|Condominium Conversion FAQs
Articles on related subjects...
by Andy Sirkin, Rosemarie MacGuinness and Cam Perridge
(July 20, 2013)
This article answers the questions we are most frequently asked by clients who are converting their San Francisco properties to condominiums. The article does not discuss the requirements for qualifying a building for condominium conversion; for a discussion of that topic, see San Francisco Condominium Conversion Laws and Instructions.
Fees and costs:
Role of Surveyor, Title Company, and Lawyer:
Selling and Refinancing:
FEES AND COSTS
How much does the conversion cost?
Here is an itemized summary of the typical cost for a conversion:
|Conversion Costs - 2013||2-4 Unit ||5-6 Unit|
|Survey-Related Services (varies w/size)||$4,000||$6,000|
|City Inspection (varies w/size)||+/-$2,400||+/-$2,700|
|3R Report (per structure)||$160||$160|
Most owners will also incur fees in obtaining permits and addressing the citations in the building inspection report. Also, condominium buildings require different insurance policies, and these generally are more expensive than policies for apartment buildings. Finally, 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.
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).
For 5-6 unit properties, state law requires that the California Bureau of Real Estate (“BRE”) approve the conversion and all associated legal documents in certain cases. To determine whether BRE will require this for a particular building, please call or office. If BRE approval is required, these buildings will incur the cost of professional budget preparation (+/-$4,500) and the BRE application fee (+/-$1,700).
Will conversion increase my property tax?
Converting your property will not increase property taxes. Once your subdivision map is recorded, the City tax assessor will prepare a separate bill for each condominium, but each owner will continue to pay property taxes based on his/her purchase price. If there are multiple owners, and if the public record shows each owner’s price, the City tax assessor will divide the pre-conversion property tax bill among the owners based on these prices. Otherwise, the City will divide the pre-conversion property tax bill based on the “percentage interests” shown on the Condominium Plan (see discussion below). The division of the property tax bill should happen automatically relatively soon after the subdivision map is recorded, but sometimes this does not occur. An owner that does not begin to receive a separate property tax bill within 12 months after conversion should contact the assessor to remedy the oversight.
How do qualifying properties begin the process of condominium conversion?
Owners of qualifying buildings must submit a conversion application to the Department of Public Works (DPW). The major components of the conversion application packet are:
- Inspection: A copy of your Request for Building Inspection (by the San Francisco Department of Building Inspection, or “DBI”) and the receipt for the inspection fee. Some owners complete the work before submitting the application, although this is not required.
- Survey: A subdivision map prepared by a licensed land surveyor that shows the boundaries of the property and footprint of the building. (Note: In addition to the subdivision map, the surveyor prepares a condominium plan (also called unit diagrams) that shows the location of the units and exclusive use areas. The condominium plan is not submitted to, or reviewed by the City; it is attached to the CC&Rs as an exhibit.)
- Occupancy and Eviction History: Qualifying owners sign a sworn statement regarding their occupancy of the property and past evictions (including those that were undertaken by prior owners).
How long does the conversion process take?
In 2012, the median length of a condominium conversion handled by our office was four months for a 2-4 unit property and six months for a 5-6 unit property. However, the creation of the Expedited Conversion Program in June 2013 is expected to dramatically increase the volume of applications and the length of processing times. Note that the conversion process involves several different subparts that take place independently. The following is a breakdown of the approximate timelines involved in a conversion.
- Assembling DPW Application: Owners must first assemble and submit a conversion application (as described above) to the San Francisco Department of Public Works. The most time-consuming part of the application assembly is obtaining the subdivision map from the land surveyor, who must visit and measure the property. Most surveyors take 3-6 weeks to complete the map. This waiting period is generally long enough for owners to easily assemble all the other parts of the application. Bottom line: Assembling the conversion application takes most owners 3-6 weeks.
