The Property Management Shop

Secondary Units, Secondary Thoughts

by Marc Wilson

Q. I have a six-unit building with a huge storage room that would make a perfect apartment unit. I heard that there was an ordinance or law change in the works that would legalize in-law or non-conforming units. Is this true? Should I now build a nonconforming unit in order to benefit from this law change? When will this law take affect?

A. One of San Francisco’s Supervisors has proposed legislation that will allow for the legal creation of new “secondary units.” The ordinance would permit construction of in-law apartments in buildings that are: (1) located within 1,250 feet of a primary transit street and/or within 1,250 feet of a neighborhood commercial district; (2) designated as a qualified historical building; or (3) designed and constructed specifically for the elderly or persons with physical disabilities. These new units would not be subject to rent control, but all preexisting in-law apartments would not be eligible for legalization.

To answer your question, this is not a wise time to build an in-law apartment even if your property does conform to one of the suggested criterion for legalization. However, there appears to be a deliberate attempt within the proposed legislation to avoid rewarding anyone who has operated non-conforming units in the past.

Surprisingly, this proposed ordinance would actually pertain to quite a lot of real estate. I mean, 1,250 feet is 2.5 city blocks—2.5 blocks in any direction from Geary Boulevard, from Lombard Street, from Mission Street, from Irving Street, etc. Also, what exactly qualifies a unit as “specifically designed and constructed for the elderly or persons with physical disabilities?” Sounds to me like a couple of wheel chair ramps and an oversized toilet and you’re off to the races. I can only imagine the newfound sensitivity to the elderly and the handicapped that will permeate San Francisco should this legislation pass. I also envision a heightened interest in historical designations and the preservation of older structures. No doubt this legislation will bring to bear the long dormant sense of civil consciousness buried deep within each and every property owner.

But I digress. “Illegal units”—secondary units, in-law apartments, non-conforming units—are not what I consider a “SFAA” or rental property issue. This issue pertains to zoning, building codes, parking and quality of life.

However, let me add my two cents to the subject. What this plan does is facilitate the construction of more housing units, while completely disregarding zoning laws, building codes, parking requirements and the quality of life of nearby homeowners. Where are the new tenants going to park their cars? I know where—on the sidewalk in front of my house. Where are the new tenants going to send their kids to school? I guess those unfortunate enough to have their kids trapped in the San Francisco public education system should get prepared for even more students per class. What about the inevitable loss of the value incurred by those homeowners lucky enough to be rewarded with non-conforming units in their neighborhood?

The role the city should take is to encourage the safe, sane development of new housing that conforms to current building codes. The spotlight should be focused on the very zoning and density issues that are preventing the pragmatic development of safe housing and neighborhoods. Why encourage the creation of substandard housing?
The irony is that this proposal will, in fact, reduce the cost of housing in San Francisco, but for all the wrong reasons. These units will contribute to the overall decline in the quality of life for all San Franciscans and are not a responsible reaction to a housing shortage.

Housing shortage? What housing shortage? I have ten vacant apartments. There are several columns of vacant apartments in the Chronicle, and Craig’s List now looks like a phone book. You want an apartment? I’ve got plenty of apartments. The tenant advocates will whine about affordability. Take a look at the current rental market. The average asking rent is $1.75 per foot, which equates to $15,750 per year for a 750 square foot apartment. The cost to build a new one-bedroom apartment is $218,750 based on the assumption that construction will be $225-per-square foot with an additional $50,000 a unit for land (a fantasy at best). The cost of financing a new $218,750 apartment is $18,240 per year. Now take the $15,750 of rental income per year and reduce it by 35 percent for operating expenses, and you will be left with $10,237 per year for debt service. Are you getting the picture? Current rents are below replacement cost rents by as much as 40 percent. No one is going to build new rentals until rents justify construction costs. There is no such thing as affordable housing. Costs to build apartment units cannot be controlled, for those costs are fixed. How much below replacement cost do rents need to go for the tenant advocates to deem this market affordable? You would be very, very surprised by the answer to that question. The definition of affordable housing appears to be housing that is provided below the actual cost to produce the housing. Are you getting the picture? The tenant advocates do not want affordable housing—they want subsidized housing. The truly scary question is, subsidized by whom?

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the SF Apartment Magazine. Marc Wilson has been managing and selling San Francisco apartment buildings for over 15 years. Please send your questions concerning property management issues to Marc Wilson at 1699 Van Ness Avenue, SF, CA 94109. He can be reached at 415-229-1275. © Copyright 2002.