Feature
By D. Andrew Sirkin
A condominium is a form of property consisting of an individually owned unit and a share of group-owned common area. The unit is the space within the walls, floors and ceilings of each condominium, and the common area is the remainder of the property. Owners pay their own mortgages, property taxes and utilities, plus monthly homeowners’ association dues that cover repair and insurance of the common area. A lengthy document, the “Covenants, Conditions and Restrictions” or CC&Rs, establishes the rights and duties of the condominium owners.
Condominiums can be created in two ways: subdivision of newly constructed buildings that have not been occupied and conversion of existing buildings that have been occupied. San Francisco has no restriction on the creation of condominiums in new buildings that have not been occupied. This means that new buildings of any size may be subdivided into condominiums. In very limited circumstances existing previously occupied buildings undergoing major alterations and additions are considered new construction, which can be immediately subdivided into condominiums.
San Francisco severely restricts conversion of existing apartment buildings into condominiums. The alleged purpose of these restrictions is to conserve affordable rental housing, but many observers believe that the true purpose is to preserve the existing demographic balance of approximately two renter households for each owner household. The conversion restrictions apply to residential and mixed-use buildings only. Conversions of entirely commercial buildings are not restricted. Existing residential or mixed-use apartment buildings may only convert to condominiums if they have six or fewer residential units. These buildings must qualify for conversion by either winning or bypassing the annual conversion lottery. Two-unit buildings can bypass the conversion lottery if both units are occupied for one year by separate, unmarried individuals who each own at least a 25 percent interest in the property during the entire occupancy period. Buildings with more than two residential units cannot bypass the lottery.
The conversion lottery is held annually during the first quarter of the calendar year. Up to 200 units (55-65 buildings) may be converted through the lottery each year. Although the lottery system is designed to favor buildings that have previously lost, there is no guarantee of winning no matter how many years one enters. In the most recent lottery cycle, first-time entrants had approximately a 4 percent chance of winning, and fifth and sixth time entrants had approximately a 48 percent chance of winning.
Buildings must meet owner-occupancy requirements to enter the conversion lottery. For 2-4 unit buildings, one residential unit must be owner-occupied for three years; and for 5-6 unit buildings, three residential units must be owner-occupied for three years. The term owner-occupied is actually a misnomer as applied in the lottery system; the occupant can be a tenant for three years, so long as he/she is an owner at the time of lottery entry. The three-year period is measured backwards from the lottery entry deadline. In order to qualify in January 2005, the required number of owners must have occupied continuously since January 2002.
Some lottery winners need tenant cooperation to convert. Lottery winners must submit tenant intent-to-purchase forms signed by residents of at least 40 percent 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. The signers may be renters or owner-occupants. In 3-4 unit buildings with only one owner-occupied unit, a renter must sign one of these forms. If all of the renters refuse, the building cannot convert even if it has satisfied the owner-occupancy requirements and won the lottery. This problem does not arise for 2-, 5- or 6-unit buildings or for 3-4 unit buildings with more than one owner-occupied unit.
Owners of buildings that qualify for conversion (either lottery winners or lottery bypassers) must submit a conversion application package and fee to the City after they qualify. The application packet is lengthy and complicated to compile, and is generally prepared by an attorney. The City currently takes 12-24 months to process a conversion application. During processing, the City physically inspects the property and provides a list of items that must be corrected. Buildings undergoing conversion need not meet current building codes, be seismically upgraded, or have parking, but do need to meet other requirements. Unfortunately, these requirements cannot be found in any written codes or guidelines. What this means is that the owner does not find out what is required until the inspection report arrives.
The cost of conversion includes City fees, attorney fees and other professional fees. The totals are approximately $12,000 for 2-4 unit buildings and $20,000 for 5-6 unit buildings. These amounts do not include the cost of completing the work on the City inspection report. The conversion rules would significantly change under a law (often referred to as the McTIC law) passed in 2001 but struck down by a court in January 2003. This court decision is now on appeal, and the rules and procedures described in this article could be affected by the outcome.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. More detailed information on this topic is available online at www.g3mh.com. D. Andrew Sirkin’s law practice is devoted exclusively to tenancy-in-common, condominium conversion, equity sharing, investment partnerships and other co-ownership matters. Copyright © 2004