- DPW Processing: After receiving a conversion application, DPW checks the packet for completeness and then forwards parts of it for verification and checking to other City agencies (Planning Department, Rent Board etc.). This process has traditionally taken 1-2 months, but is expected to take somewhat longer in 2013-2015. Assuming no defects or problems are discovered, DPW gives Tentative Approval and requests a more complete subdivision map from the land surveyor and a Certificate of Final Completion and Occupancy (“CFCO”, further discussed below) from the owner. After receiving these items, DPW checks the map for technical correctness, sometimes asking the surveyor to make corrections and changes. The map checking process has traditionally taken an additional 2-6 weeks, depending on the corrections needed and DPW and surveyor caseload. When DPW approves the subdivision map, it notifies the owner and the surveyor, triggering the start of the map recording process. In the conversion of a 5-6 unit property, there is an additional two-month approval process by the Planning Department and Board of Supervisors that follows DPW map approval, (but this is not required for 2-4 unit properties). Bottom Line: DPW processing is likely to take 6-12 months during 2013-2015.
- Building Inspection and Repair/Upgrading: Owners must request a building inspection from DBI by submitting an inspection request form and paying an inspection fee. If there is more than one building on the property, a separate form and fee must be used for each building. The inspection request may be made either before or after submitting the DPW application for conversion, but is a completely separate process. (Submitting a condominium conversion application to DPW will not trigger a building inspection by DBI, and submitting a building inspection request to DBI will not trigger the start of a condominium conversion approval process by DPW). After receiving an inspection request, DBI will contact the owners to schedule the inspection and, after the inspection, DBI will mail the owners a written inspection report. This process is expected to take 6012 months during 2013-2015. After receiving the inspection report, the owners must obtain a building permit to do the work required by the report, complete the work, and request an inspection of the completed work. If the work passes inspection, DBI will issue a Certificate of Final Inspection and Occupancy (“CFCO”), which must then be submitted to DPW when that department tentatively approves the conversion application. It takes most owners 2-6 weeks to complete the inspection work, but this time frame varies widely depending on the amount and type of work required (as discussed further below). Bottom line: Obtaining the inspection report is expected to take 6-12 months, and completing the work takes another 2-6 weeks; but these processes can run concurrently with assembling and processing the conversion application packet.
- Recording Subdivision Map: After DPW approves the conversion application, it requests a signed final plastic version of the subdivision map (the “Mylar”) and a “Tax Certificate”. The Mylar must be signed by all owners of record and, in the case of 5-6 unit properties, all lenders of record. The Tax Certificate is a document issued by the San Francisco Tax Collector certifying that all property taxes have been paid or prepaid (see further discussion below). In a conversion of a 2-4 unit property, DPW will record the subdivision map approximately two weeks after it receives these documents. Bottom line: The map recording process takes most owners about three weeks.
- CC&Rs and Bylaws (2-4 units): Although recording the subdivision map concludes the condominium conversion process from the City’s standpoint, state law imposes additional requirements. For 2-4 unit properties, state law requires that a Declaration of Covenants, Conditions and Restriction (“CC&Rs”) be recorded with the San Francisco County Recorder before a condominium can be sold or financed with its own loan. The CC&Rs define the boundaries of each condominium, explain what each owner will own, and describe how the condominiums will be used, operated and maintained. A condominium plan (also called unit diagrams), prepared by the surveyor, showing the location of the units and exclusive use areas is attached as an exhibit to the CC&Rs. Homeowners Association Bylaws add further details about the management of the condominium owners association, but this same information can also be incorporated in the CC&Rs so that there is no separate Bylaws document. (Articles of Incorporation is yet another document that can be added if the homeowners association will be incorporated, but incorporation is not legally required in California). These documents are typically prepared by an attorney and reviewed by the owners while the DPW is processing the conversion application. The CC&Rs are then recorded with the San Francisco County Recorder after DPW records the subdivision map; but the recording of the CC&Rs can be delayed indefinitely if none of the owners plan to sell or refinance. Bottom line: Assuming the CC&Rs are completed while DPW is processing the application and recorded immediately after DPW records the subdivision map, the CC&Rs do not add additional time to the conversion process.
