With supervisors Farrell, Tang, and Wiener opposing, San Francisco’s Board of Supervisors have voted 8-3 to adopt the proposed condominium conversion lottery bypass legislation as last amended.
Assuming it isn’t vetoed by the Mayor, the legislation will establish a bypass period during which qualifying TICs can condo convert for a fee; establish lifetime leases for tenants in converting non-owner occupied units; restrict future condominium lotteries to buildings with no more than four units; and suspend San Francisco’s annual condominium conversion lottery until at least 2024.
Buildings which participated in either the 2012 or 2013 lottery and have been continuously occupied by the required number of owners for no less than five years as of April 15, 2013 will immediately qualify for the bypass. Buildings which participated in either the 2012 or 2013 lottery and have been continuously occupied by the required number of owners for no less than three years as of April 15, 2014 would qualify on that date.
Buildings which did not qualify or participate in either the 2012 or 2013 lotteries will eventually be eligible to participate in the bypass assuming a formal TIC agreement was in place as of April 15, 2013 and the required number of owners have continuously occupied the building for at least six years by April 15, 2019.
In other words, TIC buildings in which the owner applicants weren’t in place by April 15, 2013 will never qualify for the bypass and five or six unit TIC buildings which don’t qualify for the bypass will never qualify for condo conversion.
As amended and approved, if any lawsuits are filed against the legislation (see previous paragraph), the bypass will be suspended along with the lottery until the lawsuits are settled or until 2024, whichever comes first.
This is just wrong.
M.R.
Well, at least three of our supervisors have IQs over 75. That’s something.
The chronicle article gives a very different impression than the socketsite. The chron publishes a big picture of smiling couple holding their baby, suggesting a win for the middle class property owners.
http://www.sfgate.com/bayarea/article/Condo-conversion-law-OKd-by-S-F-board-4594985.php#photo-4398310
The socketsite’s description is full of caveat, suggest the door of condo conversion is closing rather than opening:
Legislation can be so deceptive.
Yes, at least 6 of the Supervisors are an embarrassment to this City. I’m pretty sure Breed would have voted against, but the bill still would have passed and I think she wanted to save face. I watched the entire BOS meeting yesterday and was astonished how ignorant and incompetent they are. I have no idea how Supervisors Farrell, Wiener and Tang (formerly Carmen Chu’s spot before she took the Assessor/Recorder job) sit through those meetings without throwing punches.
There is virtually nothing good that will come of this legislation, for either side. And to pour salt in the wounds, the City will end up spending tens of millions of dollars defending lawsuits. The BOS members who voted in favor should have to pay that bill out of their own pocket. Here they are whining about money for affordable housing, yet they created a bill specifically and explicitly designed to generate costly lawsuits.
On the plus side, I will get to quietly watch as there are a ton of evictions in the next few years. I am not normally vindictive, but in this case, the tenants’ groups made their own bed. When that happens, of course the same tenant’s advocacy groups that WROTE this legislation will cry foul, despite it being entirely their fault in the first place. No incentive to not evict tenants (possibility to convert to condo) = TONS of evictions coming. If I were a landlord with a lot of below-market rent-controlled tenants (especially with the 5 and 6 unit buildings that are now forever banned from converting), I would already have the paperwork ready so I could strike while the real estate market is red-hot.
In the negotiations, Plan C SF showed a graph of the Ellis Act evictions over the years. They have PLUMMETED, and are extremely rare now, compared to the early-to-mid 2000s. The tenants groups were not intelligent enough to realize that those decreasing evictions were a result of the condo conversion lottery. Their ignorance and lack of due diligence will come back to haunt them.
I can’t wait for karma to rear its ugly head, and all these Supervisors that voted for this sham to be voted out by the very tenants advocacy groups they were selling their soul to in the first place.
Was anyone at the board meeting? What do the sups that voted for this specifically say about the ” poison pill”/law suit that is part of this? I don’t get it- how in the world is this going to work? Why won’t any of the tenant groups file a lawsuit? It will allow them to delay all condo conversions AND the lottery. This must have been brought up at the hearing. What was the response for those voting to approve this???
49yo hipster — I watched the entire meeting on SFGOV TV. There were a few amendments made yesterday to address the Poison Pill concerns, but not nearly enough to fix how absurd of a rule it is. All of the passed amendments were proposed by Chiu, so you can guess who they favor. A reasonable poison pill amendment proposed by Supervisor Breed was shot down 6-5 (socialists 6, reasonable/intelligent human beings 5). It is unheard of for something like this to exist in legislation.
I would imagine the very first lawsuit will be from the TIC side, and it will be to ask for a temporary injunction against the Poison Pill. Considering the entire basis of the Poison Pill is to strip citizens of their right to use the court system (obviously not legal), I imagine an injunction would prevail, but who knows how long that would take. And in the meantime, no bypass nor lottery.
Of course, this was the plan of the tenants union the entire time — to create a situation where they could permanently end condo conversions. Little did they consider the unintended consequences, however (see Eviction diatribe above).
Thank you..Thank you..Thank you..Thank you..Thank you..Thank you..Thank you..Thank you..Thank you..Thank you..Thank you..SF Progs.
And let me just mention that SF votes for their elected “leaders” at least once every 4 years so this is what you get for your efforts. You make your bed and now must live in it.
The net effect of this dumb ass legislation will most likely increased my already converted two unit building up by 50% or more. Leave it to the “progressives” to “fix” things. IMHO having progressives in control of SF government is the best thing that’s ever happen to the value my property. Sorry if I sound a little smug, but the Progs are better than having Republicans on the board.
Net effect having the progs in power results in:
1) Higher soft cost for build anything in SF: increase $$$ per sq foot price point on new sales.
2) Limits on condo converts: drives prices up on inventory.
3) Restriction on TIC converts: Same as 2
4) Rent control: Pushes up rents on newbies.
5) Future Higher eviction rates to clear out life long tenants.
Sadly having Progs in control is driving middle class and poor folks out of SF. Poor and Middle class SF residences now face increase cost to live in SF by way of :
1) Higher housing cost.
