to this bizarre perversion of our economic incentives. We would be much better off with a more efficient tax system in place.
    @observant Your argument about how increasing condo conversion rates will increase the amount of non-rent controlled units on the market does not address the issue of whether it will decrease the amount of rent-controlled units. I believe that it will do both slightly, and as such, is really another attempt to do an end around run on rent control. This might fly with the current BoS but probably not with the voters. Do you have an estimate as to what percentage of TICs do not allow renters?
    The City has gotten a bit more conservative lately, so it is possible that it would pass on the ballot but I doubt it. The only real winners are going to be current TIC owners. People who hold small multi-unit buildings in toto are probably going to see the value of their buildings go up a bit as well. This is as good a time as any to try and get it passed though.
    I personally don’t have much of a strong feeling about it one way or another though even though it would impact me positively, since I own a two unit building. Is it intended to allow an unlimited number of lottery bypasses? If so, there should be a flood of people applying next year.

  60. Since we’ve got some momentum on Prop 13, I was going to mention that since the ‘windfall’ (difference between TIC and condo prices) is not realized until sale, the conversion owner pays less property taxes as they get to keep their tax basis (based on TIC percentage ownership). I suppose this effect goes away if Robert’s scenario plays out (and TIC prices rise to match condos).
    As a subsidy to the middle class, I still think this is a good idea. My concern is that the subsidy ends up in the pocket of developers; fractional loans are one of the enablers in that regard. Middle class folks send their kids to public schools and bring their social to bear on improving them. This is a net gain for all (of those who remain).

  61. Robert,
    Lots of good ideas there.
    There will be part of the windfall in the hands of the developers only if this “pay-to-upgrade” tax is made permanent. From what I understood, this is a one-time deal, right.
    Then again, some one-time windfalls become revenue streams you cannot live without…

  62. I’m not complaining about paying taxes, just pointing out that the initial change from apartment to TIC has meant increased revenue for the city. Fact.
    @lol, Yes, unfortunately this is a one-time deal as it stands.
    What I’d really like to see is permanent reform of the existing 2-unit bypass. Hundreds of units bypass the lottery & convert yearly, with no extra fee. But no one seems bothered by this. I am.
    They could just expand that to all 2-6 100% owner-occupied buildings, extend the waiting period to at least the same as for the lottery (3 years) or longer and charge a smaller fee to bypass.
    I’d love to see some of the other Sups counter with a fair & permanent solution with associated revenue stream. Farrell & Weiner would have to go along, right?

  63. I’m not complaining about paying taxes, just pointing out that the initial change from apartment to TIC has meant increased revenue for the city. Fact.
    @lol, Yes, unfortunately this is a one-time deal as it stands.
    What I’d really like to see is permanent reform of the existing 2-unit bypass. Hundreds of units bypass the lottery & convert yearly, with no extra fee. But no one seems bothered by this. I am.
    They could just expand that to all 2-6 100% owner-occupied buildings, extend the waiting period to at least the same as for the lottery (3 years) or longer and charge a smaller fee to bypass.
    I’d love to see some of the other Sups counter with a fair & permanent solution with associated revenue stream. Farrell & Weiner would have to go along, right?

  64. This is a fair concept, but tipster’s idea of an auction is far better.
    Regardless, this is all academic. No way this will pass as it is perceived to be (realty be d*mned) hostile to renters. So don’t get your hopes up anyone. Just setting yourself up to be disappointed.

  65. anon,
    Any change in he rules that seems to help people who own their homes has to be against renters 😉
    One of the many many ways this goes counter to the renter’s interest: by limiting supply we’re making owning prohibitive (TIC downpayments are out of reach to many), and at the same time creating an incentive for investors to be ruthless with renters…

  66. @NoeValleyJim–
    Sorry I’ve been off this thread for a while and haven’t responded to your comment. Yes, I agree that the Wiener/Farrell measure would probably result in a slight net loss in the number of de jure rent-controlled units. Under state law, a condo is not rent controlled once it passes out of the ownership of the person who owned it at the time of conversion. Anything that makes TICs more attractive will, other thing equal, incentivize entrepreneurs to buy out tenants and market the property as TIC units.
    My point was that a small reduction in the number of de jure rent-controlled units need not, and I’d guess probably will not, result in a net reduction in the market’s responsiveness to renter demand. Long-term rent controlled tenants and TIC partnerships with rental restrictions *both* function as barriers to the supply of rental units. Just as entrepreneurs who buy out below-market tenants make the supply of rental housing more price sensitive, so too do TIC partnerships who convert their units to condominiums.
    Rent control benefits those who are fortunate to own below-market units, *not* tenants as a class. So long it is not coerced, a developer’s buyout of a long-term tenant so as to bring the unit to market as a TIC is no more harmful to tenants as a class than a developer’s buyout of the tenant to bring the property to market as a market-rate rental. I suppose you might say that the former transaction reduces the likelihood that the property will be supplied as a rental in the future . . . but then again, the person who buys it may well be moving out of–freeing up–a rental unit, as I was when I bought the TIC that’s now my home.)

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