- CC&Rs, Bylaws and Public Report (5-6 units): For 5-6 unit properties, state law requires that the California Bureau of Real Estate (“BRE”) approve the conversion and all associated legal documents in certain cases. To determine whether BRE will require this for a particular building, please call or office. Owners needing BRE approval can submit an application to BRE any time after DPW gives its tentative approval of the conversion. The BRE application involves elements and forms prepared by the owners, the lawyer, the land surveyor, a title company and a qualified budget preparer, and generally takes eight weeks to assemble. BRE processing and approval takes 30-120 days, but parts of this process can run concurrently with DPW processing. Bottom line: BRE approval adds about four months to the conversion process for most 5-6 unit properties.
- Total Duration of Conversion Process: In 2012, the median length of a condominium conversion handled by our office was four months for a 2-4 unit property and six months for a 5-6 unit property, but these periods are expected to at least double in 2013-2015 due to backlogs caused by the new Expedited Conversion Program.
Is it possible to “expedite” the conversion process?
Although the city processes applications strictly in the order received, owners can expedite conversion in several ways:
Assistance from a law firm in assembling the application packet and closely monitoring the city process will guarantee the quickest passage through city paperwork processing. A professional with knowledge of the process and the processors, and the ability to focus on the progress of the application, can address city questions immediately.
- Apply for the building inspection as soon as the building qualifies for conversion; this can be done before submitting a conversion application;
- Retain a land surveyor as soon as the building qualifies for conversion;
- Apply for a property tax “Homeowner’s Exemption” by submitting a form to the Tax Assessor’s office; and
What is a pre-inspection and is it recommended?
A "pre-inspection" is an inspection by an independent contractor or a former DBI inspector that identifies the compliance work that DBI is likely to request. Pre-inspectors are helpful in buildings with unpermitted work, an illegal unit, or a known big-ticket repair item, such as a deck. Such a consultant can provide advance warning of likely inspection issues, recommend measures to minimize work requirements, establish the legality of preexisting improvements, obtain building permits, and provide estimates of cost. If a violation is cited as part of a DBI inspection, the corrective work must be performed, even if the owner decides not to proceed with the conversion. For this reason, owners sometimes choose not to proceed with a conversion based upon a pre-inspection. We provide pre-inspector contact information upon request.
What building repairs and improvements are typically required?
Inspection reports typically identify 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. Buildings in original condition (even if quite old) do not typically require much compliance work; buildings that have been renovated or upgraded without building permits, even if they are completely satisfy Building Code requirements, may require opening of walls to establish compliance of electrical or plumbing work. Illegal deck or stair construction, or a non-permitted attic or basement room, are the most problematic situations. DBI does not impose fines on owners whose buildings have work done without permits; but if the work cannot be legalized because, for example, it violated Planning or Fire Code requirements, it must be demolished.
What if the work cannot be completed within the required time?
The DBI inspection report states that work must be completed within (6) months, but DBI has not been enforcing this requirement. However, the longer work is delayed, the more likely it is that the building inspector(s) who inspect the completed work will decide that more work is required. Also, if no work is commenced within 18 months, DBI typically requires a new inspection.
Do utilities need to be separated for a condo conversion?
The DBI requires separate electrical meters for each condominium and a separate meter for common areas such as the garage or lobby. Gas and water do not need to be metered to individual units.
ROLE OF SURVEYOR, TITLE COMPANY AND LAWYER
Who does what in the condo conversion process?
- Title Company: Initially, the title company provides information to the land surveyor, lawyer, and DPW regarding the ownership of the property and whether any lien or restrictions have been recorded against the property. Later, the title company will record the CC&Rs and provide title insurance and escrow services when the owners do their first selling or refinancing after conversion. Title companies do not charge for their services provided the owners use the same title company for their first sale or refinance following conversion, and further provided that sale or refinance occurs within a reasonable time (1-2 years) after conversion is completed.