2) Higher land cost.
3) Higher fees for public facilities.
4) Higher fines for parking infractions.
5) Higher fares for public transportation.
6) Higher cost for everyday goods due to less retail choices. No “chain stores”. No Walmart. No Home Depot.
7) Higher Taxes, auto license fees, sales taxes, transfer taxes.
These are indisputable facts that the middle class and poor face every single day while struggling to make ends meet living in SF. All brought on by a one party political power structure.
And now owners of TIC’s just got screwed thinking they could fix a broken system. Well in the immortal words of Ted Guilickson, “We will show those greedy bastards”. Now TIC owners will never be able to take advantage of lower mortgage interest rates. Never have the opportunity to sell their homes at true market rates. Always be subject to a discounted sales price due to the limitations imposed on their property. The net effect, city loses higher property tax revenue due to lower sales prices.
What a sad….sad state of affairs…but then again, this is the consequence of voting or not voting for the right people to run the city.
The poison pill provision of this bill is just idiotic.
***
J: “In the negotiations, Plan C SF showed a graph of the Ellis Act evictions over the years. They have PLUMMETED, and are extremely rare now, compared to the early-to-mid 2000s.”
I’m not sure that’s a very useful data set, it says nothing about the total number of evictions, just focuses on one means of clearing a rental unit. Sure Ellis Act evictions have dropped, but that is likely because other means have been used to clear rental units and turn them into TIC’s, so as not to effect their condo conversion chances. If/when Ellis Act evictions rise, it will likely be offset by a reduction in other means of eviction (tenet buy outs). So I’m not convinced that the net number of new TIC’s being created will change, but it will reduce the $ going into the pockets of former renters. Way to go Tenants Union!
J- thanks for the details. So were any of the sups asked DIRECTLY how the poison pill amendment was not an obvious cover up to just eliminate the lottery and all condo conversions? This is very obvious. Surely someone at public comment or wiener/Farrell would talk about this. I mean, why not just rename this legislation as “condo conversions ban. Period”. Also, does it now mean that 2 unit lottery bypass buildings are also on hold (pending the obvious upcoming lawsuit?)
Here’s a serious question for the lawyers who read this site:
Is there anything even remotely vulnerable (to legal challenge) about how this ordinance changes the rules regarding condo conversion once the lottery resumes (no 5+ unit buildings, stricter owner occupancy requirements for 3-4 unit buildings), or the exclusion from the lottery bypass of buildings whose TIC agreement was put in place after April 15, 2013?
I can’t see any such vulnerabilities. The only legal weaknesses I see are the poison pill, and possibly the mandatory lifetime lease. If I’m right, I can’t imagine who would put the money up to challenge this ordinance except the owners of a building otherwise qualified to bypass that has a tenant in place. And I’m not sure it’s worth their while to litigate either.
“No incentive to not evict tenants ”
Maybe. But that rests on the assumption that this law will never be repealed and that there will be no future restrictions on property that has been Ellised. If you Ellis and sell, that’s not your problem anymore. But as long as the SFTU holds sway, Ellised properties are going to be an appealing political target.
I don’t know what fraction of properties have been Ellised, but I’d guess that it’s a small enough fraction that their owners are politically expendable to the larger ownership community.
Ah yes, classic San Francisco whereby we think:
1. Social problems can be fixed with enough rules (i.e. we can legislate our way to utopia)
2. If our rules create unintended consequences, the solution is to make additional, often more complex, rules.
3. Repeat ad infinium
The inevitable result of this is that we eventually end up in a society where everything is actually an unintended consequence of something else. We even go so far into the rabbit hole that we begin to think the unintended consequences are what we were trying to achieve.
I watched this as well and Campos’ behavior was obnoxious. He knew who was in the audience and he played their anti owner/pro tenant strings like a master. What a slimeball.
This seems like a colossal cluster f**k. Unlike others on this thread I actually consider myself a progressive and like some of the progressive supervisors. But I’ve been apathetic about this legislation because the underlying issues (Ellis/evictions/condo conversions etc) is outside my experience and incredibly tangled. It always seemed like a policy house of cards, with each new restriction layered on top to address new perceived threats to tenants, resulting in an unnecessarily complicated mess that doesn’t actually meet well articulated policy goals on either side.
But given some of the dire predictions made by J and Umade.., I am concerned about the fallout of this, so am hoping some of you can provide some insight to the (likely) naive questions this raises for me:
– why will evictions go up? Is the idea that owners of 5+ unit buildings will no longer have to pass the “no Ellis act evictions” test to condo convert, so they’ll just Ellis Act and sell as TICs? But don’t others say there is a limited pool of TIC buyers because the financing is so limited and expensive? So what makes you think all of a sudden lots of 5+ unit buildings will go TIC?
– Why are TIC owners screwed according to Umade? Certainly current TIC owners aren’t – $20K isn’t that much to pay to convert, and then the market will adjust and future buyers will pay the market cost of a condo rather than the distorted cost of a TIC. That will raise purchase prices on those condos (good for tax revenue) but lower borrowing costs (good for owners). The people who might get screwed are future TIC owners, but they will now know that their chance to convert is small or non-existent, and build that into their purchase prices.So yes, future TIC ownership will likely go down, at the expense of putting thousands of new condo units on the market.
– Is the TIC/conversion market truly big enough to have the systemic market effects predicted by J? I mean, how many units as a percentage of overall housing in the City will be affected both by the legislation and then post-legislation spillover effects? Won’t the entry of thousands of new condo units in SOMA, Mission Bay and elsewhere like Park Merced meet the demand for units, especially if they are priced similarly to future TICs?
Would appreciate anyone setting my thinking straight.
