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, and conversions of 3-6 unit buildings are subject to an annual ceiling. The conversion eligibility rules do not apply to commercial or industrial properties, or to newly-constructed buildings or newly-constructed units in existing buildings.
There are two paths to conversion eligibility for existing buildings: automatic (lottery bypass) qualification and winning the annual conversion lottery. Only buildings with two residential units can qualify for the automatic bypass conversion, and then only 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 do not satisfy the automatic conversion requirements must win the condo lottery. For a property to enter in a particular year, at least one unit must have been owner-occupied for the three immediately preceding years. The number of units that must be owner-occupied increases to three for 5-6 unit buildings. 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 2011, the required number of owners must have occupied continuously since January 2008. 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.
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), disabled or catastrophically ill person occurred after May 1, 2005, the building is permanently disqualified from conversion even if the owners who wish to convert acquired the property long after the eviction. Even if the eviction occurred before May 1, 2005, the building may be ineligible for lottery-bypass conversion, and may be subject to special lottery rules that significantly diminish the already-low odds of winning. No-fault evictions of two or more tenants (regardless of age or disability) after May 2005 also extend all pre-conversion owner-occupancy requirements to 10 years.
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.
Pool A buildings are grouped according to the number of years they have entered. Buildings that have previously entered and lost seven times are considered "Class 7", buildings that have entered and lost six times are considered "Class 6", and so forth. If the number of units in the most senior Class is less than 100, all of the buildings in that Class automatically qualify. The unused Pool A places are then available for the next most senior Class. For example, if the total number of units in the senior Class is 32, 68 places will be available for the next Class. When the number of units in a particular Class exceeds the number of places remaining in Pool A, a lottery drawing will select the winning buildings from that Class. Buildings that do not qualify for, or are unsuccessful in, Pool A, participate in Pool B with a number of tickets equal to the number of times it has entered. For example, a first-time lottery entrant gets one Pool B ticket while a fifth-time entrant gets five.
Under a controversial policy recently implemented by the City, a building’s lottery seniority can be lost when an owner-occupant moves out or sells. Rather than basing Pool A Class and Pool B tickets on the number of times a building has entered and lost, City officials count now consider only losses for years in which the current owner occupant(s) could have qualified to enter. To illustrate, consider a four-unit building has been owner-occupied continuously for 12 years and has participated in the lottery seven times. If the current owner who has been occupying longest moved in April 1, 2006, the building would be credited with only one of its seven losses. The earlier losses would be disregarded because the owners who qualified the building to enter in earlier years no longer occupy. This new policy is ostensibly based on a 2007 amendment to the conversion ordinance, but does not seem to correspond with the language of that amendment. A legal challenge to the policy is likely.
The chances of winning the condominium conversion lottery are poor and diminishing from year to year. In both 2006 and 2007, all of the sixth-time entrants were automatically selected (there were no buildings in for the seventh or more time in either year), but by 2008 the seventh-time entrants had become the senior class, and in 2011 there were enough seventh-time entrants that a lottery for just seventh-year buildings was required (meaning there will be eighth-time entrants in 2012). The 2011 lottery odds for seventh-time entrants were approximately 55%, and the odds for all other participants (including sixth-time entrants) were below 2%. Considering that buildings must be owner-occupied for at least three years to enter the first time, this means that buildings that had a better than 50% chance in 2011 had been purchased and occupied by their current owners in 2001 or earlier. Moreover, since the number of lottery participants continues to increase, and since lottery seniority can now be lost when owners move out or sell, owners purchasing today should not expect to achieve odds above 50% for 12-15 years.
After a building qualifies for conversion by winning or bypassing the lottery, it must submit an application package and undergo a physical inspection. This application and inspection process currently takes 3-6 months. 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. The application and inspection process currently takes 3-6 months. 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.
Lottery-winning buildings with rented units must comply with additional requirements. Non-binding "Tenant Intent To Purchase" forms must be signed by residents of at least 40% of the units. These forms state that the signer intends to buy his/her unit as a condominium, but may later decide not to buy. Since the signers may be renters or owner-occupants, and since lottery-entry for 2, 5 and 6 unit buildings requires more than 40% owner-occupancy, 3 and 4 unit buildings with a solitary owner-occupant are the only properties that need renter cooperation to satisfy the requirement. All renters (including those who do not sign a "tenant intent to purchase" form) 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. All non-purchasing renters get one-year rent-controlled leases, and all disabled and senior (over 62) renters get lifetime rent-controlled leases. At the conclusion of a lease period, renters may be evicted in connection with the sale of a unit, but are entitled to a moving expense allowance. 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.
There have been many attempts to relax San Francisco’s condo conversion rules, including several ballot propositions and a proposal for a one-time “pay-to-play” eligibility for owner-occupied buildings that was part of former-Mayor Newson’s final budget in June 2010. The activist group Plan C considers conversion reform one of its primary goals, and stages an annual demonstration at the conversion lottery. Although recent election results could signal a movement toward the political center, there are no proposed changes to the condo conversion restrictions currently pending or under consideration.
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.