- Land Surveyor: The land surveyor prepares a subdivision map that shows the boundaries of the property and footprint of the building, and a condominium plan showing the location of the units and exclusive use areas. The subdivision map is part of the application packet, but the condominium plan is not (it is used later as an attachment to legal documents).
- Attorney: The attorney prepares the CC&Rs (and Bylaws, if required) for the condominium homeowners association and organizes and monitors the DPW conversion application throughout the conversion process. The attorney can also advise the owners regarding space assignments, allocation of costs, tenant rights, refinancing, sales, and other issues that arise during and after the conversion process. The attorney also assists with preparation of the homeowners association operating budget and establishing owner dues.
- Budget Preparer: For some 5-6 unit conversions, BRE requires a formal budget and study of the future repair and replacement needs of the building. This is typically prepared by a qualified BRE budget preparation service.
What is the difference between a subdivision map and a condominium plan?
Each county has a map that shows the boundaries of each individual lot in the county. The subdivision map is designed to amend that general map. It shows the exact boundaries of the lot to be converted to condominiums, and explains how many condominiums (i.e. new lots) will be created within those boundaries; but it does not show where each condominium will be located. The location of each condo, along with any other spaces that will be deeded to condo owners (such as parking spaces, storage spaces, yards, decks etc.) are shown on a separate drawing called the condominium plan. The subdivision map is submitted with the DPW application and, after it is approved, is recorded by DPW in the county records. The condominium pan is not submitted to, or reviewed by, DPW or any other governmental agency. It is attached to the CC&Rs as an exhibit and then recorded in the county records with the CC&Rs.
What are the “percentage interests” mentioned in the condominium plan and CC&Rs?
When a property is subdivided into condominiums, parts of the property become individually owned “units” and the rest of the property becomes “common area”. Typically, the units consist of three-dimensional space within the interior boundaries of walls, floors and ceilings, along with everything located inside that space, while the common area includes the land, foundation, roof, exterior walls, and interior walls surrounding the units. In smaller condominium projects in San Francisco, each condominium owner owns a percentage of the common area, and that percentage is referred to as the owner’s percentage interest”. The percentage interests that go with each condominium are shown first on the condominium plan, and later on the deed to each condominium.
The practical significance of percentage interests is one of the most frequently misunderstood aspects of condominiums. One common misconception is that percentage interest determines the portion or share of the common area that each owner can use. In fact, each owner is equally entitled to use all common area regardless of his/her percentage interest. Another common misconception is that percentage interest determines the share of common area costs (such as repair or insurance costs) paid be each owner. In fact, while owners may choose to divide some or all costs according to percentage interests, they are not required to do so and most owners do not do so. The rules for dividing common area costs are stated in the CC&Rs and need not have any relationship whatsoever to percentage interests. Yet another common misconception is that percentage interest must be based upon the relative size of each condominium unit. Here again, while owners may choose to base percentage interest on unit square footage, they are not required to do so.
The only true significance of the percentage interests is to provide the tax assessor’s office with a basis for the division of property taxes when there are no separate tenancy in common purchase prices available. This occurs when a converting building has only one owner, or when the building is owned by a group of individuals who purchase simultaneously. In these situations, the converting owner(s) should specifically instruct the land surveyor as to how property taxes should be divided, and confirm that these instructions are reflected in the percentage interests that the surveyor puts on the condominium plan.
Why is a Declaration of Covenants, Conditions and Restrictions (CC&Rs) needed?
State law requires that all condominium properties have a Declaration of Covenants, Conditions and Restrictions, or CC&Rs, recorded in the County Records. The CC&Rs describe the rights and duties of the condominium owners and the homeowners’ association, relating to:
• Homeowners' Association decision making
• Budget: Operating expenses and maintenance reserves
• Division of assessments
• Maintenance, alteration and usage rules
• Dispute resolution
Typically, the CC&Rs have two Exhibits: Exhibit “A” is the property legal description prepared by your title company. Exhibit “B” is the Condominium Plan, which shows the measurements and locations of the Units and Exclusive Use Common Areas, such as parking and storage.