49yo hipster — Both Farrell and Wiener addressed the insanity of the Poison Pill and how it is an incentive for lawsuits against the city. Supervisor Chiu was the only one that replied directly to those concerns, and claimed they were addressed in his amendments. One of his amendments separates owner occupied buildings (as in, 100% owner occupied) from other TICs if there is a lawsuit challenging the “lifetime lease” provision. So that does protect TICs that are 100% owner occupied. However there are numerous other aspects of the legislation that will surely be challenged, so closing that one loophole to protect owner occupied buildings doesn’t really do anything. There was one other amendment that I missed, but based on who voted for/against (Farrell, Wiener, Tang against), I’m guessing it wasn’t very TIC friendly. The minutes aren’t posted yet on sfbos.org, so I can’t yet see see what that amendment was. I have no idea about the 2-unit “fast track” buildings, and would love to hear the answer on this. I have no been able to find anything about that, but since they are not reliant on the lottery, they should be allowed to go on. But in this city, who knows.
Rillion — Yes, due to “buyouts”, the eviction numbers are cloudy, however Ellis Act evictions are the only way to actually force someone to leave (besides Owner move-in evictions, but that is irrelevant to condo conversions). Also, is it really so unfair for a rent-controlled tenant to live for 15+ years way below market, and then receive $50k on top of that to move? I’d say the tenant is making out like a bandit. I do agree with you that now, landlords will be much more likely to just Ellis Act someone rather than pay them off. So the tenants will lose big-time. This is fantastic.
Watcher — what else could the city do to Ellis Act buildings? It’s a state law (that the BOS would gladly repeal if they had the power), and what else could they do beyond banning them from conversion? SF already doesn’t give a damn about any property owners, let alone Ellis Act buildings.
Kddid — I respect your open mind on this (would appreciate it if you would replace some of the current progressives on the BOS). Yes, your reasoning is exactly why evictions will go up (no need to meet the no Ellis Act requirement). 5 and 6 unit buildings especially, since conversion will be officially impossible for them. 3 and 4 unit buildings will still have a chance, but not until AT LEAST 2024, so there’s really no reason for a landlord to count on that in doing their cost-benefit analysis. TIC financing has progressed recently, with fractional loans (as opposed to everyone being no the same “group loan”) becoming more common, and therefore these 5 and 6 unit buildings will have no problem getting financing. With regards to the “TIC owners being screwed”, that was not my comment and it really depends if this gets hung up in court. The longer a lawsuit drags on, the worse for TIC owners. Lastly, in response to your question about the size of the TIC market: no, it is not huge, and so many of the TIC units currently trying to convert are owner-occupied that it’s not a meaningful impact on the overall housing stock. It’s the FUTURE impact that could potentially be huge, if the unintended consequences I predict are in fact realized. I don’t know the total number of units in 5 and 6 unit buildings in SF, but I imagine it’s pretty big. And that doesn’t even count 3 and 4 unit buildings that are banned from converting until at least 2024, and even then there will be far more onerous owner occupancy rules in order to convert.
kddid – To answer the second question, I believe the general thinking on this thread is that someone will challenge the legislation in Cour, which will trigger the ‘poison pill’ clause of the legislation. This will halt ALL condo conversions under the legislation and the lottery will remain suspended. So current TIC owners would not be able to convert, even the ones that had been in the lottery for years and had a good chance of getting their unit picked in the next lottery, since the lottery is suspended.
So there would not be thousands of new condo units hitting the market because as long as there is someone willing to file a lawsuit against the legislation, there will be no conversions.
How does life time lease work? It a unit is convert into condo and sold to a new owner. Does it mean the new owner cannot evict the tenant to move in?
@Wai Yip Tung
Correct.
The tenant is still required to pay rent, so you could evict if they failed to pay, but that would be the only way you could get a tenant out.
J – My comment was just limited to the usefulness of the Ellis Act evictions information (or lack of its actual usefulness), not to the fairness of the process or the alternate means used to remove tenants. Yes, Ellis Act evictions dropped because buildings that had been Ellis’d were made to be less desirable than non-Ellis’d buildings. I was just noting that the graph presented by Plan C of Ellis Act Evictions is meaningless in providing any insight into the true number of rental units being emptied and sold off as TIC’s.
kddid,
SF is a city of renters, and most of these renters are paying less than the latest market rents. This means most landlords are missing out on potential income. The longer this situation goes, the larger the income deficit grows. Landlords are not stupid. If they see that they can get more return on their asset, they’ll go that way. If doing an Ellis eviction is killing the sale price, this is an argument against doing so and they’ll try and kindly buy out the tenant. If the resale value is NOT affected by an Ellis eviction because a TIC would never condo-convert anyway, an Ellis eviction becomes a cheaper and easier way out.
There’s definitely a market for TICs. Prices are usually 20 to 30% lower than condos, though I have seen recent sales that compared well with similar condos recently (some TICs at $1000/sf!). It is such a specific market that it’s all unit-by-unit. But the need is there. People want to buy their own property in this country for financial and social reasons. If you try to prevent that, prices for available property will go up, which creates an even bigger incentive for landlords to throw in the towel and cash out.
Somebody should jump on this and Ellis the whole place immediately. The incentive to play nice is now gone!
https://socketsite.com/archives/2013/04/brazen_in_bernal_heights.html
Whether you agree or disagree with this legislation, I think there’s one thing we can all agree on: Scott Wiener is an amateur, and got completely outmaneuvered here. Big city politics is a game for adults, not for little boys.
Thanks for the thoughtful replies.
LS – I would say the same for Farrell. He opened this door with his original “TIC friendly” legislation, and eventually got steamrolled by the more politically active and vocal interest groups. The road to hell is paved with good intentions – he clearly had not either anticipated the deep-seated opposition to TIC conversion, and/or thought through a more reasonable way to appease those opponents. In some ways the cure may be worse than the original disease he sought to fix. Badly played, but that’s what you get when you are a policy dilletante (I’ll withhold my rant about the stupidity of term limits and the naivete of most successful business people getting into government).
On the flip side of the “All 5/6’s will now just Ellis Act since there’s no disincentive” claim, the value of those units as TIC’s was just reduced. It remains to be seen by how much, but it certainly could help change the calculus enough that the effect on eviction rates for those buildings won’t be the evictiogeddon predicted here.
