Should You Convert To Condos?
Condominium conversion is a complicated process. What with local, state and federal regulation, as well as a plethora of specialists to deal with – title companies, surveyors, attorneys, and various city departments -- it seems purposely designed to confuse. With such a steep leaning curve and the prospect of a long and difficult procedure, it is easy to overlook the first question you should be asking yourself: Should I convert my property to condominiums? We’d like to suggest some practical considerations to think about before you launch into your conversion.
What Happens In A Condo Conversion?
First, some legal background. In condominium conversion, the owner(s) of a building with at least two units elect(s) to process a subdivision map and record a declaration of restrictions to divide the property into condominiums. In California, condominium conversions are regulated by a law called the Subdivision Map Act, and also by local law in the jurisdiction where the property is located. The local jurisdiction processes the conversion application and, once that application is approved, a subdivision map is recorded. The property can then become a “condominium project” under state law by recording a document called the "Declaration of Covenants, Conditions and Restrictions", or "CC&Rs" in the County Records and and creating an individual title deed for each condominium.
Weighing the Costs of Condo Conversion
In assessing whether conversion is possible, you need to determine whether it is eligible for conversion under the applicable law. But just because the building can be converted does not necessarily mean it should be converted. Before deciding to convert, the owner should understand all the costs, including the hidden ones, and carefully weight these costs against the benefits of converting.
The Fixed Costs of Condominium Conversion
The basic costs of conversion, such as the application fees, surveying fees, and attorney fees, are well-known and may be determined in advance. Our office is happy to tell you exactly what these costs will be, and we welcome your inquiry.
The Cost of Condo Conversion Building Inspection and Code Compliance
It can be more difficult to estimate the costs for repairing code violations. While it is not necesssary to bring the building up to modern-day code, one must obtain a building permit and a final inspection of any illegal work. This includes all work done without permit, even if the work conforms to building code requirements. In order to satisfy this requirement, "destructive testing" can be required. This means that walls may have to be opened in order to expose wiring, plumbing, structural supports etc. that must be inspected. Some non-permitted work, such as development of an "in-law unit", attic or deck, may be impossible to legalize because it cannot meet planning, fire, or building code requirements under any circumstances and, if this is the case, the work must be permanently demolished (and its removal is inspected and confirmed by the building inspectors).
It is not a good idea the have the City inspect the building in advance if there is a possibility that you may decide not to convert if the inspection compliance work is too expensive. The problem with this approach is that, once the building is inspected by the City, you are required to do the work even if you decide not to convert. A smarter approach is to hire a private condo pre-inspection specialist to inspect the property. This expert will give you a reliable opinion of what work you will need to perform on the building in order to convert, and what code compliance costs you should expect. The conversion pre-inspector can also suggest what steps you should take in advance of the City building inspection in order to minimize the likelihood that there will be a lot of work to do after the inspection.
Condo Conversion Property Tax Increases
Another hidden conversion cost to consider is property tax. Although conversion does not increase property tax, converting owners may be required to pay up to three installments of property tax in advance (depending on the time of year when the conversion process is completed).
The High Cost of Insuring a Condo HOA
The special insurance required for condominium homeowners associations, and the higher Insurance premiums for HOAs, should also be considered as a hidden conversion cost. Condominium buildings require different insurance policies, and these are generally more expensive than policies for apartment buildings. It is worthwhile to get a condominium insurance policy quote to understand how much your premiums will increase.
Refinancing and Selling a Condominium After Conversion
Also, remember that many of the benefits of condominium conversion cannot be realized without refinancing. The refinance process involves cost and, depending on market conditions, may increase monthly payments.
If you plan to sell, be sure to assess whether current market conditions are in fact more favorable for a building that has been divided into condominiums and, if so, does the value increase justify the cost of conversion. If there are no plans to sell, but you are considering conversion to improve your mortgage financing, it is important to determine whether more favorable refinancing will be possible for each of the owners who will need to refinance.
The Effect of Lifetime Leases on Condo Value
If you are converting under the "Expedited Conversion Program" and there are rental tenants living in the building, you must offer them lifetime leases. Having a lifetime lease tenant in a condominium lowers its value, and this should be seen as yet another hidden cost of conversion. Life leases give tenants greater rights and protections than the tenants have under ordinary rent control. A normal rent control can be evicted for owner-occupancy, relative occupancy, removing the unit from the rental market (under the Ellis Act), renovations, and various other reasons. A lifetime lease tenant cannot be evicted for any of these reasons. The fact that it is virtually impossible to evict a lifetime lease tenant significantly lowers the value of a condo with a lifetime lease. In fact, depending on the situation, a condo with a lifetime lease may well be worth less than the same unit as a TIC with a normal rent control tenant.
Considering all the pros and cons of condominium conversion will allow you to plan the right time to begin the process, avoid conflict with your co-owners over costs, and avoid unpleasant surprises.
About the Author
Sirkin & Associates has been guiding clients through San Francisco condominium conversions and subdivisions for almost 20 years, and have completed more SF conversions than any other firm. Over the years, we have been involved in drafting many of the laws that govern SF condominium conversions, and have helped develop many of the procedures used by the San Francisco Department of Public Works (“DPW”) Bureau of Street Use and Mapping (“BSM”). Our breadth of experience makes it likely that if a glitch appears in the condominium conversion process, we will have seen something similar before and know exactly what to do. And for those rare occasions when a completely new issue arises, we are the recognized masters at developing creative solutions that save our clients time and money.
Experience has taught us that the most important things to our clients are the immediate availability of staff to answer client questions and diligence in following the process of governmental approval. To ensure we achieve these goals, we have a full-time paralegal, Cam Perridge, devoted to client contact, preparation of subdivision applications, and monitoring subdivision approvals. Cam maintains a direct-access telephone line and can be reached easily any weekday to discuss the status of a conversion or subdivision process. And for those occasions when you need to speak with an attorney, Andy Sirkin is committed to being available to you when you call or within the next 24 hours. Andy is known for his diligence in calling clients back quickly, and is more committed than ever to being easily reached.
But while processing the condominium conversion or subdivision quickly and efficiently may be our client’s most immediate priority, the governing documents (the Declaration of Covenants, Conditions and Restrictions, or “CC&Rs” supplemented in some cases by Bylaws and/or Articles) will have much greater long-term impact. The quality of the governing documents will directly affect the quality of life of the owners, as well as their ability to refinance and sell. Andy Sirkin has been co-author of the past 10 editions of The Condominium Bluebook, and his expertise in preparing condominium governing documents is recognized throughout California. Sirkin & Associates governing documents continue to be the ones other firms emulate, and Realtors, lenders and buyers strongly prefer. This leadership results from constant improvement and innovation that makes our documents easier to read and understand, as well as more efficient and less expensive to enforce.
Before you choose a lawyer to handle you condo conversion or new construction subdivision, take a moment to speak with Cam, Andy, or attorney Rosemarie MacGuiness, at Sirkin & Associates. Our practice includes all required City and State applications and filings, as well as preparation of any governing documents you may need. We offer these services on a flat-fee basis, and our rates are generally lower than those of other firms. Contact us via email at [email protected], or by telephone at 415-738-8545.