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Summary of San Francisco Condominium Conversion Rules

By Andy Sirkin (7/20/13)

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Introduction to Condominium Conversion

Condominium conversions in San Francisco have been tightly restricted since 1981. The restrictions were a reaction to a spate of large conversions in 1979-1980 that displaced many long-term tenants in large buildings on Nob Hill, Russian Hill and Pacific Heights. Under SF’s law, existing apartment or mixed-use buildings with more than six residential units cannot be converted. The conversion eligibility rules do not apply to commercial or industrial properties, or to newly-constructed buildings or newly-constructed units in existing buildings.

How to Qualify For Condo Conversion

There are currently three paths to conversion eligibility for existing buildings: (i) automatic (lottery bypass) qualification for two-unit buildings where each unit is owner-occupied be a separate owner; (ii) the "Expedited Conversion Program, created June 11, 2013, under which buildings that lost the 2012 or 2013 conversion lottery, and buildings owned as a TIC as of April 15, 2013, may convert between 2013 and 2020; and (iii) the annual conversion lottery, which has been suspended but is expected to return beginning in 2024.

Buildings with two residential units can qualify for automatic bypass conversion provided both residential units are owner-occupied by separate owners who each own at least 25% of the building and use the units as their principal residences for at least one year. Vacant units do not count as owner-occupied, and only legally separated spouses can qualify separate units. Mixed-use buildings of any size can qualify for automatic conversion if they have no more than two residential units, even if the total number of resulting condominiums (including commercial units) will be greater than two.

Buildings that lost the 2012 or 2013 conversion lottery, and buildings owned as a TIC as of April 15, 2013, can qualify for the Expedited Conversion Program provided they meet certain owner-occupancy requirements. Under this program, a different subset of buildings meeting these requirements are eligible to convert, without winning a lottery, in each year beginning in 2013 and ending in 2020. For detailed information on conversion under the Expedited Conversion Program, see the article entitled New TIC Condo Conversion Law.

Buildings that do not qualify under either the duplex bypass program or the Expedited Conversion Program must await the return of the conversion lottery in 2024, and then must enter and win the conversion lottery. When the lottery returns, only 2-4 unit buildings permitted to enter; buildings with five or more residential units will not be eligible.

For a 2-4 unit building to enter the lottery in a particular year, all but one of the units must have been owner-occupied for the three immediately preceding years. Each qualifying owner-occupant must own at least 10% of the building, but need only be an owner at the time the building enters the lottery; he/she could have been a rental tenant in the building for the previous three years. Occupancy is proven by sworn statement. The three-year period is measured backwards from the lottery entry deadline, which is typically in mid-January. So to qualify in 2024, the required number of owners will need to have occupied continuously since January 2021. Buildings that enter and lose must re-enter the following year, and can only do so if they continue to satisfy the owner-occupancy requirements.

Up to 200 units may be converted through the lottery each year, representing approximately 50-60 buildings (depending on the total number of dwellings in the winning buildings). The lottery is divided into two parts, each of which selects 25-30 winning buildings that, collectively, comprise 100 dwelling units. "Pool A" selects buildings that have lost the lottery at least three times, and is designed to guarantee that a building that continues to participate will eventually win. "Pool B" is open to all applicants and operates by random selection. For more information on the conversion lottery, please see the article entitled San Francisco's Condo Conversion Lottery Priority System.

No-fault tenant evictions can affect a building’s eligibility for condominium conversion. A “no-fault” eviction is one not based on the tenant’s nonpayment of rent or other conduct, but rather on the desire of the owner to occupy, renovate, or withdraw the property from rental use. If a no-fault eviction of an elderly (over 60 who has resided in the building for 10 years) or disabled or catastrophically ill person occurred after November 16, 2004, the building is disqualified from both the duplex bypass conversion program and the Expedited Conversion Program. If such an eviction occurred after May 1, 2005, the building is permanently disqualified from conversion under all programs. No-fault evictions of two or more tenants (regardless of age or disability) after May 2005 extend all pre-conversion owner-occupancy requirements to 10 years. A no-fault eviction of any tenant after March 31, 2013 disqualifies the building from conversion under the Expedited Conversion Program.

Condominium Conversion Building Inspection and Building Code Compliance

After a building qualifies for conversion, it must submit an application package and undergo a physical inspection. This duration of the application and inspection process varies depending on the number of pending applications, but is expected to be 6-12 months during the 2013-2015 period. Inspection reports typically cover three types of problems: (i) work completed without required permits (including everything from kitchen renovations to decks to in-law units), (ii) conditions which present safety hazards (like poor fire egress or dangerous electrical wiring), and (iii) energy and water conservation violations. Converting buildings need not meet current building codes, be seismically upgraded, or have parking.

Tenant Lifetime Leases and Purchase Rights

Buildings with rented units must comply with additional requirements. All renters get an opportunity to purchase after conversion. The tenant can exercise the purchase right regardless of whether the owner wants to sell, but the owner can effectively discourage purchase by setting the price as high as he/she wishes. In buildings converting under the Expedited Conversion Program, all non-purchasing renters get lifetime rent-controlled leases. In buildings converting under the lottery system, disabled and senior (over 62) renters get lifetime rent-controlled leases, and other tenants get one-year rent-controlled leases. All tenants must be notified of their rights before a lottery conversion application is filed. Contrary to popular misconception, converted units are not exempt from most rent control restrictions until they have been sold following conversion.

The Cost of Condominium Conversion

Conversion costs, including application fees, attorney fees and surveying, total $15,000-20,000 (depending on building size), excluding the cost of required building repairs. In addition, buildings converting under the Expedited Conversion Program must pay an "Impact Fee" ranging from $4,000 per unit (if the building has entered and lost five or more condo lotteries) to 20,000 per unit (if the building has never participated in the condo lottery).


ABOUT THE AUTHOR

Sirkin & Associates has been creating condominium documents, advising condominium owners, and mediating condominium association disputes, for more than twenty years. Andy Sirkin was co-author of 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. Contact us via email at DASirkin@earthlink.net, or by telephone at 415-738-8545.

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