My question: once the dust settles, how on earth is the city going to be able to handle the tidal wave of conversions coming?
R,
There are a number of 3-6 buildings on the market right now that are priced to reflect future owner-occupants (as in, TIC or condo). I will be watching carefully how the pricing on these buildings is impacted, as they are now ineligible for condo conversion for any reasonable investment timeline. As a cash flow investor this could present some very interesting opportunities. There will also be better OMI opportunities with buildings that have lopsided rent rolls. All in all I can’t see any possible way that this is good for long-term, rent controlled tenants.
@rabbits:
Agreed, that’ll be really interesting to watch. That said, the conversion horizon for those units was already around 12-15 years. This will likely only push it back a couple additional years. The biggest change is that the occupancy requirements are now stiffer and, perhaps most importantly, none of the agents involved will be able to sell the lie that “conversion takes about 5-7 years…”.
“On the flip side of the “All 5/6’s will now just Ellis Act since there’s no disincentive” claim, the value of those units as TIC’s was just reduced.”
Not by much.. getting a 5/6 unit through the condo lottery from scratch was a very long term proposition.. so I don’t think this law will change their value much.
It will affect smaller buildings to some extent though.
LS & Kddid —
I agree that Wiener and Farrell got worked over by the tenants’ rights lobbyists. However I don’t think they should be derided for it. They picked a battle and lost, but I admire them for at least trying to create some change in this City. The Board of Supervisors has been one-sided and incompetent for years (how do you think we ended up in this housing crisis in the first place?), and I can only commend those guys for trying. Having said that, they probably should have held back-room negotiations first, rather than last, to take the temperature and see if this sort of thing would be happen. The irony is that Farrell and Wiener are the smartest guys in the room, not the dumbest. But unfortunately being intelligent and reasonable doesn’t get you additional votes on the BOS. Wiener is politically pragmatic and is exactly the sort of person we need 11 of on the BOS.
TJ — it doesn’t matter how much the TIC values are reduced by. The rent-controlled rents are so far below market rate, a 10 or 20% change in TIC values isn’t going to make a difference. The Bernal Heights building linked above is a good example of that.
If your goal to buy a TIC is not as an investment (i.e. you don’t plan to get rich from buying it. A wise friend told me, “don’t try to get rich from your primary residence.”) and you are planning to live there, then you don’t have to worry about rent control. Actually, because of rent control regulations that applies to TIC’s, TIC is usually price much less than a similar condo. So you basically pay less money.
(Just think about it, without rent control, TIC probably will cost as much as condos.)
And because TIC owners don’t want to rent their place out, most are owner occupied (especially in Ellis Acted Buildings, which can’t be rented out). Which means you don’t have neighbors who are renters and who don’t take care the place.
Also, because TIC loan all require 25% down, means you don’t get poor people in your building. (Which sound bad, but it is good thing for living environment if you don’t have to live next to poor people).
Only downside is that so few banks give fractional loans, the loan rate is a lot higher. But that isn’t problem if you can afford to pay cash for the place.
So TIC and rent control associated with them is great for well off people who can get a great discount for a place.
J,
I agree the math doesn’t really change. TICs are still a very interesting alternative to rentals.
Let’s take 300 Colleridge as an example. Say someone buys it at 300K a unit, ellises the tenants, and resells as TICs after cosmetic renovations.
Even if each TIC is sold for 500K, owning a TIC still costs less than renting, assuming there’s fractional financing.
Purchase price = 500K
Minus 25% down: financing = 375K
Fractional mortgage @5% = $2013/month
Property taxes = $550/month
HOA, insurance = $300/month
You’re still under $3000/month for a 2 bedroom, some units being with parking. That’s before any Mortgage Interest deduction that could save you $100s/month.
Now, without rent control, the free-flowing of renter units would make market rent cheaper (20%? 30%?) which would mean a lower incentive to make these deals.
And this is how SF loses tenant occupied units one building at a time.
Does anyone have a link to watch a replay of the hearing and vote online? (I might be looking at the wrong place, or it has not been uploaded yet?)
@Curious — I see the video links here, not sure if the 6/11/13 one works or not:
http://sanfrancisco.granicus.com/ViewPublisher.php?view_id=10
I can’t find the text of the law anywhere online.
Can someone please confirm whether the law as passed has *any* affect on the conversion process (lottery bypass) for 2-unit owner-occupied buildings?
Being in contract on a 2-unit building this is rather important to me 🙂
[Editor’s Note: The link to the text of the law as was presented to the Board can be found here.]
I’m confused by many commenters who argue that this legislation will encourage landlords to evict their tenants. I’m a renter in a 3-unit building. The landlord owns all three units, they are not condos, and the landlords don’t live on the premises. Under the new legislation, none of the units in my building would be eligible for bypass at any point in the future.
How does this increase the market value of my apartment? If my landlord sells the unit, the new buyer “will never qualify for the bypass” (see article above) and therefore faces the prospect of remaining in a TIC situation unless/until they win the normal lottery.
Is there something I’m missing?
Matt – the argument goes that your landlord will have to weigh the value of renting vs. selling out lock stock and barrel. Because of rent control (if your building is subject to it), the possible income stream from renting may result in a far lower rate of return than selling in the current hot market. Assuming the units are rented at significantly below market rates for many years (b/c of low turnover, protected tenants, etc), that same building could be sold to someone willing to Ellis Act the building, kick out the tenants, and sell it off as TICs. Even factoring the lower prices of TICs vs. condos, selling may make more financial sense then holding and renting.
But there are so many assumptions in there that it’s still unclear to me how many landlords will make that calculation and choose to sell. Could be a lot, could be a little – no one seems to know.
Matt, it won’t “encourage landlords to evict their tenants,” but it will remove the stigma of an Ellis Act building.
In other words, landlords that were hesitant to Ellis the building in the past due to not being able condo convert will no longer be hesitant because regardless of whether they Ellis or not, they will not be able to condo convert. So why not Ellis?