When must the CC&Rs be recorded?
The CC&Rs can be recorded after the subdivision map is recorded, but not before. If you are refinancing or selling, most lenders want to see recorded CC&Rs before considering your, or your buyer’s loan application. If you are not refinancing or selling, you can delay recording the CC&Rs.
How does a property owner obtain a “Tax Certificate”?
A Tax Certificate is a document issued by the San Francisco Tax Collector certifying that required property tax payments have been made. Converting owners request Tax Certificates at City Hall Room 110 and receive a statement showing the tax amount that must be paid or prepaid. Then, owners must pay the required amount (discussed below) along with a $40 Tax Certificate fee by personal or cashiers check in Room 140, and bring the receipt back to Room 110. The Tax Collector then emails the Tax Certificate to DPW with a copy to the owner.
How much property tax must one pre-pay in order to complete a condominium conversion?
The property tax payment required to complete conversion depends on the time of year that the converting owner submits his/her subdivision map for recordation. If the subdivision map is recorded between January 1 and June 30, the converting owner must pay all property tax due for the current fiscal year (which runs through June 30), plus all property tax due for the next fiscal year (which begins the next July 1 and runs until the June 30 of the following calendar year). Assuming the bill due the prior November was paid, the owner must pay in advance the installments that would ordinarily have been due in March, November, and the following March. If the subdivision map is recorded between July 1 and December 31, the converting owner need only pay the property tax due for the current fiscal year (which runs through June 30 of the following calendar year). Assuming the bill due the prior March was paid, the owner must pay in advance the installments that would ordinarily have been due in November and the following March.
What are the rights of tenants living in a building that is converted to condominiums?
An owner may not raise a tenant's rent for two years following submittal of a conversion application. In addition, between the date the owner submits the application and the date the subdivision map is recorded, the converting owner is not entitled to evict the tenant for any reason other than nonpayment of rent or violation of a lease. Note that these rights are in addition to those provided by San Francisco’s rent control laws, and apply even to buildings that are not subject to rent control. Also note that the expiration of the lease term is not a permitted basis for eviction during the conversion process; the tenant can stay until the end of conversion (and beyond, as discussed further below) no matter what the tenant’s lease or rental agreement states.
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. A tenant who chooses not to take the lease and decides to vacate voluntarily is entitled to relocation payments (currently about $1,000 per tenant but subject to change). A tenant who chooses not to take the lease but does not voluntarily relocate becomes a rent-controlled tenant (unless the building was built after 1979), and can only be evicted for one of the 14 “just causes” listed in San Francisco’s rent control ordinance. A tenant who takes the one-year lease also becomes a rent-controlled tenant upon the expiration of the lease, meaning that such a tenant also cannot be evicted without “just cause” even after the end of his/her lease. One of the 14 “just causes” in the rent control ordinance is “sale following condominium conversion”, meaning that an owner who intends to sell a tenant-occupied unit within a reasonable time following conversion can evict the tenant (but not re-rent the unit) once the tenant’s lease rights are over. Finally, special extended eviction notice provisions apply to post-conversion evictions, and any owner intending to evict should seek the advice of a qualified landlord-tenant attorney before undertaking such an eviction.
Each rental tenant living on the property at the time the subdivision map is recorded is also entitled to purchase the unit he/she occupies whether or not the owner intends to sell it. The tenant must purchase within 60 days of receiving notice that the conversion is completed, but the 60-day purchase period does not begin until the owner gives the notice. The purchase price differs depending on whether or not the tenant was living in the property when the conversion application was submitted to DPW. A tenant that was there at the start can purchase at the price that the owner wrote in the conversion application; a tenant that moved in during the conversion process can purchase at whatever price the owner offers, provided that if the owner is advertising the property for sale, the owner cannot quote the tenant a price that is higher than the advertised price. In 5-6 unit buildings, each tenant must be given another purchase right when the unit that he/she occupies is offered for sale to the general public.