Matt, when the BOS passed a law keeping buildings with evictions out of the lottery it seems to have reduced the number of buildings subjected to the Ellis Act. Condo conversion was like a reward for not evicting. With the ten year moratorium, and who knows what kind of picture when the lottery resumes in 2024, some may see there is no longer much incentive to not evict. Maybe this won’t happen, who knows, but it’s the kind of unintended consequence that is all too common.
As for your situation your landlord could decide to move in at any time, or sell to a new owner who wants to move in, or to a group who forms a TIC and all want to move in. There is not much eviction safety in these smaller buildings that are more prone to OMIs.
I don’t think this increases the market value of your building at all. In fact I think it goes down a little. Owners can still form a TIC but condo conversions are even further removed than they were.
@DJD: no impact/change to 2 unit owner occupied bypass, which btw represent the overwhelming majority of condo conversions in SF each year. Meaning this law won’t impact or deter much.
@Matt: The “argument” applies mainly to 5/6 unit buildings which are no longer eligible for conversion. But this and the tenants’ argument that the potential for eventual condo conversion drives TIC formation both rely on the (very suspect) premise that the city policy drives property owners’ decisions.
I can’t believe we have do create such complex rules (and feed the lawyers), when only one would suffice: repeal rent control. It is the source of profound imbalances in this City. We have to legislate ad nauseum back and forth around this obsolete rule and the effects on the market.
A guy at PandoDaily just posted his take about the perverse effects of rent control. A bit simplistic but true on many levels.
Matt, all of these commenters already answered your questions, but the bottom line is that it all comes down to rental income for the landlord. If all three tenants in your building just moved in last year and are paying market rate, then the landlord is doing very well and would have absolutely no reason to evict anyone. (This is why rent control only causes MORE evictions, not fewer). However, if all of you moved into the bldg in 1980 and are paying $500/month when market rate would be $5k each (or whatever), then evicting everyone and selling the building off as a TIC is a total no-brainer. I used an extreme example to make a point. In reality, most buildings probably fall somewhere in the middle, and the owner has to determine what makes the most sense for them. “What makes the most sense” just moved closer to the “evict” side of the equation with this legislation.
Here’s how I think this will play out over the next several years: the SF RE market continues to sizzle. TIC fractional financing will become more commonplace and more accepted, perhaps a couple more banks join sterling and marin bank to do them. These TICs will become the new condos. There will be more incentives for bldg owners to straight out Ellis and sell as TICs. The public will accept them as permaTICs, almost the equivalent of condos. The only real difference today is that fractional financing is not as good as (low) 30 year fixed loans. But those won’t last forever, and it’s possible the fractional loans will become more competitive as more banks enter this market space. I see a solid future for TICs in SF. I think they will become the new condo. Give it a couple years.
I don’t think Wiener and Farrell should be pilloried for losing control of their bill. The outcome was a coup for the tenants union, but at the time the ordinance was introduced, it seemed likely that the board would swing moderate in the next election (e.g., Eric Mar being voted out, a new moderate elected to replace Elsbernd, and an anything-might-happen open seat race in D5). The 2012 election was a disappointment for moderates.
Also, the massive escalation in rents over the last 2 years made it quite likely that the tenants union would come forward with some hair-brained ballot measure. They might have pushed a flat moratorium on *all* condo conversions, which SFBG has been arguing for since around the time of the 2011 mayoral election (if not before). And TU might well have gotten the necessary 4 supervisor votes to put a moratorium on the ballot (Avalos, Campos, Mar, and Kim).
By making the case for current TIC owners, Wiener and Farrell at least set agenda, and created an opportunity for Chiu to cook up a “compromise” measure that’s lousy but better than a flat moratorium.
Alas, Chiu’s compromise is just one more example of the San Francisco “left” protecting current residents who have a vested interest in the status quo, while screwing newcomers, the environment, and the Bay Area as a whole (including working-class people in the Bay Area as a whole). Anyone who doubts that this is the de facto agenda of the SF left should read the recent SFBG piece on planning for long-term housing needs in the Bay Area, http://www.sfbg.com/2013/05/28/planning-displacement. It’s a hilarious instance of unwitting self-parody.
2 unit 100% owner occupied buildings are not subject to any of these laws. See lines 4-7 on page 4 of the amended legislation.
“In addition, this legislation does not intend to affect in any way the conversion of 100% owner-occupied two unit buildings in accordance with the terms of Subdivision Code Section 1359.”
Another interesting provision near the end is the 180 day window after a lawsuit is filed to submit an application. I think there will be a huge rush over the next 6 months to get buildings that are qualified via the lottery through the process before this window is shut. It is going to be a madhouse at Planning/DBI over the next 6 months.
observant – regarding your snide swipe at the SF “protecting current residents…” I think it is a legitimate policy goal to preserve a mix of incomes, jobs, and housing types in a city. And like all complex policy questions, it will create some winner and losers at the margins, like new arrivals (especially those without high paying jobs), potential homeowners, etc. And without going down the rent control rabbit hole, Lol’s simple minded chant of “just get rid of rent control” is worse than useless. Anyone who studies this knows that will have all kinds of consequences as well, including displacement of poor people, rent seeking behavior, etc., which many would argue does not make San Francisco a better place to live.
My general guideline is to make sure any policy is both clear about what it hopes to accomplish, has a measurable impact on the stated problem, and is transparent about the potential side effects. Governance in a democracy is a messy business of balancing many competing needs, and this is the only way to try and make that process rational. This condo conversion bill fails most of my criteria – I’m not sure what it’s supposed be fixing (the waiting list? affordable housing? evictions?), may not be the best way to actually accomplish the desired end result if it could actually be articulated, and doesn’t seem to have considered (with data and information, not just bloviating and wishful thinking) the possible side effects it might cause.
Why is it a legitimate policy goal to preserve a mix of income, jobs and housing types? What makes any individual so special that you need to be preserved in this city? If you are too poor to live in this city, how is it anyone else’s fault? Suck it up and get out.
I don’t have a dog in the TIC hunt, but I just have to say, the comment above by “tim” has to be the socketsite comment of the year. So earnestly expressed, and yet so succinct, it’s really a masterpiece. I’m going to print that out, frame it and put it on my wall for future inspiration.
How about this as an explanation: preserving a mix of income, jobs and housing types is a legitimate municipal policy goal because the Board of Supervisors says it is.
It’s really that simple. If you don’t like it, how is the fact that you’re still here anyone else’s fault?
You should have the courage of your convictions, suck it up and move to some other municipality where the governing body doesn’t have the ability to make such determinations. Go find Patri Friedman and make a go of seasteading, I’m sure he’s still kicking around somewhere.
^ No need to move out actually. People who live in nice places with incomes too low will move to smaller/less desirable places. This frees up a place for someone with a better income who will himself free up a less desirable place which will itself become available. Expect a giant switcheroo.
The end result will be places with a rent decided on desirability, not by date of entry like today. And overall this will cause lower market rents on all segments because the market will have to adjust to incomes.
Yes, some people will have to move out, bunk with roommates, whatever, but it will be much less than feared by tenant advocates.
I don’t think anything will happen though. The rent control gravy train keeps giving, and no-one wants to stand in the way. Especially not politicians.
“If you are too poor to live in this city, how is it anyone else’s fault? Suck it up and get out.”
How about you apply your reasoning to Prop 13? If you are too poor to afford market-rate taxes on your property, suck it up and get out.
Stop ejoying your handout and shaming others for enjoying theirs.
Well, Brahma, I can afford to live here, TIC or not, rent control or not, board supervisors’ policy or not. You apparently are the one who is expecting hand outs and complaining it is getting too expensive.
As a TIC owner of 6+ years, I was excited to see a possible way to be able to refi and move on from my TIC situation. Last night, I felt my heart sink and crushed that any snowballs chance had melted along with my recently recovered property value. One owner rented out their unit a couple of years ago and just signed a new tenant in the past couple of weeks even after knowing about the “lifetime lease” clause. Problem is, they want to sell their unit too and have for a while but couldn’t due to loan qual issues with the other owners. Really not sure what to do now. I need to move on but also need at least one of the current owners to stay.
For those RE investors out there. Would you hold a TIC unit that barely breaks even or do anything you could (lease to own, seller financing, etc.) to sell now before the lawsuits start locking everything up.
“Why is it a legitimate policy goal to preserve a mix of income, jobs and housing types?”
No comment on income or housing types, but it is good to provide housing for those who work nearby simply to reduce commute times and the related strain on the community. Cities that force the import of labor due to a mismatch between jobs, income, and housing create greater costs all around. The same goes for cities like bedroom suburbs that force the export of labor.
Rent control isn’t the only solution. There’s plenty of other tools in the box including smaller less expensive rental properties, unbundling parking from living space, and then just plain old paying workers enough to live near their jobs.
6yrs of Tickets, your situation looks like a group mortgage.
I have seen a very similar situation a few months ago, looking for an affordable TIC. But the deal had too many unknowns: very expensive group mortgage (6.5%+), TIC partners that couldn’t not easily refi, mortgage broker stuck with offering no real viable alternatives. The sellers were renting out, tried to sell, but they couldn’t lower their asking price or else they’d have to write a big check at closing. Per the realtor the sellers decided to rent but were still willing to sell at some point.
Are you in the 94133? That’d be an interesting coincidence.
@Moz, I don’t see how Prop 13 is related to this issue. Did I say I couldn’t afford property taxes?
Also @Brahame, because I don’t see living spaces/real estate as an investment (there are a lot better investment vehicles out there.), and I don’t care about higher interest rate of tic loans because I can pay cash for a place. (as long as you are in a fractional loan building not a group loan building.)
As I mentioned in another note above, in fact, the TIC rules, conversion rules, stupid tenant protection, rent control, all increases the TIC discount. So it creates a 20% discount for me vs. buy a condo.
Also btw, if the Board of Supervisors care about the TIC owners who has to pay higher interest for loans, they should focus on policy towards banks (they are the ones making all the huge profit) rather than policy on TIC conversions, and then having it backfire.
My theory is that the more we can eradicate TICs from the SF market the better. It’s an odd “product” and the sooner its eliminated the better.
What is stopping a creative and well lawyer’d up TIC group in a 6 unit building from reorganizing as a 4 unit TIC; converting, and then doing a condo unit split?
kddid wrote:
Brahma – I understand the stated reason for the legislation, but given how complex it is (moratorium for 10 years, limits on different housing sizes, etc) it feels like a rube-goldberg policy machine whose makers are not quite sure how it is going to work. I admit I don’t know all the details, and take with a pound of salt all the dire predictions mentioned above. I can only hope that all the chefs in that kitchen actually thought through these possible consequences. Did anyone do any rudimentary modeling to see what possible impact a 10-year moratorium on conversions might do? Did anyone analyze how many 5+ unit buildings are in the city to evaluate the worst case scenario of mass Ellis Act-ing? I’d love to know.
And “tim” – everything brahma said, plus an invitation – if you want to live in a place where everyone can afford what you can afford, I suggest Blackhawk or some gated community outside of Dallas. But if you value a rich and diverse urban life, you too should support policies to keep a rich and diverse mix of people in the city (which equates to incomes and housing stock). And while there are many strategies to support that goal, saying “if you can’t afford to live you, you don’t belong” is not one of them.
@kddid You got it backwards. why should I be the one to leave, when I can perfectly afford to live here.
In fact, as I exampled above, all these so called policies to preserve “poor” people and those entitled people who think they deserve to be “preserved” doesn’t hurt rich people. It doesn’t hurt the banks that make huge profits.
It just hurts the poor people (who are getting evicted) and poor people who wants to move into the city, hurts small time real estate investors or small homeowners who counts on appreciate of their homes as investments/nest egg.
At 2269 units to convert and $20K for each, the City gets $45 million. They can probably build 500 units in city property for low income housing and those negatively effected, how many can there be? 2269 properties get thrown into the housing market mix. The lawsuits will also be avoided and those alone would cost many millions over the many years. Hardly worth it. Let the TIC owners convert if they want and move on.