What notices does a condo-converting owner need to give the renters?
Each tenant living in the building at the time a conversion application is submitted to DPW must receive notice that the owner is applying for conversion, along with a description of each of the tenant’s rights (as described above). A tenant who moves in during the conversion process must receive notice that a conversion application is pending, along with a description of the tenant’s post-conversion rights. When conversion is completed, each rental tenant living on the property must receive another notice stating that the conversion has been completed, describing his/her rights (as listed above) including the purchase price and lifetime lease right (if applicable), and showing the time frames within which the tenant may exercise those rights. In 5-6 unit buildings, each tenant must be given another notice when the unit that he/she occupies is offered for sale to the general public, and each tenant who moves in after conversion must use a rental agreement that identifies the unit as a condominium.
SELLING AND REFINANCING
Is it necessary to refinance after condominium conversion?
The condominium conversion process does not alter the ownership or financing of the property. To illustrate this point, imagine two owners who each own 50% of a duplex with a single mortgage. The owners’ conversion application is approved and they record their subdivision map effectively completing the conversion process from the City’s standpoint. At that point, each of the owners owns 50% of both condominiums, and continue to have one shared mortgage. If their goal is that each of them own one of the condominiums, they will need to take three additional steps: (i) record their CC&Rs; (ii) pay off the entire existing mortgage; and (iii) sign and record deeds transferring each condo to the proper individual owner. However, if for some reason this was not the owners’ goal, or if it was their desire to delay individual ownership in order to continue to enjoy the benefits of a favorable shared mortgage, the owners could delay the recording of the CC&Rs and the refinancing and sale process indefinitely, without in any way “undoing” the conversion process.
Is it possible to market a condominium before conversion is completed?
In conversions involving 2-4 unit properties, owner(s) may begin marketing, and even contract to sell, the condominiums any time during the conversion process; however, no condominium can be deeded to a new owner until conversion is completed and all shared mortgages have been paid off in full. In conversions involving properties of five or more units, pre-marketing is permitted in buildings that do not need where BRE approval, but strictly limited when BRE approval is required.
How does one set up a condominium homeowners association (HOA)?
Recording the CC&Rs creates the infrastructure of a condominium homeowners association, but the association officially begins to exist on the day that the name on title to one of the condominiums is different than the name on title to another condominium. At that point, the condominium owners need to begin to follow the operating procedures in their CC&Rs and well as adhere to state law governing homeowners associations. This means having a budget that includes properly calculated repair/replacement reserves, collecting owner dues based on that budget that include all of the estimated association expenses, opening at least two separate bank accounts (operating and reserve), and keeping all required records.
A common misconception is that no homeowners association exists until the owners create a corporation or some other sort of “official” entity. In fact, many small condominium properties never create a corporation or obtain an official tax identification number, but this does not change the fact that the owners are a homeowners association under California law. There are pros and cons to undertaking the various tax and other filings that small homeowners associations are permitted (but not required) to make, and these are discussed in our article entitled Forming and Operating A Small Condominium Homeowners Association (www.andysirkin.com/HTMLArticle.cfm?Article=189).
About the Authors
Sirkin & Associates has been guiding clients through San Francisco condominium conversions for almost 20 years, and has completed more SF conversions than any other firm. Experience has taught us that the most important things to our clients are the immediate availability of staff to answer 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 applications, and monitoring approvals. Cam maintains a direct-access telephone line and can be reached easily any weekday to discuss the status of a conversion. And for those occasions when you need to speak with an attorney, Rosemarie MacGuinness and Andy Sirkin are available when you call or within 24 hours.
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 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 your condo conversion or new construction subdivision, take a moment to speak with Cam, Andy, or attorney Rosemarie MacGuinness, 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.