Even the British get it: http://www.telegraph.co.uk/finance/newsbysector/constructionandproperty/10113582/Rent-controls-are-madness-we-need-to-build-more-homes.html
Version passed yesterday:
http://www.scribd.com/doc/147522609/CC-Bypass-6-12-13
If we could survey 100% of the people who live here maybe 2% tops would even know this legislation exists.
Here are some ripe pickings for the new generation of Ellis’ers–a pair of 3 unit buildings with ~1900 sq ft flats and low rents on South Van Ness at 22nd.
http://www.redfin.com/CA/San-Francisco/1080-1084-S-Van-Ness-Ave-94110/home/1694784?utm_medium=email&utm_content=address&utm_source=myredfin&utm_campaign=listings_update
http://www.redfin.com/CA/San-Francisco/1086-1090-S-Van-Ness-Ave-94110/home/713781?utm_medium=email&utm_content=address&utm_source=myredfin&utm_campaign=listings_update
Does anyone who follows the investment-property market want to venture what these would have sold for in the pre-“bypass” days?
Observant neighbor — Very interesting timing with these coming on the market just yesterday after the vote having gone through. Probably not a coincidence. I love that they wrote “possible TIC” in the description. Hint hint!
I am the co-owner of a six unit building that is currently being Ellis’d.
Without going into particulars it was not an easy decision to come to.
When Lee signs this into law our decision to Ellis would have taken two seconds. If we wanted to stay landlords within a five year window we could be charging market rates and make double or more of whatever losses we would suffer from no rentals in that time period in just the first year. No more thoughts of ever getting condos.
If we want out of the landlord business we could be selling TICS within two to three years (being realistic about how long even a legal Ellis Act takes) with pretty minimal legal/Ellis/defending Ellis costs.
This really simplifies the decision making process by taking away the hopeful carrot.
gribble,
Thanks for the insight.
It’s a good thing you have 2 options (wait out an Ellis no-rental period or sell as TICs), because one way or another, one of the Supes will find a way to micro-manage your life decisions.
For instance 4 years ago a very painful Ellis eviction was initiated in North Beach and the plan was to resell all the units as TICs. The owner also planned to convert the first floor into garages to make the units more appealing to the buyer pool.
David Chiu, came up with this nugget of a legislation. It didn’t pass but this gives you the general environment in the BoS. They legislate, the law back-fires, they legislate again. Rince, repeat.
The core of the problem is still not being addressed (high prices/rents caused by prop 13/rent control) but they keep adding coat after coat of nre innovative and untested legislation, each and every time asking themselves “why has it gone worse?”.
Anyway, enjoy the fun. Hope you have a sense of humor.
I think 49yo hipster nailed it at 2:37 yesterday – TIC’s will become more commonplace, smart banks will start taking more fractional loan risks. With prevailing rates so low, if a bank lender can get an extra 150-200 basis points for a TIC loan, that becomes interesting. When more bankers understand “It’s just one of those WTF San Francisco real estate rules” then they will get involved.
Also, the single family home remains pretty sacrosanct in all this mess. Still some affordable homes in the 94124 that will get turned around.
lol — thanks for posting the PandoDaily link yesterday. That “guy” who wrote it isn’t just a random apartment owner — he is the founder of Bleacher Report and a very successful entrepreneur. His parable is relevant and paints a very simple and useful picture for supporters of rent control. However, obviously there are a lot of variables to the rental situation in SF, and his piece only takes into account some of it.
But the best part of what he wrote was his link to a NY Times op-ed by Paul Krugman. The op-ed is 13 years old yet probably deserves even more weight given that it is 13 years old but easily could have been written last week. Krugman is a very liberal economist (and very famous now, a decade after this op-ed was written). I recommend everyone reads it:
http://www.nytimes.com/2000/06/07/opinion/reckonings-a-rent-affair.html
The bottom line of the column: economists don’t agree on ANYTHING. Yet they agree that rent control is bad for everyone, including renters. However it’s a great read, i recommend it to everyone. If someone could get the Board of Supervisors to read it, that would great. (Or with some of them, you might have to read it aloud to them with pictures and cartoons).
Lastly, you guys keep mentioning Prop 13. But that’s a state law, not a local law, so it’s pretty much irrelevant to this condo conversion/rent control discussion. Oakland, Marin, Palo Alto, San Diego, etc all are subject to Prop 13 as well, but do not have the issues we have here in SF.
J – You made my day. Krugman stumping against rent control. Too good.
Yeah, that’s an article I read a while ago and that was an eye opener. Paul Krugman is one brilliant economist proven right again and again.
One quote sums up the current predicament: when a San Francisco official proposed a study of the city’s housing crisis, there was a firestorm of opposition from tenant-advocacy groups. They argued that even to study the situation was a step on the road to ending rent control — and they may well have been right, because studying the issue might lead to a recognition of the obvious.
13 years later and we haven’t gone anywhere. Are rents cheaper? Are there more working class folks in SF or at least have they stabilized? Easy answers. Easy cause.
You know, waking up to a fresh sunny morning, maybe this new legislation isn’t that bad. Assume it gets challenged. If they are successful at nullifying the poison pill part, we are golden. If not, and some ‘further out’ tic owners challenge it that it favors current owners vs. future, that may take a couple years to resolve. BUT, if the lawsuit fails we still go through this plan and current owners benefit. If the law gets rejected as unfair, as part of the settlement I’d certainly ask that the city up the 200 condo limit by the time that this law delayed the process. I.e. if this delayed the lottery by 2 years, the next lottery would allow for 600 conversions (the current year plus 2 years of litigation.)
49yo hipster — I think you’re being very optimistic. Every additional day this is caught up in court is bad for current TICs. No chance they ever increase the size of the lottery based on missed years. Zero chance.
^ what J said. Do not expect any kind of fairness from the BoS. If anything, expect more twisted rules.
No, not from the BoS. From the courts. They can mandate that the city recoups lost condo conversions due to their inane legislation.
I live in Silicon Valley and became a SF landlord due to the much higher rent… One of my investments is a TIC in Pac….2/2 with view with garage currently renting $3000…
With this new legislation, yes,it does make decision making much easier for me… I will evict the current tenant and either sell, or try to re-rent it without going onto Craiglist…. Tons of youngish single coworkers in the office who just have to live in SF…..
One canard that needs to be killed – rent control in SF stifles housing construction. Krugman mentioned this, and it was in the PandoDaily piece too. While it may be true in some cities, in SF no new buildings are subject to rent control.
Krugman’s piece claims this is true even in SF because investors are scared that new buildings MIGHT come under rent control, but my understanding is that would require a change in state law, and that’s not going to happen. Look around town and there is plenty of new construction, and yet that has not yet demonstrably lowered prices as the free-marketeers would predict.
Eliminating rent control may or may not lower prices as well (see the earlier cited example from Cambridge, MA) but it would certainly cause landlords with rent controlled units to immediately jack up rents to what the market will bear. Maybe the top end will come down (depends on the strength of demand), and maybe equilibrium will be found at some point lower than the current median. But certainly there will be lots of poor and elderly people who will be displaced during that equilibrium-finding period. No one here has talked about that real damage, and how (or even if) we should mitigate it.
Maybe the changing demographics of SF will work against rent control over time. But given the success of this measure, it’s clear who still has power in this town, and it’s not the whiny tech workers, TIC owners, or the well-off like “tim” on this blog. Complain all you want about rent control, but until you get smarter and better politicians than Farrell or Tang, it’s not going anywhere.
kddid,
Yes there is seemingly plenty new construction, but it’s adding a minimal number of units to the housing pool. We’re talking 4 digits a year in the pipeline.
The number of units that are tenant occupied and rent-controlled are probably north of 100,000 (60% of SF are renters and a large majority lives in pre-1979 buildings).
There’s a question of proportion there. The demand is such and the increase in supply so minuscule that any new unit will be absorbed right away and will only moderately affect the increase in demand, not the underlying demand itself.
SF basically suffers from a huge lack of turn-over.
Someone posted a redfin link to 2 3-unit buildings earlier. If you look at 1086-1090 Van Ness, you’ll notice that Unit #2, a roomy 1900sf 3 Bedroom, is currently rented for…drums rolling… $783!!!
In the mean time, newcomers will pay $3500/month for a place 1/2 the size.
There’s absolutely NO reason for such a low rent. If there is, I’d love to hear why.
and yet that has not yet demonstrably lowered prices as the free-marketeers would predict.
Free marketers would not predict that the teensy little amount of building that we’ve seen over the past ten years would have any measurable impact on prices (we’ve increased the overall housing stock by only a couple percentage points!).
lol got at the correct impact of rent control – it keeps those that would naturally be priced out, and thus increases demand at the high end. Every new building goes to the high end, because a huge percentage of the existing units never turn over at their natural market rate.
49yo hipster, I also think you’re being very optimistic, and that includes your claim that the courts will somehow overturn the Board of Supervisors but keep the mechanics of the conversion process in place and make unlimited condo conversions available to each and every real estate speculator in the city who bought a rental residential building on the hopes of one day converting to condo and then selling the condos.
There’s no constitutional right to a condo conversion. The City can regulate them however they wish, even if such regulations meet your definition of “inane”.
While I have seen contorted legal opinions that right-wing judges bring to bear to justify their predetermined policy preferences, I think that one is far fetched.
The legislation says at the outset that it’s purpose is to relieve, on a one-time basis, the backlog of owner-occupiers who were already in the pipeline for the lottery.
Don’t get me wrong, I understand that the legal line of attack will be that the Board of Supervisors shouldn’t treat some condo owners differently than others who came along for the conversion lottery later, on equal protection grounds. I just don’t think that it’ll convince an appellate court judge.
UTIR — that’s not even close to legal so you might want to check with your attorney before doing anything like that. You’d also screw over the owners of the other units in that TIC by Ellis Act evicting someone, unless you own the entire building. Either way, you can’t evict someone and then rent the unit out again (for X number of years). You could buy them out under the table, and then rent it out. Or evict them and sell it. Or OMI evict them and “move in”, wink wink.
kddid — you are right, that “future construction might come under rent control” does not hold up in SF. However, SF has been anti-development for so long that it doesn’t matter. Why do you think we have this problem in the first place? SF is the one preventing construction and causing the supply/demand problems. There was a socketsite post a few months ago about net new units in SF, and there essentially have been ZERO net new units in SF since 2009 (I believe the actually number was a few hundred, but that’s pretty much zero in the grand scheme). That’s appalling. SF (the BOS, mayor, etc) caused this problem. If you are going to massively inflate demand by instituting rent control, you damn well better make up for it with tons of new construction.
Your claims of “plenty of new construction” is very anecdotal, and while somewhat true, these buildings are just getting started and it will be a long time before those units hit the market. They DO help the situation, as renters buy condos and that frees up those rental units. However, the biggest factor in deciding to buy is a Rent vs Buy analysis, and if you are paying 50% lower than market rate on your apartment (and are assured it will never be meaningfully increased), why in the world would you buy a condo? This is where rent control causes huge problems.
lol – I threw up in my mouth when i saw your post about that person paying $783 for a 3BR/2BA, 1900 sq foot apartment. Market rate would be at least $4750, based on a low estimate of about $2.50/sq foot.
UPDATE: The Clock Is Ticking For Expedited Condo Conversions In SF.
UPDATE: Condo Conversion Program Kicks-Off With A Challenge In The Works.
J said: On the plus side, I will get to quietly watch as there are a ton of evictions in the next few years. I am not normally vindictive, but in this case, the tenants’ groups made their own bed.
I think J really called this one right. Forever TICs no longer carry a stigma with this new legislation. Looks like the first round of evictions is a comin’.
Can anyone give an update on the state of TIC financing.